1.1 The Asia-Pacific Region
1.2 The United Nations Framework Convention on Climate Change (FCCC)
1.3. Investment Patterns and Cost of CO2
1.4 Opportunities for Tangible Benefits in the Asia-Pacific Region
Growing concern about the effects of climate change has led to increasing research, policy initiatives, and development of innovative programs and projects around the world. These activities have focused on developing a better understanding of the environmental, economic, and social risks associated with climate change. Developing policy, program and project measures that reduce human-induced greenhouse gas (GHG) emissions (i.e., CO2, N2O and chlorofluorocarbons [CFCs]) are of particular interest. Opportunities to reduce GHG emissions exist in the energy, transportation, agriculture, and forestry sectors of the global economy. These opportunities vary regionally and nationally, depending on a number of environmental, economic, and social variables.
International negotiations through the United Nations Framework Convention on Climate Change (FCCC) have led to the establishment of Quantified Emission Limitations and Reduction Objectives (QELRO) for industrialized countries – most notably the United States, European Union and Japan. QELRO are to be achieved through both domestic and international actions using an emerging international trading system for GHG emissions. One international approach available to these countries has been tested for several years: to offset their industrial emissions, parties in industrialized countries have invested in low-cost carbon dioxide mitigation projects in developing countries that reduce, avoid, or sequester GHG emissions. In this paper “carbon offset” project activities are generally referred to as certified Emission Reduction Credits (ERC). Engaging in ERC projects has been voluntary in nature with no actual credit received for the emissions reduced, avoided, or sequestered, but in the near future ERC projects will be a major mechanism for developed countries to achieve their legally binding QELRO.
Profitable ERC project opportunities have been identified in the energy, transportation, and forestry sectors. The pilot phase for Activities Implemented Jointly (AIJ) provides a framework for countries to both experiment and gain experience with ERC projects on a voluntary basis. Many governmental and private sector programs now promote ERC pilot projects. As of October 1997, about 40 projects are officially recognized by the FCCC. This number is likely to grow significantly. Many projects focus on the forestry sector, as opportunities in this sector are of low cost relative to other sectors. Thus, they are often termed “no-regrets” projects since they tend to be compatible with other important environmental, economic, and social priorities.
Just as businesses often locate manufacturing facilities in developing countries to lower costs and increase profit margins, developed countries see a comparative advantage in developing and investing in forestry sector ERC projects in developing countries. The comparative advantage is generally related to low-cost land and labor and greater biomass growth rates of tropical forests (sequestration and storage) versus that of countries in temperate and boreal regions. On the other hand, distance, business culture differences, and other technical and social challenges in some Asia-Pacific countries increase investment risks and transaction costs.
An important issue worth noting is that GHG emission levels of developing countries will soon surpass developed countries. ERC project activities financed by developed countries represent investment that ultimately helps directly and indirectly reduce national level emissions of developing countries. ERC projects, by definition, should contribute to sustainable economic development and be endorsed by governments of both developing and developed countries. Thus, the host country government acceptance or approval provision of ERC projects provides for developing country government oversight of ERC investment in their country – presumably ensuring that the investment is consistent with their national development priorities. This report focuses on opportunities and constraints in forest sector ERC projects in the Asia-Pacific Region. The following sections explore opportunities for developing such carbon dioxide emission offset projects in the Region. Subsequent sections provide background on the international policy framework for ERC (or GHG mitigation) mechanisms, namely Joint Implementation (JI), Activities Implemented Jointly and the emerging Clean Development Mechanism (CDM).
The Asia-Pacific Region is one of the world’s most significant for studying climate change and potential strategies to address it. The Region contains many island nations and vast coastal regions where rising sea levels can have a significant impact. Its countries contain major portions of the world’s remaining natural tropical forests, plus the majority of the world’s population. The Region’s forests are not only extensive terrestrial sinks of GHGs, but also major reservoirs of global biological diversity. Understandably, most countries in the Region feel both vulnerable to and threatened by possible climate change.
Arguably, all socio-economic levels within the Region have benefited from the growing liberalization of the world economy. Investment by developed countries is generally credited for the Region’s unprecedented economic growth. ERC project investment in a most basic sense offers an opportunity for investment in climate friendly projects and the emerging market value of carbon dioxide. Such ERC investments can be viewed as an innovative form of investment fueling sustainable development.
Historically, developed countries have been responsible for most GHG emissions and, therefore, bear much of the responsibility for the problems associated with climate change. However, the Asia-Pacific Region is projected to become one of the world’s largest contributors of GHG emissions. China, for example, the world’s most populous country, recently became the second largest emitter of GHG, replacing the European Union. China, India, and Indonesia are currently among the top ten countries in GHG emissions. Their emissions, relative to other nations, are expected to grow significantly unless major preventive steps are taken (WRI, 1994). China alone accounts for 9.9% of total global emissions, followed by India (3.7%) and Indonesia (1.9%). New technologies and strategies for reducing GHG emissions from these countries are, therefore, critical. The challenge is to enable countries to pursue sustainable development goals while promoting energy efficient technologies and conservation of carbon sinks (forests), thereby minimizing further increases in GHG emissions.
1.2.1 The 1997 Kyoto Protocol
1.2.2. Policy Framework for Joint Implementation, Activities Implemented Jointly and the Clean Development Mechanism
1.2.3. The Future of the Protocol and Emission Reduction Credits (ERC)
1.2.4. The Kyoto Protocol and the Forestry Sector
The FCCC, which opened for signature during the 1992 United Nations Conference on Environment and Development (UNCED) held at Rio de Janeiro, Brazil, was designed as a first step in dealing with the threat of anthropogenic climate change. The main objective of the Convention is to stabilize atmospheric GHG concentrations at a level that would prevent dangerous anthropogenic interference with the climate system.
The FCCC contains a wide range of provisions. Under Article 4.1, all Parties are obligated to prepare national inventories of emissions by sources and removals by sinks of certain GHGs (see also FCCC Article 12 regarding communicating and reporting methodology) and undertake measures to mitigate climate change. Article 4.1 also requires all Parties to cooperate in controlling, reducing, or preventing anthropogenic emissions of GHGs not controlled by the Montreal Protocol [on Substances that Deplete the Ozone Layer]. Article 4.2 requires industrialized country Parties and other Parties listed in FCCC Annex I1, which comprises those countries that were members of the Organization for Economic Co-operation and Development (OECD) at the time of adoption, some Eastern European countries, and some of the countries that were part of the former Soviet Union, to adopt policies and take measures to limit anthropogenic emissions of GHGs and protect and enhance sinks. Under Article 4.2, Annex I countries must also report periodically on the policies adopted and measures taken “with the aim of returning individually or jointly to their 1990 levels these anthropogenic emissions of carbon dioxide and other greenhouse gases not controlled by the Montreal Protocol.” The FCCC explicitly recognizes that countries have “common but differentiated responsibilities.” Hence, all of the Parties to the FCCC have obligations to fulfill in terms of reporting, communications, and general actions, but only Annex I countries are subject to an aspirational “aim” of returning national emissions to 1990 levels by the year 2000.
1 The original Annex I countries are: Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Czechoslovakia, Denmark, the European Community, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, the Russian Federation, Spain, Sweden, Switzerland, Turkey, Ukraine, the United Kingdom, and the United States of America. Since the FCCC opened for signature, additional countries have joined the OECD and there is no consensus among the FCCC Parties as to whether some of these new OECD members should become Annex I countries. This is particularly true of newly industrialized countries such as Mexico and South Korea.Despite the fanfare attending the completion of the FCCC, the Convention was but the first step on a much longer road toward ameliorating global climate change. The Intergovernmental Panel on Climate Change (IPCC) had “calculated with confidence”, that to stabilize atmospheric concentrations of long-lived GHGs at 1990 levels, it would be necessary to reduce current levels of emissions from human activities by 60%; yet Article 4.2 of the FCCC, which delineates the key obligations of industrialized countries with respect to climate change and establishes a reduction “aim,” contains no binding emission targets or timetables.
In recognition of the preliminary nature of the commitments, FCCC Article 4.2 calls for a review of the adequacy of commitments at the FCCC’s first Conference of the Parties to the Convention (COP). COP-12 was held in Berlin in April 1995. At that meeting, the Parties decided that existing commitments were inadequate to meet the Convention’s ultimate objective for three reasons:
1. national projections of GHG emissions indicated that most Annex I countries were not on track to meet the Convention’s emissions aim for the year 2000;Consequently, in a decision known in popular parlance as the “Berlin Mandate,” a process was established to strengthen the FCCC’s commitments for Annex I Parties through a protocol or other legal instrument with the goal of establishing Quantified Emissions Limitation and Reduction Objectives (QELROs or “targets”) for the post-2000 time-frame, and of elaborating policies and measures relating to emissions reductions. A new body, the Ad Hoc Group on the Berlin Mandate (AGBM), was established to negotiate the new legal instrument, with a view to its adoption in 1997 at COP-3. The AGBM met eight times from 1995 through 1997 to discuss and develop the overall framework and specific provisions for the new legal instrument. It produced a draft text to serve as the basis for negotiations among high-level officials of the Parties to the FCCC at COP-3 in Kyoto, Japan. Thus, the stage was set for adoption of the Kyoto Protocol.2. the Convention contained no provision relating to GHG emissions for the period after 2000; and
3. Parties recognized that stabilizing GHG emissions at 1990 levels would not be sufficient to stabilize atmospheric GHG concentrations.
2 COPs are identified by adding a number at the end, so that the first COP is denominated COP-1.
Of significance to the development of the Protocol and to its prospects for adoption by the Parties to the FCCC, was the decision in the Berlin Mandate at COP-1 that no new commitments would be negotiated for developing countries as part of the process adopted by the Parties through the Mandate. In general, the view of many developing countries, even before the negotiation of the FCCC, has been that it is the responsibility of the industrialized countries to adopt significant measures to reduce their GHG emissions before the developing countries should potentially place their economic development at risk by adopting similar measures. This view stems largely from the fact that the industrialized countries, due to their economic development, historically were the largest GHG emitters and thus, in the view of developing countries, are responsible for the problems associated with climate change. This perspective is reflected in the Berlin Mandate, which, as noted above, expressly precludes the introduction of new commitments for developing countries as part of the process adopted by the Parties in the Mandate. However, the Berlin Mandate did call for the Parties to “advance the implementation of existing commitments under [FCCC] Article 4.1,” commitments which apply to all FCCC Parties. This was another focus of negotiations and analytic efforts leading up to the Kyoto Protocol.
The Kyoto Protocol contains several defining features. It provides for legally-binding emissions targets for Annex I countries, based on a five - year commitment period. It allows Parties flexibility with respect to national implementation of their commitments. It also provides flexibility in the international context by providing for the use of emissions trading and other market - based mechanisms, including cooperative projects between developed and developing countries. In addition, it takes a comprehensive approach by covering both GHG emissions and sequestration by sinks, and by including not only CO2, methane and N2O, but also the three synthetic GHGs. These and other important features are explained below.
The Kyoto Protocol contains substantive commitments in all three areas specified by the Berlin Mandate: binding emission limitation and reduction targets (i.e., QELROs) for industrialized countries; a requirement for industrialized countries to implement or further elaborate appropriate policies and measures to meet their QELROs as established by Article 3 of the Protocol; and provisions that reaffirm and seek to advance the implementation of certain commitments that pertain to all FCCC Parties. In addition, the Protocol contains several new mechanisms to provide for transboundary trading by Annex I countries of emission allowances and credits arising from QELROs.
Article 4.2 of the FCCC provides that Parties may “individually or jointly” implement policies and measures aimed at reducing GHG emissions to 1990 levels by the year 2000. In response to broad equity and developing country concerns about the potential impact of JI projects on development, the COP-1 criteria require that all pilot JI projects:
1. support national development priorities;The Convention, however, contains no further guidance on how such cooperation might occur. This omission led to debate as to whether the FCCC allows Annex I countries and developing countries to generate ERCs through “joint implementation”. Many Annex I countries view JI through emission reduction projects in developing countries as a cost - effective way to reduce global emissions, while promoting the transfer of climate - friendly technology, if credit for reductions is provided to the Annex I country. Other countries, primarily developing countries, fear that industrialized countries would use JI as a way to avoid taking domestic action to reduce GHG emissions. The developing countries also fear that JI would allow industrialized countries to buy up all of the relatively cheap and easy emission reductions available in developing countries, so that when the developing countries take on emission reduction targets, only the more difficult and expensive reductions would remain for attaining their targets.2. be approved by both the host and investor country governments;
3. bring about real, measurable climate change benefits that would not have occurred without these projects;
4. be implemented with additional resources beyond normal official development assistance flows; and most importantly
5. not receive any carbon credits for emission reductions during the pilot phase.
Unable to resolve the dispute over credit for JI with developing countries, the FCCC Parties established at COP-1 a pilot - phase of “Activities Implemented Jointly” (AIJ), to gain experience in cooperative projects to reduce emissions. The pilot phase allows Annex I Parties to invest in emission reduction projects in non-Annex I countries, but does not allow Annex I countries to take ERC credit for such projects. The Parties agreed to make a decision by the end of the year 2000 on whether to continue or terminate the pilot phase and on whether ERC may be provided for such projects.
Debate over JI continued during the negotiation of the Kyoto Protocol. Several Annex I countries, including the United States, proposed ending the pilot phase of AIJ and authorizing credit from JI with developing countries in the Protocol. China and many of the Group of 77 – representing the developing countries – vehemently opposed this proposal. The EU supported JI with credit among Annex I countries, but insisted on waiting for completion of the pilot phase of AIJ to take a decision on developing country participation in JI for credit.
Another component of the debate was the differing views on emission reduction cooperation among Annex I countries. The United States, New Zealand and other non-EU Annex I countries proposed a broad system to allow Annex I countries to trade portions of their assigned amounts.3 The proposed “emissions trading” system would require countries, as part of their national monitoring and reporting systems, to track and report country-to-country emissions transfers, which would be recorded by the FCCC Secretariat. Private sector participation would be allowed, but would be overseen by the Parties themselves, not by the Secretariat or any other international body. The EU opposed this formulation, in favor of a project-based JI system among Annex I Parties only.
3 Target-based emissions trading of assigned amounts deals with transfers of portions of overall budgets from one country to another and therefore differs from JI, which is based on specific projects. While JI could produce transferable credits, emissions trading allows transfers in actual assigned amounts based on targets. Under target-based trading, each Party is responsible for ensuring that the tons of emissions that it has sold are “good.” Each Party also must ensure that its emissions are less than its assigned amount, adjusted for trading transactions, at the end of the commitment period. Under a JI system, the emission reductions generated are certified prior to sale.Under the EU proposal, Annex I countries could only trade credit for emission reductions generated from specific projects. The proposed system would require international certification and tracking of each individual project and resulting trade, with one exception: trade within the EU bubble. Many non-EU Parties argued that the EU’s internal burden-sharing arrangement was, in fact, a form of internal, EU target-based emissions trading, and that all Annex I countries should be provided with the same opportunity. The EU countered that the burden-sharing is necessary due to, and is strictly a product of, the EU member states’ unique economic cooperation.
Ultimately, four distinct mechanisms reflecting the competing proposals on transboundary emission reduction cooperation were included in the Protocol. Project-based transfer of credits, or ERC, among Annex I countries, is authorized by Article 6 and accounted for in Article 3.10 and 3.11. Through these provisions the Annex I countries and private-sector participants would be able to invest in emission reduction projects in the territory of any other Annex I country and to apply ERCs for such projects toward their national emission targets. As a precondition for acquiring credit for an emission reduction through such project-based ERC, Parties must be in compliance with the measurement and reporting requirements of the Protocol. The Article does not contain rules or guidelines for the certification and tracking of projects or for attaining credit for emission reductions generated by such projects, but these may be further elaborated by the meeting of the parties (MOP).
In comparison to project-based trading under Article 6, future development of a target-based emissions trading system is authorized by Article 17 and accounted for in Article 3.10 and 3.11. Despite a difficult, lengthy debate the Parties were not able to agree in Kyoto on the specific mechanism or rules for target-based emissions trading; therefore, the language of these Articles does not provide much detail on the type of target-based trading system contemplated by the Parties. Instead, the Protocol simply authorizes Annex B countries to participate in emission trading with each other and use such trading to meet emission target commitments under Article 3. It also directs the COP (under the FCCC) to develop the rules and modalities for emission trading (e.g., concerning accounting, verification, and reporting of trades). If the COP does not agree on modalities and guidelines for emissions trading, Annex I countries might be able do that on a bilateral or multilateral basis. Finally, the Protocol specifies that such trading shall be “supplemental to domestic actions” to meet emission target commitments. The COP, rather than the MOP, was tasked with the duty of defining the rules and modalities of trading prior to entry into force of the Protocol.
Authorization of the EU burden-sharing arrangement is contained in Article 4. Early in the negotiations, as a concession to other Annex I countries which viewed the burden-sharing arrangement as providing a special advantage to EU member states, the EU proposed language which would allow other Annex I Parties the option to “bubble” (i.e., meet their commitments individually or jointly). Article 4 allows Annex I Parties, including Annex I Parties acting within the framework of a regional economic integration organization, to agree to jointly fulfill their Article 3 commitments.
A fourth mechanism for international cooperation on emission reductions is authorized by Article 12 and accounted for in Article 3.12. This mechanism reflects the evolution of a concept first proposed by Brazil as a non-compliance mechanism – the “Clean Development Mechanism” (CDM). The CDM concept received full G-77/China support and is viewed as distinct from JI in the following: CDM projects can be developed by the developing country itself and the CDM guidelines would be uniform among nations (multilateral), whereas JI is unilateral. Under the CDM, Annex I Parties may invest in emission reduction projects in developing countries and may apply some portion of the reductions generated by these projects toward meeting their emission target under Article 3. In return, a share of the proceeds from projects will be used to finance adaptation to climate change in particularly vulnerable developing countries, as well as to cover the administrative expenses of the mechanism. The CDM will be supervised by an executive board and subject to the guidance of the MOP, which will develop rules and guidelines for operation of the CDM, and designate operational entities to certify and track projects. Certified emission reductions obtained as early as the year 2000 may be used to assist in achieving compliance in the first commitment period. Hence, under the CDM, Annex I countries may be able to generate ERCs applicable to their QELROs by investing in projects in developing countries that meet certain requirements.
The Kyoto Protocol has the capacity to move its Parties further along toward a regime that more adequately addresses the problem of global climate change. The development of binding targets and timetables for Annex I countries begins to address the main shortfall of the FCCC. It remains to be seen, however, the extent to which the Parties will be able to develop the various market mechanisms needed to realize the full potential for cost-effective ERC systems, such as emission trading and the CDM.
In the near term, further action on elaboration of the Kyoto Protocol is likely to focus primarily on the rules and guidelines for emissions trading and other market-based mechanisms in preparation for COP-4 in November 1998 at Buenos Aires, Argentina; although Decision L.7, through which the Parties participating in COP-3 adopted the Protocol, lays out additional topics for discussion at COP-4. The rules and guidelines for emissions trading might include mechanisms for verifying and tracking emission trades, and accountability and consequences for violating trading rules. Similar considerations might be considered in the development of the modalities and procedures for the CDM.
It will also be important to involve developing countries more closely in efforts to combat climate change. As indicated above, this is necessary because of the volume of GHG emissions expected from developing countries in the future, particularly from large economies such as those of China, India, and Brazil. It is also critical from a political perspective as the United States and others want greater developing country involvement.
Article 3.3 of the Kyoto Protocol mentions that net changes from deforestation, reforestation, and afforestation will be included in Annex I national emissions inventories. Articles 6 and 12 contain broader language providing support for ERC project activities, including the range of forest sector activities.
Article 3.3 language has generally been regarded as complicated, resulting in different interpretations. Some analysts contend that the apparent omissions of forest management and especially conservation mean that they would not qualify as ERC activities in the future. Others contend that forest management and conservation are encompassed in the terminology – deforestation, reforestation, and afforestation. Article 6 mentions that projects can be developed in “any sector of the economy” which could encompass conservation and forest management. Article 12 pertains to non-Annex I countries and defines the CDM. Its language regarding ERC seems to be even broader than that of Article 6.
In summary, there are three important points to recognize: 1) sinks are definitely included in the Protocol, although forest management and conservation are not specifically mentioned; 2) forest management seems to have broader support than conservation for inclusion in Protocol ERC activities; and 3) the Protocol provides for credit for ERC project activities. Much debate and interpretation will occur over the coming months, especially relating to the inclusion or omission of conservation and forest management. A June, 1998 FCCC meeting in Bonn, Germany and the November 1998 COP-4 meeting will provide fora for both Annex I and non-Annex I countries to address these issues and define the scope and nature of an ERC project regime.
The concept of ERC project credit, which was lacking prior to Kyoto, is the driving force or incentive for investing in ERC activities. By agreeing to crediting and emissions trading, Parties to the Kyoto Protocol have done much to increase investor interest in the value of carbon dioxide and offsets of emissions. The immediate effect of the policy uncertainty (regarding forestry and general ERC activities) on investment is unclear, but investor interest has clearly increased since Kyoto and the market is developing.
Several dozen carbon offset projects have already been developed throughout the world, some of which are discussed in later sections of this report. Investment capital has so far generally come from developed country governments and private sector companies, primarily in the electric utility industry. Most projects have been in the forestry and energy sectors, and have been undertaken only as pilot projects. This is consistent, however, with the basic purpose of AIJ, as its purpose is to demonstrate the various valid approaches and proven efficiencies of such projects, while also identifying potential problems. The costs of these early carbon offset projects in the forestry sector have been estimated at between US$ 0.50 and US$ 2.00 per ton of CO2 (Dixon et al., 1993). Some of these estimates, however, are considered “soft”, as most participating investors have leveraged support from other organizations, such as environmental and development advocacy groups, whose inputs are generally not accounted for in total GHG costs.
Another way to estimate the potential costs for carbon offset projects is to examine existing or projected regulatory costs for GHG emissions. Though there are no current US taxes on GHG emissions, Manne and Richels (1994) estimated that uncertainty over future GHGs regulations in the US has influenced electric utilities’ decisions to the equivalent of a carbon tax of US $4.75 per ton of CO2. Several other countries, and some state jurisdictions in the US, have already imposed or are considering taxes on energy consumption based on carbon content. Scandinavian countries have already imposed such energy taxes – based on carbon emissions – on both industry and personal consumption. For industry consumption, these taxes currently range from US$ 3.93 to US$ 10.39 per ton of carbon (OECD, 1994). Future projections for the cost of CO2 emission taxes vary significantly, depending on the policy objectives and level of GHG reductions, as well as parallel policy incentives for developing alternative energy technologies. Two recent analyses estimated the following costs per ton of carbon4:
· The International Energy Agency estimated that for developed countries (i.e., OECD), a tax of US$ 72 per ton of carbon would be required to lower emissions by the year 2050 to 12% below 1990 levels.· The US Congressional Budget Office estimated that a tax of US$ 28 per ton of carbon would be required to stabilize US emissions at 1990 levels, reflecting the official US commitment to date.
4 These cost estimates are for tons of carbon; to obtain equivalent cost estimates for CO2, divide these figures by 3.67.
A major benefit developing countries could obtain through a properly structured international emission reduction system is access to foreign capital investment and new, superior technologies. Many developing countries seek greater foreign investment to improve their infrastructure. Development of such emission reduction measures can provide a mechanism for directing such investment to areas where it is most needed. In addition, many countries are seeking ways to improve their obsolete or inefficient technologies and see developed country investment as a means of obtaining state of the art technologies. Introduction of new technologies through such investment in energy efficiency or alternative energy sources could allow countries to reduce energy, especially oil imports, which in turn could free some foreign exchange plus provide additional funds for development programs.
ERC projects in the forestry sector could, for instance, provide biomass as an inexpensive and purely local source of alternative fuels. Forestry projects could provide many environmental benefits: reducing soil erosion, protecting watersheds, enhancing water quality, and conserving biodiversity, while at the same time creating or maintaining valuable carbon sinks. The following opportunities are adapted from a paper presented at a 1997 AIJ workshop in India.
Increased Investment in Priority Sectors
Because the FCCC criteria specifically requires host country government approval for international ERC projects, countries have an opportunity to direct new private capital flows into priority sectors of their economies. Thus, pilot projects could contribute to forestry sector investments that host governments deem desirable. These investments carry certain advantages over both joint ventures and foreign direct investment as the economic, social, and environmental benefits are an integral part of the project, not merely incidental effects.
In contrast, the viability of joint ventures is based primarily on the financial returns of the project within the host country. The global environmental benefits, if any, are purely by-products. For ERC projects, the contribution to GHG abatement is explicit and closely monitored. The economic return usually includes incentives provided by the host and investor country governments. A future trading system for carbon credits could also be included in the project’s value. Projects that benefit the global environment can move forward even if they would not be financially attractive. Although joint venture projects do not necessarily provide these other benefits and are probably difficult, or nearly impossible to develop, they could well provide a more direct, less politically charged approach to obtaining foreign investment on acceptable terms.
Technology Transfer
ERC project principles require parties to report the transfer of environmentally sound technologies and know-how to developing countries. This framework, along with government approval of projects, can insure that state-of-the-art technologies are brought to countries in the Region. In the forestry sector reduced impact logging, intensive plantation management, conservation through social forestry, and biomass energy systems are only a few of the technologies that could be transferred through ERC projects.
Reduced Petroleum Imports
ERC projects that promote renewable energy sources, industrial and power generation efficiency, and fuel efficiency in transportation, can ease the burden of petroleum imports and free funds for critical development needs. Though the costs of some alternative energy sources are higher than coal thermal plants or diesel generators, most renewable technologies, such as biomass energy, are in the long run highly competitive.
Employment Generation
ERC investment can also assist countries in creating new jobs for their underemployed and growing workforces. Promoting renewable and decentralized power generation technologies, which are more labor and less capital intensive, can create new jobs. In the forestry and agricultural sectors, new jobs can be created through the development of sustainable management practices. Examples of more labor-intensive technologies include wind power and biomass energy production. New power generation plants can support small-scale rural industries, food and wood processing, and traditional crafts, just to name a few. Access to power also increases irrigation potential, thus raising crop yields, agricultural employment, and off-farm benefits.
Social and Infrastructure Benefits
ERC projects in the energy sector, especially those using decentralized technologies, in turn increase local food supplies and employment opportunities. Projects promoting sustainable forest management and the more efficient use of fuelwood – energy-efficient cookstoves, for instance – effectively enhance local access to fuel and, thus, encourage enterprises based on non-timber forest products. This would also protect valuable GHG sinks.
Institutional Capacity
A major barrier to moving forward with ERC projects in most developing countries is the lack of institutional capacity to design, execute, and monitor projects. That only a few pilot phase AIJ projects have emerged in the Region highlights the need for capacity building. Foreign investment, while it may provide capital, does not necessarily contribute to local skills. On the contrary, many projects have relied heavily on foreign equipment, consultants, technical expertise, and monitoring – all highly expensive. In the long run, this perpetuates dependence on outside experts, clearly inconsistent with sustainable development. Reporting guidelines during the pilot phase require project participants to assess the degree to which they strengthen host country capacity. Such projects, therefore, should provide opportunities for training and assistance in project planning and development, technology assessments, marketing, project evaluation, communications and outreach, and, of course, policy analysis. Capacity building strategies should be directed to organizations at the local, state and national levels. This is rarely the case.
Local Environmental Benefits
Population growth, rapid urbanization, plus the development of heavy industry, and unsustainable agriculture and forestry practices have had serious adverse environmental impacts in many countries in the Region. Throughout the developing world, it is the poor who suffer most from air and water pollution, erosion, and other environmental problems. In many cases, government policy may exacerbate problems rather than solve them. International regimes, such as ERC, therefore, should focus on providing local environmental benefits and on promoting sustainable livelihoods, which do not degrade the environment. AIJ pilot phase criteria require projects to report on the local social and environmental benefits provided to host countries, beyond the benefits of GHG mitigation alone.
