2. Policy background

2.1. The UNFCCC and the concept of Joint Implementation
2.2. The ‘Activities Implemented Jointly’ pilot phase
2.3. The Kyoto Protocol
2.4. Project-based mechanisms: the Clean Development Mechanism (CDM) and Joint Implementation (JI)
2.5. The clean development mechanism and forestry - are land use changes eligible?

2.1. The UNFCCC and the concept of Joint Implementation

In July 1992, representatives from 155 nations gathered in Rio de Janeiro for the United Nations Conference on Environment and Development (UNCED). Recognition that climate change was a reality led to the signature of the United Nations Framework Convention on Climate Change (UNFCCC), which resulted in a voluntary commitment by industrialised countries (Annex 1 countries, see Box 1) to reduce their emissions to the 1990 levels until the year 2000. Imbedded in the agreement was the concept of Joint Implementation (JI) with other countries to reduce greenhouse gases. Investors financing these projects would be allowed to claim credits for the carbon emission reduction or carbon sequestration. These credits should be equivalent to the carbon sequestration derived from the investment, and investors would be allowed to use them to lower greenhouse gas related liabilities (e.g. carbon taxes, emission caps, etc.) in their home countries. The rationale of JI is that the marginal costs of emission reduction or CO₂ sequestration are generally lower in developing than developed countries.

2.2. The ‘Activities Implemented Jointly’ pilot phase

Dissatisfaction between G77 countries over the concept of JI led to a growth in opposition to this JI model. Perceived problems included that this was a mechanism for industrialised countries to avoid addressing the real issues of reducing emissions at source. It was also felt that developing countries might hand over all their cheap offset opportunities to industrialised countries in this initial phase while they had no commitments to greenhouse gas reductions.

In the first Conference of the Parties (CoP 1) to the UNFCCC held in 1994, this dissatisfaction was voiced as a formal refusal of JI. Instead, a compromise was accepted to have a pilot phase during which projects were called ‘Activities Implemented Jointly’ (AIJ). During the AIJ Pilot Phase, JI projects were conducted with the objective of establishing protocols and experiences, but without allowing actual transfer of carbon credits between developed and developing countries.

2.3. The Kyoto Protocol

In December 1997, the Kyoto Protocol was conceived during CoP 3 of the UNFCCC. The most important aspect of the Kyoto Protocol is the binding commitment by 39 developed countries and economies in transition (Annex B countries, see Box 1) to reduce their greenhouse gas emissions by an average of 5.2% of 1990 levels by the commitment period in 2008-2012. The Protocol also approved the use of three ‘flexibility mechanisms’ for facilitating greenhouse gas emission reduction targets. These are QUELRO trading, Joint Implementation (JI) and the Clean Development Mechanism (see Box 1 for definitions).

Another important output of the agreement was the recognition of forestry activities or ‘sinks’ as valid options for reducing the net concentration of atmospheric greenhouse gases. This is mentioned in Articles 3.3 and 3.4 of the Protocol, which deal with “afforestation, reforestation and deforestation” and “additional human-induced activities related to ... land use change and forestry”, respectively. It is clear in the Protocol that Annex 1 countries are required to report on land use changes that have occurred since 1990, and are responsible for any changes in carbon stocks associated with these. It is less clear in the Protocol which forestry activities can be conducted as part of Article 12, the Clean Development Mechanism (see below).

The Kyoto Protocol was opened for ratification on March 16, 1998 and becomes legally-binding 90 days after the 55^th government ratifies it, assuming that those 55 countries account for at least 55 percent of developed countries emissions in 1990. As of February 2001, 84 Parties had signed the Kyoto Protocol and 32 had ratified it.

2.4. Project-based mechanisms: the Clean Development Mechanism (CDM) and Joint Implementation (JI)

The Kyoto Protocol created two flexibility mechanisms related to project-based activities: the Clean Development Mechanism (CDM) and Joint Implementation (JI). In short, the CDM involves investment by developed countries in carbon offset projects in developing countries. As defined by the Protocol, its purpose is twofold: firstly, to assist developing countries (non-Annex I Parties) in making progress towards sustainable development and contributing to the UNFCCC’s objectives; and secondly, to assist developed countries and economies in transition (Annex I Parties) in achieving their emission reduction targets. Non-Annex I Parties are supposed to gain the economic, developmental and environmental benefits from implemented projects that generate Certified Emission Reductions (CERs) for export. An important facet of the CDM is that these CERs are supposed to be bankable from the inception of the CDM that was originally planned to start in 2000.

BOX 1. A GLOSSARY OF TERMS RELATED TO CLIMATE CHANGE MITIGATION PROJECTS Since the early 1990’s, a variety of terms have been used to refer to different project-level climate change mitigation mechanisms and their outputs. The meanings of these terms have changed gradually. Below are some of the definitions that have been used. Most bear some relation to stipulations of the UN Framework Convention on Climate Change (UNFCCC) signed in 1992, whose provisions are fleshed out by the Kyoto Protocol, signed in December 1997. MECHANISMS (1) - EARLY PRE-KYOTO DEFINITIONS Joint Implementation (JI) The concept of joint implementation (JI) was introduced by Norway into pre-UNCED negotiations in 1991. This was reflected in Article 4.2(a) of the UNFCCC which gives Annex I countries (see below) the option of contributing to the Convention’s objectives by implementing policies and measures jointly with other countries. The investing participants in these projects could presumably claim emission reduction ‘credits’ for the activities financed, and these credits could then be used to lower greenhouse gas related liabilities (e.g., carbon taxes, emission caps) in their home countries. Activities Implemented Jointly (AIJ) In the first Conference of the Parties (CoP 1) to the UNFCCC held in 1995 in Berlin, a Pilot Phase of Activities Implemented Jointly (AIJ) was created. During the AIJ Pilot Phase, projects were conducted with the objective of establishing protocols and experiences, but without allowing carbon credit transfer between developed and developing countries. The AIJ Pilot Phase is to be continued at least until the year 2000. MECHANISMS (2) - POST-KYOTO DEFINITIONS The Kyoto Protocol of the UNFCCC created three instruments, collectively known as the ‘flexibility mechanisms’, to facilitate accomplishment of the objectives of the Convention. A new terminology was adopted to refer to these mechanisms, as detailed below. Note that because of the Kyoto Protocol’s distinction between projects carried out in the developed and developing world, some AIJ projects may be reclassified as CDM or JI projects. Joint Implementation (JI) Set out in Article 6 of the Protocol, JI refers to climate change mitigation projects implemented between two Annex 1 countries (see below). JI allows for the creation, acquisition and transfer of “emission reduction units” or ERUs. The Clean Development Mechanism (CDM) The CDM was established by Article 12 of the Protocol and refers to climate change mitigation projects undertaken between Annex 1 countries and non-Annex 1 countries (see below). This new mechanism, whilst resembling JI, has important points of difference. In particular, project investments must contribute to the sustainable development of the non-Annex 1 host country, and must also be independently certified. This latter requirement gives rise to the term “certified emissions reductions” or CERs, which describe the output of CDM projects, and which under the terms of Article 12 can be banked from the year 2000, eight years before the first commitment period (2008-2012). QUELRO (Quantified Emission Limitation and Reduction Obligations) trading Article 17 of the Protocol allows for emissions-capped Annex B countries to transfer among themselves portions of their Assigned Amounts (AAs) of greenhouse gas emissions. Under this mechanism, countries that emit less than they are allowed under the Protocol (their AAs) can sell surplus allowances to those countries that have surpassed their AAs. Such transfers do not necessarily have to be directly linked to emission reductions from specific projects. WHICH COUNTRIES IN WHICH MECHANISMS? Annex 1 countries These are the 36 industrialised countries and economies in transition listed in Annex 1 of the UNFCCC. Their responsibilities under the Convention are various, and include a non-binding commitment to reducing their greenhouse gas emissions to 1990 levels by the year 2000. Annex B countries These are the 39 emissions-capped industrialised countries and economies in transition listed in Annex B of the Kyoto Protocol. Legally-binding emission reduction obligations for Annex B countries range from an 8% decrease (e.g., EC) to a 10% increase (Iceland) on 1990 levels by the first commitment period of the Protocol, 2008 - 2012. Annex 1 or Annex B? In practice, Annex 1 of the Convention and Annex B of the Protocol are used almost interchangeably. However, strictly speaking, it is the Annex 1 countries which can invest in JI/CDM projects as well as host JI projects, and non-Annex 1 countries which can host CDM projects, even though it is the Annex B countries which have the emission reduction obligations under the Protocol. Note that Belarussia and Turkey are listed in Annex 1 but not Annex B; and that Croatia, Lichenstein, Monaco and Slovenia are listed in Annex B but not Annex 1. PROJECT OUTPUTS Carbon offsets - used in a variety of contexts, most commonly either to mean the output of carbon sequestration projects in the forestry sector, or more generally to refer to the output of any climate change mitigation project. Carbon credits - as for carbon offsets, though with added connotations of (1) being used as ‘credits’ in companies’ or countries’ emission accounts to counter ‘debits’ i.e. emissions, and (2) being tradable, or at least fungible with the emission permit trading system. ERUs (emission reduction units) - the technical term for the output of JI projects, as defined by the Kyoto Protocol. CERs (certified emission reductions) - the technical term for the output of CDM projects, as defined by the Kyoto Protocol.

Other features of the CDM include:

• project activities must be additional to activities that would happen in a business-as-usual scenario;
• the CDM is open to participation by either private or public entities, or combinations of the two;
• projects must have the express approval of the host government;
• CDM projects must be independently certified;
• the CDM also has a mandate to use a portion of its proceeds to assist those countries, which are particularly vulnerable to climate change, to adapt to those changes.

The operational structure of the CDM is under development and is expected to be defined during the Sixth Conference of Parties to the UNFCCC (CoP 6).

Joint Implementation, on the other hand, is a parallel mechanism based on projects involving Annex I parties only. Article 6 of the Protocol defines JI as the creation, acquisition and transfer of emission reduction units (ERUs) between Annex I parties (developed countries and economies in transition), that result from projects aimed at reducing emissions at sources or enhancing greenhouse gas removals by sinks. Credits from JI will only start accruing from the beginning of the first commitment period in 2008-2012.

2.5. The clean development mechanism and forestry - are land use changes eligible?

Although Article 3.3 of the Kyoto Protocol specifically mentions the role of afforestation, reforestation and deforestation (although not forest conservation) for reaching the targets agreed by Annex B countries, Article 12 on the CDM refers only to “emission reductions” with no mention of any specifically eligible activities. This vagueness of the Protocol has allowed a disturbingly broad scope for interpretation, and totally opposite views have been put forward.

Countries that want forestry included have argued that Article 12 implicitly refers to the activities listed in the main body of the Protocol text (Articles 3.3 and 3.4), while those that do not want forestry included argue that only fossil fuel based emission-reduction activities should be allowed. Even among those promoting forestry, a further point of contention is the types of forestry activities which should be allowed. Some countries propose only those activities listed in Article 3.3, afforestation, reforestation and deforestation, and others promote a much wider range of land use activities as in the spirit of Article 3.4 (“other activities”).

Contention over the inclusion of forestry in the CDM led delegates at the CoP 4 meeting in Buenos Aires in November 1998 to defer any decision until CoP 6. This has been a central issue during the CoP 6, leading to the breaking of the talks in November 2000. This issue will now be revisited in the second part of CoP 6, expected to take place in June-July 2001. In the meantime, an international collaborative research network of forest scientists under the auspices of the IPCC (Intergovernmental Panel on Climate Change) was commissioned to prepare a special report on land use, land use change and forestry (IPCC, 2000). The objective was to provide policy makers with the necessary information to allow the implementation of the forestry aspects of the Kyoto Protocol, by reviewing the requirements and outcomes of different policy options. Chapter 5 of the special report deals with forestry projects, and is generally positive about the potential and feasibility of using this greenhouse gas mitigation option.

Since the CDM was initially proposed many developing countries have supported the inclusion of some types of land use activity. Latin American countries, and in particular Costa Rica, Argentina, and Bolivia, have been the most vociferous proponents of CDM forestry, with the equally vocal exception of Peru. Brazil has recently moved to supporting the inclusion of reforestation and afforestation, but remains opposed to activities involving forest conservation. Indeed this position was explicitly stated at CoP 5, and enshrined in the so-called Cochabamba Declaration in June 1999, at which the Ministers of Bolivia, Brazil, Ecuador, and Colombia agreed on a common strategy regarding the CDM and the Amazon Basin. This declaration included the following paragraphs:

“(We) recommend the inclusion of forestry projects within the CDM, including activities for forestation, re-forestation, restoration, and sustainable management of the natural forests.

(We) recommend the analysis of the inclusion of conservation of natural forests, with the requirement that this type of project not be eligible for implementation among Annex 1 countries.”

Industrialised countries are also divided on their views of forestry in the CDM. The European Union, whilst not in complete opposition, is keen to maintain the current ‘slow track’ approach, even in the light of the conclusions of the IPCC report. Within the European Union however, Holland is a relatively strong proponent (having led the way with carbon offset projects through the FACE Foundation), with Germany and the United Kingdom more cautious. Japan, United States, Canada, Australia, New Zealand and Iceland, all strongly in favour of a wide role for sinks in meeting the Kyoto commitments, the CDM included. Furthermore, the United States is pushing strongly for agriculture and particularly agricultural soils to be included, under the open-ended Article 3.4. The degree to which this will also apply to eligible land use activities under the CDM is unclear.

Polemic also prevails amongst the international Non Governmental Organisations (NGOs). While some NGOs strongly favour forestry’s inclusion in the CDM (e.g., The Nature Conservancy, Conservation International, Winrock Foundation, Sierra Club), other NGOs are still quite uncertain and suspicious (e.g., WWF International, Greenpeace, Friends of the Earth). There is some support for the CDM from grass-roots organisations and local NGOs. They see the CDM as a potential source of funding for their programmes (e.g., see Letter of Brasilia, 1998; also the variety of NGOs involved in carbon offset projects - Tipper 1997). However, others see it as another threat to the rural poor from the processes of globalisation (e.g., Centre for Science and Environment, India).