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Although the Kyoto Protocol has not yet entered into force, there is a great deal of interest in and positioning for the Protocol’s market mechanisms from both the private sector and national governments. Countries are putting into place national frameworks, analyzing their mitigation opportunities and potential competitive advantages in the developing GHG market, and even developing project pipelines for sale into the market. For developing countries that anticipate participating in the Clean Development Mechanism, for example, there are institutional and policy steps that can be taken now to prepare. Countries can establish national positions regarding the Protocol’s flexibility mechanisms; assess mitigation options; establish sustainable development priorities; establish a national infrastructure to manage the host country approval process; and take other measures to facilitate eventual implementation of the Protocol’s market mechanisms. Initiating transparent processes that are not bogged down by unnecessary bureaucracy, fees, and delays will likely position countries to participate more competitively in future greenhouse gas markets. Countries that move early to take the necessary administrative and procedural steps will benefit from earlier participation in the developing markets. These steps can be taken even while countries continue to actively participate in and influence international negotiations involving the Protocol’s flexibility mechanisms. Note that taking these steps can be independent of a country’s postiion in the international negotiations. Some countires (eg Brazil) that are holding a tough position in negotiations are also preparing for trading opporuntites that result. Several international programs through which countries have begun to assess their opportunities and begin participating in greenhouse gas markets include the Activities Implemented Jointly (AIJ) pilot phase, the National Strategies Studies (NSS) program, and the World Bank’s Prototype Carbon Fund (PCF). The Activities Implemented Jointly (AIJ) Pilot Phase The AIJ pilot program was launched in 1995 at the First Conference of the Parties to the United Nations Framework Convention on Climate Change. AIJ was intended to let countries experiment with the concept of market mechanisms, but the program did not provide for actual transfer of emissions reduction credits from one country to another. The AIJ program specifically provided that AIJ-based emissions reductions would not count toward industrialized country emissions reduction commitments. Any country could participate in the AIJ pilot phase. The Parties to the Framework Convention left open which projects Parties could pursue and the criteria that projects must meet, with one key exception: project financing was to be "additional" to other financial obligations of industrialized countries and existing official development assistance flows. The Parties established an AIJ reporting framework to ensure transparency and credibility. Many countries set up programs under the AIJ pilot phase, including Australia, Canada, Chile, Costa Rica, the Czech Republic, Finland, Germany, Guatemala, Japan, Mexico, the Netherlands, South Africa, Sri Lanka, the United States, and Vietnam. More than 100 projects have been formally classified as AIJ projects, and reviewed or approved by national AIJ programs. However, the level of AIJ activity was less than many countries had anticipated, and many AIJ projects would have happened anyway. Developing countries felt that the lack of AIJ activity suggested that industrialized countries were not serious about mitigation efforts. For industrialized countries, the key element of a market system – quantification and distribution of GHG emissions credits – had been omitted from the AIJ program. By prohibiting international crediting and creating uncertainty regarding the future availability of crediting, the Parties established a largely self-defeating framework. The absence of credits eliminated much of the incentive for private-sector participation, undercut the rationale for aggressive efforts to quantify and verify project benefits, and hindered development of answers to technical issues raised by critics of market mechanisms. Today, the future of AIJ projects is not clear. It is not known whether they will be absorbed into the JI or CDM mechanisms, or under what terms. But given the likely near-term development of JI and CDM policy, few, if any, new AIJ projects are being undertaken. National Strategy Studies (NSS) A collaborative effort by the World Bank, the government of Switzerland, and other bilateral donors, the National Strategy Studies program works with developing and "economies in transition" countries on climate change mitigation issues. NSS efforts include helping these countries assess their current and projected emissions status, understanding more fully the issues and opportunities associated with the Protocol’s market mechanisms, putting into place national infrastructures, and beginning to develop project pipelines. Russia, Uzbekistan, the Czech Republic, Argentina, Colombia, and Zimbabwe have all completed National Strategy Studies; India, China, and Brazil are considering joining the NSS program. The host country conducts the study, collaborating with outside experts as needed. The primary goal of each study is to enable countries to better understand their options as the Protocol’s market mechanisms continue to develop. Typically, studies are co-financed by the host country (providing 10–15 percent of the budget) and international donors (providing up to 85 percent of the budget). World Bank Prototype Carbon Fund (PCF) The World Bank's Prototype Carbon Fund (PCF) was launched in January 2000 to promote the transfer of funds and climate-friendly technologies to developing countries and economies in transition. As a pilot activity, the PCF is not intended to compete in the emissions reduction market as it matures. Originally, the PCF was restricted to an "investment" of US$150 million, and was scheduled to close to new investors on March 31, 2000. Due to increasing interest in the fund, the term has been extended and the maximum size of the PCF has been increased to $180 million. During the next three years, the World Bank will invest PCF capital in approximately 20 climate change mitigation projects. The primary focus is expected to be renewable energy technology projects in developing countries. The projected price for the emissions reductions is between US$3-6 per ton of CO2 or CO2-equivalent. These prices should provide adequate incentives to the host entity and government as well as the Fund’s investors. The Bank believes that emissions reductions pursued within the industrialized countries would have higher costs — between $10 and $15 per ton. In accordance with the Kyoto Protocol, all PCF projects must have host country approval. A potential host country can sign a Memorandum of Understanding or a Letter of Endorsement (for a future project) to become a member of the PCF Host Country Committee. Countries that have signed MOUs with the PCF include Latvia, Costa Rica, Mexico, Guatemala, Argentina, El Salvador, Brazil, Nicaragua, Togo, Senegal, Zimbabwe, Burkina Faso, Uganda, Czech Republic, Honduras, Colombia, Morocco, Peru, and Guyana. Governments reviewing their participation include Russia, Indonesia, and Slovenia. The Liepaja Solid Waste Management Project in Latvia is the first of two PCF projects currently getting underway; the second project is in Costa Rica and will involve development of renewable energy supplies. The Latvian project will replace existing landfills with an advanced waste management technology. Use of this "cell-based" landfill management system will accelerate and concentrate the production of methane, a strong greenhouse gas. By capturing the methane, which otherwise would be emitted, and using it to generate electricity, the project will reduce the use of fossil fuels for electricity production. The project is estimated to cost about US$6 per ton of CO2-equivalent, including development and monitoring costs. Countries are at different stages of preparing for the developing GHG market. A snapshot of activities in several countries is found below. Brazil Brazil ratified the Framework Convention in 1994 and signed the Kyoto Protocol in 1998. In June 2000, Brazil created a National Forum on Climate Change, led by the Ministry of Science and Technology, to advise the president on climate change and to place Brazil in a leadership role with respect to the Kyoto Protocol. Brazil advocates that the CDM be implemented as early as 2001, through the creation of an interim Executive Board soon after the Sixth Conference of the Parties to the Framework Convention in November 2000. The fact that they have set up an infrastructure in their govenrment is important The government of Brazil is currently participating in the World Business Council on Sustainable Development (WBCSD) and Brazil/US Aspen Global Forum processes to identify potential GHG reduction projects in Brazil. WBCSD, in collaboration with the United Nations Development Programme, has begun to develop a "blueprint" to identify, select, and implement CDM projects in Brazil. Several Brazilian companies will do feasibility studies for these projects and WBCSD is assembling a project developers’ guide. The Brazil/US Aspen
Global Forum’s task force on Early Start Carbon Emission Reduction
Projects is also working to help sponsors of GHG mitigation projects
decide on strategies to get financing for those projects. The task force
is currently evaluating several "early start" projects,
including one forestry project and three projects with energy and
forestry components. Project examples include:
Argentina Argentina has had a high profile in climate change mitigation efforts. During the Fourth Conference of the Parties, the president of Argentina announced that his nation, a developing country with no emissions reduction obligations under the Framework Convention or the Kyoto Protocol, would set its own carbon emissions goals. These emissions goals, involving a reduction from "business as usual" emissions, were formally announced at the Fifth Conference of the Parties in October 1999. Argentina anticipates that by adopting these commitments, it will be able to participate more actively and profitably in the Protocol’s market mechanisms, including mechanisms that may not be available to countries without commitments in place. Argentina previously established an Office for Joint Implementation (or OAIC) in the Secretariat of Natural Resources and Sustainable Development. Argentina is now also considering establishment of a CDM Focal Pointoffice to provide the necessary country-level reviews and approvals. China China ratified the Framework Convention on Climate Change in 1993 and signed the Kyoto Protocol in 1998. The national Climate Change Coordination Office was established in 1990. This office coordinates ministries and government agencies in their efforts to address climate change. It has four working groups: scientific assessment, impact assessment and response strategies, economic implications, and convention implementation. China has been cooperating with Japan in the development of several mitigation projects. In May 2000, the United States and China also signed an agreement to cooperate on environment and sustainable development issues, including climate change. Colombia Colombia recently completed a comprehensive National Strategy Study on implementation of the CDM. The study estimated the potential benefits for Colombia from participation in the CDM. For example, the study determined that under optimal conditions, the CDM could generate $435 million per year for the country, earnings similar to the economically important banana sector. In addition, the study concluded that forestry-sector projects would increase local incomes and provide other co-benefits and could be a viable alternative to illicit agriculture, cattle ranching, and unsustainable forest exploitation. Colombia analyzed the potential prices for emission reduction credits under three scenarios and determined that the price for these credits would be:
$19 per ton under an optimistic scenario. The study concluded that the "market could develop even without ratification of the Kyoto Protocol, given recent developments" in the private sector. The study presented an initial portfolio of high-quality CDM projects designed to serve as demonstration projects for future project development in the region. Included in Colombia’s study is an analysis of key sectors’ abilities to develop and formulate cost-effective potential CDM projects. In the electricity sector, for example, Colombia found that 430 million tons of CO2 emissions could be avoided for less than $16 per ton. More renewable energy projects became competitive at $20 per ton of CO2. Colombia analyzed possible institutional structures for implementing the CDM in the country and formulated its national negotiating position based on criteria that would aid Colombia’s competitiveness in a CDM market. For example, the country proposed designing a national CDM office that would evaluate possible CDM projects and work to build national capacity to propose CDM projects. This office would be responsible for evaluating projects presented for approval as well as capacity building and promotion of the CDM in Colombia. Kazakhstan Kazakhstan, formerly part of the Soviet Union, signed the Kyoto Protocol in December 1999. The Kazakhstan government has set up the Climate Change Coordinating Center to be the national focal point for climate change activities. This agency reports to a board of directors made up of six government ministers. Responsibilities include the collection of information to establish baseline emissions for the country through a greenhouse gas inventory and approval of emissions trading projects. A company that wants to offer tradable emissions must have the emissions reduction plan certified by a private entity, such as the Society Generale du Surveillance (SGS) of Switzerland, to ensure that the proposal meets requirements of sustainability, additionality, and other standards. When the Center approves the project, it can offer its tradable emissions for sale. For example, the country has conducted a feasibility analysis on the potential to reduce GHG emissions by capturing and using methane, which is released from coalmines. India India ratified the Framework Convention on Climate Change in 1993, but has not signed the Kyoto Protocol. India has not yet developed a national climate change policy; the Ministry of Environment and Forests is responsible for climate change issues, but climate change was included in the country’s most recent five-year plan (1997-2002). India is preparing a greenhouse gas emissions inventory as a step towards establishing baseline emissions data, but there is no a government or private mechanism to provide host country approval for projects. Many Indian government officials have expressed a desire to wait until after international negotiations have settled certain issues to begin this task. The U.S. Agency for International Development is implementing an eight-year (1997-2005) Greenhouse Gas Environmental Pollution Prevention Project in which industry is working with government to increase energy efficiency and to develop climate-related policies and projects. Zimbabwe Zimbabwe signed and ratified the Framework Convention on Climate Change in 1992. Zimbabwe’s GHG emissions are low, but the country has participated in opportunities to identify mitigation options. Zimbabwe has completed a National Strategy Study in which it identified five potential projects for reducing greenhouse gas emissions; all of these projects are believed to have a high potential for replication in the country. The projects are:
There is a great deal of excitement about the potential of the Kyoto Protocol’s market mechanisms to not only reduce the cost of Annex B countries’ (i.e., industrialized countries) compliance with Protocol commitments, but also to help advance sustainable development and other goals of developing countries. Preparations for national and global markets in greenhouse gas reduction projects are underway in many countries. Countries as diverse as Brazil and Zimbabwe have begun to develop potential projects for these markets and put in place institutional structures to screen CDM projects. Though key policy issues and administrative details have yet to be worked out, countries that make preparations for participating in these market mechanisms, anticipate that they will be better placed to benefit from the mechanisms as GHG markets develop. |