COP-6 Part II
The Bonn Agreement, produced at COP-6 Part II in July 2001, contains broad decisions how the Kyoto mechanisms-International Emissions Trading, Joint Implementation and the Clean Development Mechanism-will work in practice. However, much of the detailed legal language is still to be negotiated, so uncertainty remains as to how the mechanisms will be implemented.
Cross-cutting Issues
Supplementarity: The Protocol states that the reductions achieved by industrialized country (Annex I) Parties through the mechanisms will be "supplemental" to domestic actions to reduce emissions. These provisions (known as "supplementarity") seek to ensure that developed countries engage in domestic actions and implement national policies in order to lower emissions and do not reach their emissions targets solely by buying credits from other countries. What constitutes "supplemental," however, has been extensively debated. In the Bonn Agreement, Parties agreed to a qualitative definition of supplementarity. Parties are to provide information on how they are meeting this supplementarity requirement to the compliance committee's facilitative branch, which will determine whether a Party's domestic action, as reported under the Protocol's reporting requirements (Article 7), is sufficiently "significant." It is still unclear how this provision will be interpreted, but
without a quantitative definition of supplementarity, this provision is unlikely to constitute a serious constraint on Parties' use of the Kyoto mechanisms.
Liability and the Commitment Period Reserve: One issue that has been at the forefront of the negotiations on the Kyoto mechanisms is liability. The issue was who should be found liable in case a Party oversold its assigned amount. Proposals to address this situation have included "buyer" or "seller" liability for emissions credits, or having governments prove that emissions credits were truly excess to their assigned amount before selling them (which would essentially limit trading to a "true-up" period after the end of the commitment period). A major concern among many Annex I Parties was that the solution not be one that would unduly restrict the liquidity of the emissions market, which would raise the costs of compliance.
The Bonn Agreement requires each industrialized country Party to maintain in its national registry a "commitment period reserve" which "should not drop below 90 per cent of the Party's assigned amount…or 100 per cent of five times its most recently reviewed inventory, whichever is lowest."
This two-option provision seeks to ensure that Parties do not sell most of the units that they will need for compliance. The first option in the Bonn Agreement-maintaining a commitment period reserve of 90 per cent of the assigned amount-applies to Parties that will likely need to buy credits to meet their targets. They will be required to keep in reserve, throughout the commitment period (2008-2012) 90 per cent of their assigned amount. There would be no restrictions on the number of credits a country could buy. As long as exports minus imports do not exceed 10 percent of a country's assigned amount, it can buy and sell as much as it wishes.
The second option-maintaining a commitment period reserve of five times the most recently reviewed inventory-applies to countries that have targets but will likely be net sellers (e.g. some economies in transition). Their most recently reviewed emissions inventory will likely be significantly lower than 90 per cent of its assigned amount. In this case, they will need to hold in reserve emissions credits equivalent to five times its inventoried greenhouse gas emission levels, leaving the remaining credits available for trading. For example, if a country's target is 100 Mt CO2 equivalent, and its most recently reviewed inventory is 80 Mt CO2 equivalent, it would have to hold its entire inventory in reserve, and its net transfers (exports minus imports) of emissions credits would be limited to 20 Mt CO2 equivalent.
Joint Implementation
Three provisions on JI were included in the Bonn Agreement: 1) a developed country that hosts a JI project will determine whether the project promotes sustainable development; 2) countries "are to refrain" from using Emissions Reduction Units (ERUs) generated from nuclear facilities to meet their targets; and, 3) an independent Supervisory Committee, will be established after the Protocol enters into force to verify that ERUs generated from JI projects are real, compared to an approved baseline. This independent verification will only apply to JI projects in host countries that do not meet inventory and reporting requirements under the eligibility criteria for participation in the mechanisms. These are known as "track two" projects.
Clean Development Mechanism
CDM adaptation levy: The Protocol requires that a share of the proceeds from CDM projects be levied to cover administrative costs and to contribute to an adaptation fund that would assist developing countries. The level of the "adaptation levy" was not set in the Protocol. The Bonn Agreement sets the level at two per cent of the Certified Emission Reductions (CERs) generated by the project. It should be noted that it will be the CERs that are levied, not the profits resulting from the project.
Sustainable development, nuclear projects: Two provisions applying to JI also apply to CDM. The Bonn Agreement calls on countries to "refrain" from using emissions reductions from nuclear projects to meet their emissions target and recognizes the host country's prerogative to judge whether a project meets sustainable development goals.
Financial additionality: The Bonn Agreement text on the CDM states that "… public funding for clean development mechanism projects from Parties included in Annex I is not to result in the diversion of official development assistance and is to be separate from and not counted towards the financial obligations of Parties included in Annex I".
Executive Board: Members of the Executive Board of the CDM will be elected by the Conference of the Parties at COP-7. The 10-member Board will include one member from each of the five UN regional groups, two from Annex I Parties, two from non-Annex I Parties, and one from a small island developing state. This composition is likely to result in 3 to 4 industrialized countries and 6 to 7 developing countries being represented on the Board.
Expedited project approvals: The Executive Board will develop and recommend to COP-8 "simplified modalities and procedures" for the following CDM activities selected for "fast-tracking":
- renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent);
- energy efficiency improvement project activities which reduce energy consumption, on the supply and/or demand side, by up to the equivalent of 15 gigawatthours per year;
- other project activities that both reduce anthropogenic emissions by sources and directly emit less than 15 kilotonnes of carbon dioxide equivalent annually.
Sinks in the CDM - Eligibility: The Bonn Agreement decided that during the first commitment period, afforestation and reforestation will be the only eligible sinks projects under the CDM. Activities that result in the avoidance of deforestation (the long-term or permanent removal of forest cover and conversion to a non-forested land use) are not eligible. The eligibility of sinks in CDM projects for future commitment periods will be decided during negotiations on the second commitment period.
Sinks in the CDM - Cap: The Bonn Agreement imposed a cap on the number of credits from eligible CDM sinks projects that country may use towards its target during the first commitment period. The cap is equal to one percent of the Party's base year emissions, times five.
Banking of Emissions Credits: The Protocol and the Bonn Agreement stipulate that CDM projects beginning as early as the year 2000 may be eligible for validation and registration and may generate CERs as of the date of the adoption of a decision on CDM rules (i.e. agreement on the current text). This "prompt start" provision allows Parties to bank emissions credits earned prior to the first commitment period (2008-2012) and apply them to their tally during that time.
Delegates were not able to adopt a final decision on the mechanisms and the draft decisions have been forwarded to COP-7 for further negotiations.
COP-7
There are many outstanding issues to be resolved, despite the Bonn Agreement, including:
Eligibility: Parties agreed that the requirements for eligibility to use the mechanisms were limited to compliance with emissions inventory and reporting requirements. However, the specific requirements for these Articles are not yet finalized. Parties must still agree in the decision on inventories, reporting and review (Articles 5, 7 and 8) on whether eligibility is tied only to the inventory of emissions by sources or also to the inventory of removals by sinks.
To be eligible to use the mechanisms, a Party must also accept the agreement on compliance supplementing the Kyoto Protocol. (However, it is not completely clear what form this "agreement on compliance" will ultimately take).
Fungibility: Each mechanism creates a specific type of emissions credit-Emission Reduction Units (ERUs) under JI; Certified Emissions Reductions (CERs) under CDM; and Assigned Amount Units (AAUs) under emission trading. While the credits created by each mechanism will likely be in denominations of one tonne of CO2 equivalent, there has nonetheless been much debate on whether the three types of units would be fully fungible (i.e. interchangeable and tradable). If each type of emission unit is equal, Parties and participants in emissions trading can buy and sell them as needed to meet their targets. The main debate at COP-7 will be whether CERs can be traded or whether they should be immediately retired.
Commitment Period Reserve: For the compliance reserve mentioned above, the Bonn Agreement says that Parties "should" maintain a reserve at the 90/100 percent level, not "shall." The wording implies the level is desirable but it is not legally binding. This issue may be raised at COP-7.
Joint Implementation: For JI, key issues will be the composition and voting rules of the supervisory committee and the verification procedures for JI projects-i.e., the extent to which they will be similar to the CDM procedures and whether a Party needs to be in compliance with its monitoring and reporting obligations before it can transfer the credits.
CDM: The CDM text under consideration reflects differing levels of agreement, with some provisions accepted in drafting groups and some yet to be agreed or even considered. Issues that will need to be resolved include:
- Voting rules for the Executive Board
- The role of the Executive Board versus that of the COP/MOP.
- Terms of reference for baselines and additionality, particularly for small projects, afforestation and reforestation.
- Project approval-whether only host Party approval of projects will be required, or whether approval will need to be sought from both host and investor Parties.
- "Unilateral CDM"-i.e. whether CDM projects can be undertaken without the participation of an Annex I Party. It is possible that this issue will never be addressed explicitly, but will be resolved implicitly as part of the debate on host/investor Party project approval.
- Rules to promote an equitable geographic distribution of projects.
Further information:
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