2.1 Developing Countries
2.2 Developed Countries
2.3 Private Sector Initiatives
The success of ERC projects depends upon structuring projects to meet the objectives and expectations of all parties involved. In creating a framework for ERC projects, it is critical to consider the expectations of:
· the developing countries which will host such projects;Over the past decade, initiatives to address climate change have emerged from international fora, national governments, and the private-sector. These initiatives and the responses to them are discussed in the following sections, presenting varying perspectives on ERC projects from both developed and developing countries.
· the developed countries from which the investors will come; and
· the investors themselves, who will generally be private sector organizations responsible for substantial GHG emissions.
2.1.1. The Asia-Pacific Region
2.1.2 Costa Rica and Central America
As noted earlier, developing countries do not have explicit commitments under the FCCC to reduce their GHG emissions, nor are they likely to have any in the foreseeable future. However, emission trading and ERC projects have a significant impact on developing countries. Developing countries have been active in defining the scope and structure of ERC projects. Developed countries see investment in such projects as a way of meeting their emissions reduction commitments in the most cost-effective way. Developing countries generally view such projects as a low-cost emissions reduction opportunity for developed countries, and some have been particularly sensitive to the concept.
For developing countries, different regions of the world have responded differently to prospects for initiating ERC projects. Latin America has benefited the most from ERC project investment. Among developing countries, Costa Rica has formulated the most sophisticated approach to developing such projects. The success of Costa Rica’s approach created interest in other countries of Central and South America, such as Mexico, Belize, and Bolivia. In other regions, the Russian Federation created an internal process for reviewing forestry sector ERC proposals, while countries in Eastern Europe, such as Hungary and the Czech Republic, are developing promising ERC initiatives.
Developing countries in Asia and the Pacific may see ERC projects as a potential means of helping to meet national development priorities, but they have been more reluctant than countries in other regions to pursue ERC opportunities. A number of countries have exhibited a wait-and-see attitude and seem skeptical as to its success. Others, such as India, have supported a pilot phase for AIJ, arguing that time is needed to experiment with the concept and insure that ERC projects will work for the benefit of developing countries. Generally, the active support of developing countries has been lacking, which has contributed to a limited number of ERC projects in the Asia-Pacific Region.
Several countries of the Asia-Pacific Region lead developing country resistance to ERC projects and international trading. This has created difficulties for potential ERC project developers in the Region, especially as there is limited knowledge and enthusiasm for such projects within host country governments. The Asia-Pacific Region has generally been less receptive to ERC projects largely due to political tensions such as:
· Developing countries want to see progress by the developed countries in reducing their GHG emissions at home. They want developed countries to face up to the policy and economic realities of reducing their own energy consumption before calling on poorer nations to do so.The varying support for ERC projects around the world can probably be attributed to the stage of economic development and concern over ERC projects as a form of developed-country eco-imperialism. Eco-imperialism has become a concern to developing country governments, industry and NGOs only over the last decade. ERC projects are thus viewed by some as another ploy whereby developed countries dictate or control forestry (and energy) resources in a developing country. Countries with rapidly developing economies, mostly in Southeast Asia, but also including a few Latin American countries (Brazil, Venezuela), have expressed limited support. Lesser-developed countries of the Asia-Pacific Region are more receptive, although the position of regional leaders (e.g., Malaysia) affects their positions. The difference between lesser and more developed countries of the Region is that the less developed countries are more dependent on international assistance, such as ERC project investment. Another reason is that more industrialized developing countries anticipate increasing emissions from their continued rapid economic development and are reluctant to engage in activities that might reduce their economic growth.· Developing countries maintain they have a right to develop their natural resources and advance their national economies in a manner similar to what most developed countries used in the past to fuel their own economic development. Some countries question why developing countries should bear the brunt of global responsibility to reduce GHG emissions now when it is their opportunity to use their natural resources in ways that meet the demands of their growing populations.
· The current ERC framework will allow investors in developed countries to purchase the lowest-cost GHG credits from the developing countries, forcing the latter to invest more of their own resources in more expensive GHG reduction activities to meet their own future obligations.
Geography also plays a part. Latin America is closest to the United States where the initial ERC concept, JI, first became operational. US-based NGOs and the private companies that first advanced ERC projects were most active in the Latin American Region. Thus, since the inception of the ERC project concept, awareness of the concept has been greatest in Latin America.
The response to ERC projects in the Asia-Pacific Region – which in different situations might be interpreted as opposition, disinterest, or caution – results in limited understanding, or even confusion, among governmental officials and non-governmental representatives. In a number of countries, it is therefore difficult to determine the government’s position because officials in various ministries disagree or are uncertain about the costs and benefits of ERC projects in general.
As developing countries in the Region begin to recognize potential benefits resistance seems to be waning. India and the Philippines recently released their criteria for AIJ projects. Other countries seem set to follow. ERC projects are increasingly viewed as a way for developing countries to meet their national development and environment priorities while contributing to their economic, social, and institutional development. These benefits, in turn, can provide the basis and the funding for broader objectives, such as better health care, education, and human development – but only if the ERC system is ultimately restructured to make these far-reaching potential benefits both possible and visible.
As mentioned earlier, Latin America has been a leader in developing ERC programs. Costa Rica is widely seen as the most innovative leader in promoting ERC projects. It has had the greatest success of all developing countries in getting projects approved through international programs and in obtaining their funding. Costa Rica’s success is generally attributed to early recognition by the nation’s political leadership that ERC investment holds tremendous potential for attracting foreign capital to support development activities consistent with Costa Rica’s own environment priorities. This small country has, therefore, created its own internal research, development, and financial institutional mechanisms to promote ERC projects. Its leadership and success, moreover, have spilled significantly over to other countries in Central and South America. Mexico, Belize, and Bolivia, have all benefited from Costa Rica’s experience and now encourage and assist project developers in attracting outside investment.
In July 1994, the Ministry of Natural Resources, Energy and Mines established the Costa Rica Office for Joint Implementation (CROJI) for facilitating and promoting the participation of Costa Rican private companies in GHG mitigation activities (Van der Gaast, 1996). In October 1994, the Costa Rican government, for instance, was the first nation to sign a bilateral JI agreement, in this case with the United States.
Costa Rica already has eight United States Initiative on Joint Implementation (USIJI) approved projects, four of which are in the forestry sector. These projects include several forestry activities: preservation, sustainable forest management, reforestation, and agroforestry. A new forestry law passed in March 1996, created a specific framework for attracting ERC investments to forestry sector projects. It provides for a Costa Rican National Forestry Financing Fund (FONAFIFO) to assist with project development and to administer funds for small-scale reforestation and forest management projects (Tattenbach, 1996).
CROJI has developed a Carbon Fund to oversee carbon-offset projects. Similar to a mutual fund approach, the Carbon Fund protects investors against risks associated with projects by allowing them to purchase portions of the Fund’s overall GHG reductions. The Fund also helps investors reduce transaction costs for development of individual projects, plus ensures the credibility of GHG reductions through rigorous, non-partisan, third party verification. The Fund serves as an intermediary between project developers and ERC investors by creating Certifiable Tradable Offsets (CTOs)5 for purchase by investors.
5 CROJI (1996) describes a CTO as “... a specific number of units of GHG emissions reduced or sequestered in which all phases of the JI project in the host country have already been completed and in which the without project baseline has been certified by both the home and host countries. The home country verification would certify that the offsets are of high enough quality to allow them to count against national and firm level GHG reduction commitments, if such crediting is permitted under the FCCC.”CROJI issues CTOs through two separate JI initiatives: A Protected Areas Project (PAP), which focuses on preserving biological resources through land purchases and aimed at consolidating Costa Rica’s system of National Parks and Biological Reserves. It also includes a Private Forestry Project (PFP) for compensating landowners for conservation, reforestation, and sustainable management efforts (Tattenbach, 1996). FONAFIFO developed a revolving fund, starting with a small carbon tax providing funds for launching several PFP projects. Project developers will assign GHG reductions to the Carbon Fund, which will then be sold as CTOs to interested ERC investors. CTO revenues will then be recycled into additional PFP projects, thus creating more such projects.
Costa Rica’s innovative leadership and success in promoting JI projects appears to have had a significant impact on all of Latin America. Other countries have now developed their own ERC proposals and seek to develop domestic frameworks enabling them to better compete in attracting foreign capital. The Mexican government, for example, recently convened a workshop to bring ERC project developers together to share lessons on how to develop such projects, and how to explore ways to support the development and marketing of ERC projects.
The Mexican government has demonstrated its interest in ERC investment through establishing a focal point for JI/AIJ within the Instituto National Ecologica (INE), and three committees to review potential projects and to address methodological issues related to both forestry and the energy sector. The forestry sector’s priority is significant as the first two Mexican-approved projects are in this very sector. At an April 1997 workshop in Chiapas, a government official noted that forestry sector opportunities provide an important short-term “window” for JI initiatives that could help the Mexican government meet sustainable development objectives while providing environmental priorities leading to substantial GHG reduction benefits. In the long term, however, he stated that investments in energy efficiency and alternative energy sources will be necessary.
A 1997 workshop in Chiapas, Mexico explored some of the innovative mechanisms used in the Scolel Te project (see Section 4.3.2): using a credit union as an intermediary between investors seeking GHG reductions and farmers engaged in forestry and agroforestry to ensure GHG reductions. Workshop participants also discussed national means for developing acceptable methodologies for quantifying forestry sector GHG reductions, while creating a viable portfolio of ERC projects, such as Costa Rica’s Carbon Fund. Investments in Mexico would thus become less risky and more cost-effective for investors.
2.2.1 The United States
2.2.2 The Netherlands
2.2.3 Australia
2.2.4 Canada
2.2.5 Japan
As noted earlier, developed countries are urged by the FCCC to take the lead in designing and applying strategies for reducing global GHG emissions based on their commitments under the FCCC to reduce national emissions. Such commitments have generally not been met and the Kyoto Protocol has increased pressure to meet QELROs. In general ERC projects have focused on:
· Developing cooperative and mutually beneficial methods for reducing GHG emissions on a global scale and to take advantage of cost-effective opportunities in developing countries.Developing country ERC projects interest developed countries because any carbon dioxide offset in developing countries should be cheaper. They also, in effect, represent an additional form of international development assistance – which has generally seen significant reductions in recent years. Developed countries’ concerns center on the reliability and credibility of projects in developing countries where it is often difficult to implement and monitor projects. This is especially true of land use projects where technical, financial, institutional, and policy barriers are common. Forestry sector ERC projects, therefore, are sometimes viewed as risky ventures needing contractual safeguards, such as strict monitoring and verification mechanisms.· Promoting sustainable development in developing countries through technology transfer and increased foreign investment.
· Encouraging increased private-sector investment and technology transfer from developed to developing countries.
· Developing pilot projects and evaluation methods through which the international community can learn and understand acceptable criteria for joint implementation.
Significant investment opportunity exists for cost-effective ERC projects worldwide. In response to this opportunity, a number of domestic ERC programs have now emerged, driven by both the governmental and private sectors:
· Development advocates who recognize the need for ERC investment in promoting sustainability and technology transfer (Owang and Karani, 1994; Rose and Tietenberg, 1994).Currently, at least ten developed countries, including the United States, the Netherlands, Canada, Germany, Australia and Japan have developed or declared their intention to develop mechanisms to review and approve international investment proposals to reduce GHG emissions (Stuart and Sekhran, 1996). To date, these national programs have led to several projects with an estimated capitalization of US$ 40 million. Much of this investment has funded projects in Latin America. The number of such projects is expected to grow as more countries become interested.· Economists and diplomats who recognize the efficiency potential of ERCs (Jones, 1994).
· Host countries that wish to target foreign investment and technology for sustainable development priorities (Sughandy, 1996; Stowall, 1996).
· Private companies that see ERC projects as a means to protect shareholder value against policy uncertainty, as well as low-cost opportunity for highly visible entry in emerging markets under the banner of environmental sensitivity (Malin, 1996; Lafstedt et al., 1996).
The Netherlands, one of the most experienced countries in carbon offsetting, has opted for a different track and has developed a “JI Simulation” program to review selected sustainable development initiatives supported by the Netherlands Development Assistance programs, modeled on ERC potential. A few of the more prominent programs adopted are briefly discussed below.
The USIJI is a US inter-agency panel, chaired by the Environmental Protection Agency and the Department of Energy, with further membership drawn from the Department of State, the Treasury, the Departments of Agriculture, Interior, and Commerce, plus the United States Agency for International Development (USAID). The USIJI was developed under the 1993 US Climate Change Action Plan and is the first US attempt to forge program encouraging voluntary private sector ERC initiatives. The USIJI acts both as an auditor of ongoing projects and as an evaluator of proposed projects.
The USIJI has had six evaluation rounds since 1994, during which 28 projects were approved. About half these are in the forestry sector. Most projects are in Latin America and Eastern Europe. Of the six forestry interventions, preservation, reforestation, reduced impact logging and biomass energy are all represented. Twelve of the 28 projects are fully or partially funded. Interest from investors, however, seems to have increased since Kyoto.
The Dutch Electricity Board (S.E.P.) instigated one of the earliest forestry carbon offset programs, the Forests Absorbing CO2 Emissions (FACE) initiative, with the expressed goal of financing 150,000 hectares of varied reforestation activities over the coming twenty years. The initial impetus behind FACE’s creation was S.E.P.’s desire to demonstrate that the proposed EU carbon tax would not be the most effective or reliable way to lower overall carbon emissions. The tightening of standards for sulfur and nitrogen oxide emissions, to reduce acid rain precursors in the Netherlands, had already forced coal-reliant Dutch utilities to make significant investments in cutting edge scrubber technologies. Currently, 90% of Dutch electricity is generated by burning fossil fuel, and S.E.P. admits that it will be decades before the industry can convert to a system, which produces lower CO2 emissions (Stuart and Sekhran, 1996). The FACE Foundation has already launched afforestation activities in the Netherlands, Central Europe, South East Asia, and Central America.
The Dutch government has developed an ERC modeling initiative: the Pilot Project Program (PPP). The PPP amounts to a testing regime for developing organizational models, GHG reduction calculation methodologies and criteria for identifying suitable projects. PPP participants are selected from ongoing Dutch bilateral aid projects with characteristics, which could be suitable candidates for future ERC investment. To participate in the PPP modeling process, host governments must agree to the status of “early experience.” They do not, however, need to formally endorse ERC principles at this time.
Presently, the PPP initiative is modeling eight projects. They include three FACE Foundation forestry projects (in Ecuador, Uganda, and the Czech Republic), a landfill methane extraction project in Moscow, a horticultural efficiency project in Western Siberia, and a municipal energy efficiency project in Hungary. Additional projects include compressed natural gas retrofitting for buses in Hungary and a micro-hydro project for Bhutan.
In late 1994, Australia initiated a Pilot JI Program for the South Pacific. The program concerns enhanced measures, all undertaken in cooperation with the South Pacific Forum Secretariat Energy Division. Two further projects are in the final stages of contractual negotiations; a photovoltaic installation in Fiji and a demand-side management program in the Solomon Islands. The Australian Department of Environment funded both as models to explore various ERC issues, including baselines, intergovernmental affairs, and crediting. This pilot program is unlikely to be expanded as it depends totally on internal departmental funding.
Australia is also developing a larger ERC program, along the lines of the USIJI. Unlike the South Pacific initiative, projects will not be directly government funded. The aim is to encourage Australian companies to direct capital towards projects which are both profitable and GHG beneficial. The plan will include efforts to develop bilateral agreements with the Asia-Pacific Economic Cooperation (APEC) and South Pacific countries, the development and implementation of cooperative projects with other countries, initiatives to enhance the export of Australian technologies and services with greenhouse benefits, and greenhouse specific development assistance to countries in the Asia-Pacific Region.
The Canadian government has initiated a Canadian Joint Implementation Initiative (CJII). Emission reductions are registered within an internal Canadian system, the Voluntary Challenge and Registry (VCR) under Canada’s Ministry of Natural Resources. Initiated in February 1995, by November 1995, VCR had registered over 475 participants. Now, 50% of the forestry, pulp and paper industries, 100% of all refiners, 95% of electric utility and chemical industries, 88% of natural gas distribution companies, and 60% of the mining industries participate in the VCR (Stuart and Sekhran, 1996).
The CJII is a sub-program within the VCR. The stated objectives of CJII are to contribute to global efforts to reduce net emissions of GHG through voluntary partnerships between Canadian and foreign entities and to encourage private sector initiatives in developing technologies for building such capacities in other countries. It will test and evaluate methodologies for initiating JI to gain early and practical experience for longer-term JI programs both domestically and inter-nationally. The pilot projects hope to: 1) achieve cost-effective GHG emission reductions; 2) be sustainable over the long term; 3) have social, environmental and economic benefits; and 4) improve energy efficiency in other countries as well.
Japanese ERC initiatives began in late 1995. The lead agencies for these initiatives are the Environmental Agency (EA) and the Ministry of International Trade and Industry (MITI). They are similar to the Dutch PPP in emphasizing monitoring and evaluating existing assistance projects to improve energy efficiency. Project proposals are eventually expected to broaden in sope and include forestry and renewable energy proposals with members of the Alliance of Small Island States (AOSIS) (Matsuo, 1996). One of the Japanese program’s aims is to create an extensive project portfolio for monitoring and certification protocols. In the Japanese ERC program, each ministry or agency is only responsible for assessing the projects submitted to it.
The guidelines include stipulations for a Japanese ERC project, providing the following conditions be met: the project’s effectiveness in reducing carbon dioxide emissions must be assessable; the recipient country must agree; and the project must accept environmental assessment and no increase in CO2 can be allowed once the project is underway. The Ministry of Agriculture, Forestry and Fisheries has also approved six forestry projects based on community reforestation. Four of the projects are in Southeast Asia. One is in Central Asia and the other in East Africa. These are all sponsored by NGOs with one exception – one funded by the commercial Sumitomo Forestry Group. This project involves a development in a large forestry plantation.
2.3.1 Edison Electric Institute
2.3.2 The World Business Council for Sustainable Development (WBCSD)
2.3.3 Network For Expertise
Private sector investors in ERC projects respond to both international market-based opportunities and the possibility of regulatory approaches to reducing GHG emissions. For companies with significant GHG emissions, it is logical to seek low-cost investment opportunities in developing countries through which they can voluntarily offset their emissions. One investment approach for companies is to “bundle” projected GHG emissions with investments that will offset those emissions. Such an approach provides at once recognition, while lowering emissions. It would also demonstrate the credibility of a market-based approach. Company investments in ERC projects can also provide market access in rapidly developing economies, thus providing additional opportunities for businesses.
Private sector investors are also responding to the expectations, and fears, of regulatory frameworks, which might be imposed. Company response, therefore, is based on a strategy that could prevent such a framework from being arbitrarily imposed. It might well take advantage of investment opportunities below the anticipated regulatory costs. The private sector has also developed initiatives to promote ERC projects. Beyond individual corporate investments in carbon offset projects, there are four major private sector initiatives which promise to identify private investment opportunities.
The Edison Electric Institute (EEI) is the US utility trade association for investor-owned (private) utilities. It has a combined annual revenue of US$ 170 billion (Stuart and Sekhran, 1996). In voluntary cooperation with the US Department of Energy, EEI is coordinating the US electricity industry’s GHG emissions reduction efforts as a part of the US Climate Challenge Program. Individual utilities sign commitments of intent with the Department of Energy for reducing emissions by either a given percentage or a gross amount. By the end of 1995, 113 commitments had been signed representing annual reductions of 47 million metric tons of carbon equivalent by the year 2000 (Stuart and Sekhran, 1996).
EEI has separately developed five individual initiatives in different sectors. One is the Utility Forest Carbon Management Program (UFCMP). The UFCMP developed criteria, plus a process, to review proposed carbon offset projects in the forestry sector. One year later it issued a request for proposals to hundreds of individuals and organizations. Thirty-two proposals, from the US, Central America, South America, and Asia were reviewed by the UFCMP committees (Kinsman et al., 1996).
A non-profit corporation, the UtiliTree Carbon Company, was established by forty of the UFCMP’s 55 utilities to sponsor these selected projects. UtiliTree was initially capitalized at US $2.4 million, with a range of contributions from US $10,000 to $25,000 (Energy Information Administration, 1996).
The WBCSD supports proactive business involvement in improving environmental efficiency. The WBCSD includes several of the world’s largest multinationals. Through its WBCSD’s working group on climate and energy, it has launched a project to promote GHG mitigation projects. A project entitled “International Business Action on Climate Change,” intends to facilitate credible and effective international business actions, implement relative GHG mitigation, achieve a portfolio of projects in various location, and employ technology to reduce, avoid, and sequester GHGs. It is both an ambitious and promising endeavor.
The E-7 is a non-profit international group of eight of the world’s largest electric utilities and includes major utilities from France, Germany, and Italy, Tokyo Electric and Kansai Electric of Japan, Ontario Hydro and Hydro Quebec of Canada, and Southern California Edison of the US. E-7 provides assistance for GHG mitigation under its “E-7 Network of Expertise for Global Environment” and its working group on “Greenhouse Gases and Joint Implementation”.
The E-7 focuses ERC programs on providing in-kind services to the energy sector in developing countries. E-7 is not, however, committed to directly investing in formal mitigation projects. It currently participates in three ERC projects: in Indonesia, Jordan and Zimbabwe. In Indonesia, the E-7 contributes in-kind services, and plans to participate in local infrastructure development for renewable energy systems. In Jordan, it assists the Jordan Electricity Authority in increasing the efficiency of older thermal stations. E-7 is also involved in micro hydro projects in Zimbabwe.
