Activities Implemented Jointly Research Articles

The incidence and extent of the CDM across developing countries

AbstractThis paper empirically examines the factors that determine the incidence and extent of the Clean Development Mechanism (CDM) in developing countries. Estimation results show that the incidence and extent of the CDM is greater for the developing countries with larger mitigation potential and greater capacity to manage the projects. Developing countries with faster economic growth and past experience with activities implemented jointly (AIJ) projects are more likely to host renewable energy projects, although this is not the case for other project types. The incidence and extent of foreign investment projects in energy efficiency, CO2reduction and non-CO2gas reduction projects are higher for the countries with lower per capita GDP, most likely due to capital constraints. There is no evidence that the number of sub-regional projects impinged on investment flows. Countries in Sub-Saharan Africa appear to face special obstacles under the CDM even after the strength of institutions and energy-related mitigation opportunities are accounted for.

Will Markets Direct Investments Under the Kyoto Protocol? Lessons from the Activities Implemented Jointly Pilots

Under the Kyoto Protocol, countries can meet treaty obligations by investing in projects that reduce or sequester greenhouse gases elsewhere. Prior to ratification, treaty participants agreed to launch country-based pilot projects, referred to collectively as Activities Implemented Jointly (AIJ), to test novel aspects of the project-related provisions. Relying on a ten-year history of projects, we investigate the determinants of AIJ investment. Our findings suggest that review-agency preferences related to national political objectives and possibly deeper cultural ties influenced project selection and limited the number of AIJ projects. Bilateral ties also appear to have affected investment decisions directly, possibly because of related transaction costs. The results suggest an investment process different from the assumptions that underlie well-known estimates of cost-savings related to the Protocol’s flexibility mechanisms. We conclude that if approaches developed under the AIJ programs to approve projects are retained, the scale of investment under Kyoto’s flexibility provisions and their cost-savings will be less than what is generally anticipated and the pattern of investment less driven by abatement costs.

Investments in Global Warming Mitigation: The Case of “Activities Implemented Jointly”

This paper examines bilateral cooperation between developed countries (home country) and developing countries (host country) to reduce greenhouse gas emissions and to enhance carbon dioxide sinks. With the home-host country pair as the unit of analysis, our logistic regression model examines 158 Activities Implemented Jointly (AIJ) investment projects from 1993 until 2002 across 2541 country-pairs. Because the marginal costs of reducing emissions may be lower in developing countries, the AIJ projects served as a policy laboratory to assess whether such investments might be advantageous to both countries in the event future regimes allowed emission credits from such bilateral projects. Instead of investing in home countries where maximum pollution reductions (or carbon sequestration) might be possible, home countries invest in locations where they can conduct their policy experiments at low transaction costs. Prior trade and aid relationships were used as a proxy. Regarding energy projects, location decisions are driven by home countries’ desire to reduce air pollution that they receive from abroad. Geography – proximity of a host country to a home country – in interaction with host country's coal production, is a very important driver of location decision in AIJ energy sector projects. Location of sequestration projects is impacted by the host country's potential for avoiding deforestation as well as by previous aid and trade patterns between a home and a host country. Proximity is not important in this case.

Does the CDM contribute to sustainable development? Evidence from the AIJ Pilot Phase

The purpose of the Activities Implemented Jointly (AIJ) program, adopted at the first Conference of the Parties to the United Nations Framework Convention on Climate Change, is to foster the transfer of technology for global warming abatement from developed to developing countries. Projects should not only reduce greenhouse gases, but also contribute to the sustainable development goals of host countries. However, given the lack of consensus regarding the definition and measurement of sustainable development, it is difficult to gauge to what extent the AIJ phase has been useful for developing countries. In this paper, we adopt a macro perspective and analyse the real-life data of 210 projects with respect to equity and financial issues related to sustainable development in a broad sense. We focus only on three aspects (financial additionality, credit sharing and geographical distribution) and conclude that the performance of the AIJ program was in general fairly poor. Because the AIJ experience prepares the grounds and is fundamental for the design of two project-based mechanisms from the Kyoto Protocol (JI and CDM), these failures must be overcome and strong sustainable development criteria must be set for each project.

Transaction costs of the Kyoto Mechanisms

Transaction costs will reduce the attractiveness of the Kyoto Mechanisms compared to domestic abatement options. Especially the project-based mechanisms Clean Development Mechanism (CDM) and Joint Implementation (JI) are likely to entail considerable costs of baseline development, verification and certification. The Activities Implemented Jointly (AIJ) pilot phase and the Prototype Carbon Fund (PCF) programme give indications about the level of these costs. Under current estimates of world market prices for greenhouse gas emission permits, projects with annual emission reductions of less than 50,000 t CO 2 equivalent are unlikely to be viable; for micro projects transaction costs can reach several hundred € per t CO 2 equivalent. Thus, the Marrakech Accord rule to have special rules for small scale CDM projects makes sense, even if the thresholds chosen advantage certain project types; projects below 1000 t CO 2 equivalent per year should get further exemptions. An alternative solution with no risk for the environmental credibility of the projects would be to subsidise baseline setting and charge lower, subsidised fees for small projects for the different steps of the CDM/second track JI project cycle.

The impact of private investor’s transaction costs on the cost effectiveness of project-based Kyoto mechanisms

From a private investor’s point of view transaction costs of project-based Kyoto mechanisms relate mainly to project management and interaction with government representatives. However, when analysing the cost effectiveness of project-based Kyoto mechanisms these transaction costs are often underestimated or completely ignored 1 See ( http://www.unfccc.int/program/aij/aijproj.html). 1 due to limited data availability. This paper presents an analysis of transaction costs of project-based Kyoto mechanisms by applying cost estimates from comparable activities, for example, activities implemented jointly (AIJ). The findings show that transaction costs of AIJ projects range between 7% and more than 100% of production costs with 80% of projects lying between 14 and 89%. Furthermore the data clearly illustrate that “bigger” projects have lower specific project costs indicating the existence of economies of scale. Due to the fact that high transaction costs will push many promising projects out of the market, efforts should be undertaken to reduce transaction costs by improving procedures and business environments, for example, by standardisation.

Can the Risks of the Kyoto Mechanisms be Reduced Through Portfolio Diversification? Evidence from the Swedish AIJ Program

Through Joint Implementationand the Clean Development Mechanism, reductionsof greenhouse gas emissions achieved abroad canbe credited to domestic firms. However, thetechnical, economic and political risksinvolved may prevent the private sector frominvesting in such projects. This paperdescribes three types of risks which emissionreduction projects are exposed to. Eleven pilotprojects carried out under the ActivitiesImplemented Jointly (AIJ) program and financedby Sweden are evaluated. Actual project costsare found to exceed projected costs in allcases. Annual emission reductions also deviatefrom their expected values and vary stronglyover time, supporting the hypothesis that suchprojects are risky business. The riskmanagement tool portfolio diversification isapplied to a sample of Swedish AIJ projects.The results indicate that diversification canreduce the risks of greenhouse gas mitigationprojects significantly. Thus, carbon funds area promising way of lowering the risks of theKyoto Mechanisms for private sector investors.

The impact of private investor's transaction costs on the cost effectiveness of project-based Kyoto mechanisms

From a private investor's point of view transaction costs of project-based Kyoto mechanisms relate mainly to project management and interaction with government representatives. However, when analysing the cost effectiveness of project-based Kyoto mechanisms these transaction costs are often underestimated or completely ignored due to limited data availability. This paper presents an analysis of transaction costs of project-based Kyoto mechanisms by applying cost estimates from comparable activities, for example, activities implemented jointly (AIJ). The findings show that transaction costs of AIJ projects range between 7% and more than 100% of production costs with 80% of projects lying between 14 and 89%. Furthermore the data clearly illustrate that “bigger” projects have lower specific project costs indicating the existence of economies of scale. Due to the fact that high transaction costs will push many promising projects out of the market, efforts should be undertaken to reduce transaction costs by improving procedures and business environments, for example, by standardisation.

Transaction costs of the Kyoto Mechanisms

Transaction costs will reduce the attractiveness of the Kyoto Mechanisms compared to domestic abatement options. Especially the project-based mechanisms Clean Development Mechanism (CDM) and Joint Implementation (JI) are likely to entail considerable costs of baseline development, verification and certification. The Activities Implemented Jointly (AIJ) pilot phase and the Prototype Carbon Fund (PCF) programme give indications about the level of these costs. Under current estimates of world market prices for greenhouse gas emission permits, projects with annual emission reductions of less than 50,000 t CO2 equivalent are unlikely to be viable; for micro projects transaction costs can reach several hundred € per t CO2 equivalent. Thus, the Marrakech Accord rule to have special rules for small scale CDM projects makes sense, even if the thresholds chosen advantage certain project types; projects below 1000 t CO2 equivalent per year should get further exemptions. An alternative solution with no risk for the environmental credibility of the projects would be to subsidise baseline setting and charge lower, subsidised fees for small projects for the different steps of the CDM/second track JI project cycle.

The AIJ pilot phase as laboratory for CDM and JI

The Activities Implemented Jointly (AIJ) program has developed about 150 greenhouse gas reduction and sequestration projects in many economic sectors in over 40 countries during the last six years. Most of these projects are rather small and many of them have only been partially implemented due to lack of finance. The lack of emissions credits is the main reason. Only half a dozen investor countries and even less host countries have developed real national AIJ programs. The criteria of these programs have often delayed the acceptance of projects which have not really been implemented. Most of the implemented projects are commercially viable unless they have been financed by an investment subsidy. The problems of additionality and baseline determination, that manifest themselves in differing standards of baseline setting, did lead to a lot of research and proposals for methodologies. However, these methodologies have so many political implications that it has not been possible to get quick decisions on baseline rules for the CDM. Reporting has been shown to be one of the weak spots of the AIJ regime, as its quality is highly variable and data are not comparable, especially concerning costs.

International CO2 Abatement Projects: Experience from the Swiss AIJ Pilot Program

This paper analyses the two most advanced Swiss AIJ (Activities Implemented Jointly) projects. Key success and failure factors are derived from practical experience in developing and implementing these projects. The assessment of uncertainties shows that the counterfactual nature of baselines forms the most relevant factor for uncertainty with regard to climate benefits. Different strategies to minimise this uncertainty are described. For the investor, the performance of the project during its lifetime is the main source of uncertainty, since this will usually have a direct influence on the amount of emission reduction credits produced. Consequently, adequate legal structure and incentives for project hosts are crucial to ensure.

Project-Based Emissions Trading: The Impact of Institutional Arrangements on Cost-Effectiveness

In this paper we demonstrate that the institutionalarrangement (or: design) of Joint Implementation (JI) and the CleanDevelopment Mechanism (CDM) has a decisive impact on theircost-effectiveness. We illustrate our arguments by statistically analyzing thecosts from 94 Activities Implemented Jointly (AIJ) pilot phase projects aswell as by adjusting these data on the basis of simple mathematicalformulas. These calculations explicitly take into account the institutionaldifferences between JI (sinks, no banking) and the CDM (banking, no sinks)under the Kyoto Protocol and also show the possible effects on credit costsof alternative design options. However, our numerical illustrations shouldbe viewed with caution, because AIJ is only to a limited extentrepresentative of potential future JI and CDM projects and because creditcosts are not credit prices. Some of the main figures found in this study are:an average cost figure per unit of emission reduction for AIJ projects of 46dollar per ton of carbon dioxide equivalent ($/Mg CO2-eq), anaverage potential JI credit cost figure which is lowered to 37$/Mg CO2-eq by introducing banking and an average of 6$/Mg CO2-eq per credit for potential low-cost CDM projects whichincludes sinks. However, at CoP6 in November 2000 in The Hague (TheNetherlands), the Parties to the Framework Convention on Climate Change(FCCC) did not (yet) reach consensus on the institutional details of theproject-based mechanisms, such as the possible arrangement of early JIaction or the inclusion of sinks under the CDM.

Constraints for activities implemented jointly (AIJ) technology transfer in Africa

This paper outlines institutional constraints in relation to technology transfer and development in Africa. Institutional constraints are inherent in inefficient organizational, administration and management structures. Lack of institutional, incentive systems and technological capacities to re-organize institutions limits the potential for the transfer of technologies. It is practically difficult to design, implement and manage AIJ projects in Africa without a provision for capacity building. Existing institutions need strengthening and human capacity needs to be developed.

Activities implemented jointly: another look at the facts

The first Conference of the Parties to the United Nations Framework Convention on Climate Change in Berlin established a pilot phase of so-called Activities Implemented Jointly (AIJ). This pilot phase started in 1995 and was to end in 1999. It was prolonged at the fourth Conference of the Parties in Buenos Aires (1998) for a yet undetermined period after 2000. This paper is an empirical study of AIJ experience in the first five years (1995–1999) based on 96 AIJ from the UNFCCC’s web site as of April 30, 1999, and a separate study on seven AIJ projects of Japan. The main results of this study are: (1) AIJ investment shows a pattern of regional-specificity with rather divergent regional investment portfolios in the United States, Japan and Europe. This pattern can be traced back to differences in the national AIJ programs of investors and hosts, on the one hand, and to specific ways of minimizing transaction cost on the other, e.g. by attaching AIJ to established institutional links of development co-operation or by ‘trading in the neighbourhood’; and (2) AIJs are overwhelmingly no regret-measures with almost zero or negative cost. Transaction costs of reporting have been minimized by applying simple and straightforward methods of baseline determination. The exception to this is the verification procedure where expensive external verification prevails.

Climate cooperation as development policy: the case Of Costa Rica

Project-based climate cooperation between industrial and developing countries was first proposed in the early l990s, then under the name of joint implementation (JI). Once in place, this cooperation could lead to a high amount of additional financial flows to developing countries. Nevertheless, many NGOs and developing country representatives were in the beginning very sceptical about JI and feared it would not take into account development priorities and create new kinds of dependence on industrial countries. Therefore, developing countries and industrial countries found a compromise at the Berlin Conference of the Parties as they instituted a pilot phase for so-called activities implemented jointly (AIJ), lasting until 2000. Since the Kyoto conference, this concept has existed in the design of the Clean Development Mechanism (CDM), which allows for industrialised countries to account this kind of activity against their national obligation for greenhouse gas reduction, starting with the year 2000. This paper discusses the first results of the Au pilot phase in Costa Rica, which is important for the evaluation of the whole pilot phase and the ultimate design of the CDM. Costa Rica has a relatively high level of economic and social development and a well-developed environmental policy, which is comparable with that of advanced industrial countries. It is a major destination for ecotourism. Nevertheless, it suffers from high deforestation, owing to unequal distribution of land, migration and cattle ranching, as well as plantation expansion. Moreover, transport emissions are rising rapidly and fossil fuel electricity generation is growing, despite a target of phasing out fossil fuels completely. Building on a broad knowledge base, Costa Rica was able to develop creative environmental policy instruments, such as debt-for-nature swaps and biodiversity prospecting, to attract foreign funding. It is not surprising that it was the first developing country to open an JI office, develop project approval criteria and host AIJ pilot projects. The framework for climate cooperation in Costa Rica can therefore be described as ideal compared with the average developing country. After an initial phase of single bilateral projects, the Costa Rican JI office tried to attract more finance by offering certified tradeable carbon certificates resulting form these projects' offsets. Now it encourages multi-sector large-scale programmes, where transaction costs are lower and coherence with national development objectives can be more easily checked. It directs its attention to public Au investors, such as the Norwegian government. The renewable energy projects suffer from the unrealistic target to phase out fossil fuels by 2001, thus making AIJ projects in this sector impossible from that time. Therefore, the bulk of projects concern forestry, which is prone to uncertainties in the calculation of emission sequestration. A comparison of the estimates shows wildly differing assumptions in baselines and the sequestration capacity of the forests. Whether actual project implementation conforms to the plans remains to be seen. The analysis of the Costa Rican case shows that climate cooperation can be successful in the long run only if the industrial countries offer incentives for investors and if baseline determination rests on a clear set of guidelines. Human and technical capacities are necessary but not sufficient conditions for successful climate cooperation projects in developing countries. They seem to be able to prevent complete project failures, however, and can lead to innovative approaches. The issue will be settled only if large-scale investment is forthcoming under a regime of legally binding emission targets for industrial countries, as stipulated in the Kyoto Protocol. Then the ability to process a huge number of project proposals and to check whether they conform to development priorities, as well as monitoring and verification, becomes crucial.

The Climate for Joint Implementation: Case Studies from Russia, Ukraine, and Poland

Joint implementation (JI) can provide flexibility in meetingKyoto Protocol commitments, and 44 nations have already participated inthe U.N. Framework Convention on Climate Change – Activities Implemented Jointly (AIJ) pilot. Thispaper surveys JI policy and projects in three countries – Russia, Ukraine,and Poland – over the past five years and examines the effects of domesticinstitutions, foreign policy, and investment trends on JI in each country.The institutional and economic situation in the three nations differs greatly,and these distinctions have resulted in very different circumstances for AIJprojects, affecting both their number and scope. Poland has a well-definedset of rules and procedures for JI and its economy is quite strong. Ukrainehas not yet established criteria or clear procedures for AIJ project reviewsalthough it does have an Interagency Commission on Climate Change.Ukraine's economy declined by over 40% in the 1990s. Russia'seconomy has also declined, to a lesser extent. Russia does have aprocedure for reviewing AIJ projects, though it has temporarily halted thesereviews. Countries seeking JI investment can take several steps to improve thenumber and quality of AIJ projects that they receive. In the long term,governments can create macroeconomic stability and a solid legalinvestment basis to attract investment for JI and other areas. In the shortterm, however, governments can undertake several simple and inexpensivesteps to promote JI. Establishing clear rules and procedures for AIJprojects is an important step. So too are clearly delegating responsibilityfor AIJ project review and providing a single JI point of contact in thegovernment to which investors and project developers can turn. Gainingmore experience in implementing AIJ projects now is important preparationfor fully implementing the Kyoto Protocol beginning in 2008.

Outcomes of the Fourth Conference of the Parties to the Convention on Climate Buenos Aires, 2 – 13 November 1998

INTRODUCTION The Fourth meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP-4) was held from 2nd to 13th November 1998 in Buenos Aires, Argentina.1 With representatives from about 180 countries, numerous Non-Governmental Organisations and the press, more than 5000 participants struggled and argued about climate change and how the Kyoto follow-up-process should be organised. COP-4 brought no significant progress for the mitigation of climate change. For real breakthroughs to take place to occur, the meeting took place too shortly after COP-3 (Kyoto, December 1997) There was not enough time (and only one meeting of the official Subsidiary Bodies to the Convention in June 1998 in Bonn) to prepare further decisions. Moreover, COP-4 threatened to fail after the opening of the conference by the Secretary of Natural Resources and Sustainable Development of Argentina who was elected President of COP-4. With support of the United States Argentina had launched an initiative to invite non-Annex I Parties to establish voluntary commitments under the United Nations Framework Convention on Climate change (UNFCCC).2 Voluntary commitments by non-Annex I Parties had already been discussed amidst much controversy in Kyoto and afterwards, with most developing countries opposing this idea. After intensive discussions during the opening session of COP-4 Argentina was forced to withdraw this proposal and the conference could take up its work. In Buenos Aires, delegates discussed items on a long agenda including Activities Implemented Jointly (AIJ), ‘Flexible Mechanisms’ and commitments of non-Annex I-Countries. All these items were subject to very controversial arguments between industrialised and developing countries, but within these groups as well heavy debates took place and it was not possible to reach consensus on the different positions. The remaining open questions were summarised in the so-called “Buenos Aires Action Plan” which was adopted by delegates at the end. With this plan the parties demonstrate their will to reach substantial progress on the questions of financial mechanisms, the development and transfer of technologies, the adequacy of commitments, Activities Implemented Jointly under the Pilot Phase and the Mechanisms of the Kyoto Protocol no later than COP-6 at the end of the year 2000.

The 1997 Kyoto Protocol: What Does It Mean for Project-Based Climate Change Mitigation?

The Kyoto Protocol effectively ends the Activities Implemented Jointly (AIJ) pilot phase. However, it is premature to conclude that Articles 6 and 12 of the Protocol vindicate joint implementation and successfully conclude the AIJ pilot phase. Rather, Articles 6 and 12 can be seen as part of the price developing countries felt they had to pay to obtain a Protocol. Debate over Articles 6 and 12 is likely to be as contentious as the JI/AIJ debates that preceded it. Indeed, the AIJ pilot phase has not answered many concerns posed by developing countries and other interest groups. While companies and countries participating in AIJ have had wide latitude to pursue almost any projects they wished, it remains to be seen how much of this flexibility will be preserved as Articles 6 and 12 become operational. This will determine whether the importance and cost-effectiveness originally predicted for the joint implementation concept comes to pass. A review of the JI and AIJ literature suggests many potential stumbling blocks to achieving large-scale and cost-effective emissions reductions through project-based mitigation efforts under the Kyoto Protocol. This paper identifies these stumbling blocks and systematically assesses their potential implications. The Greenhouse Gas Offset Cost Assessment and Decisionmaking Model (GGOCAD©) is used to qualitatively as well as quantitatively evaluate the importance of key criteria and methodological decisions under Articles 6 and 12. It is easy to develop scenarios in which project-based mitigation through Articles 6 and 12 would not be permitted to contribute substantially to achievement of countries’ obligations under Article 3. Overcoming the challenges facing project-based mitigation efforts is important to achieving the larger goals of the Kyoto Protocol.

Potential for the Diffusion of Australian Renewable Energy Technologies to Countries in the Asia-Pacific Region

There is significant potential for the diffusion of Australian renewable energy technologies to the Asia-Pacific region. Many Australian companies already export New and Renewable Sources of Energy (NRSE) technologies to countries in the region, and Australia's domestic industry provides a sound base for companies to expand into increasing export markets. In addition, the Australian government is increasing interest in NRSE, pursuing Joint Implementation (JI) or Activities Implemented Jointly (AIJ) as a mechanism for the transfer of NRSE technologies under the United Nations Framework Convention on Climate Change (UNFCCC). Despite competition with often subsidised conventional energy sources, NRSE technologies are considered to be economically and technically viable in many areas of developing countries. This paper explores issues relating to NRSE projects in developing countries, potential markets for Australian NRSE technologies, and opportunities for Australian industry and government players.