1.1 The Asia and the Pacific Region (Asia/Pacific) Region
1.2 Concepts and Terms
1.3 The United Nations Framework Convention on Climate Change Framework Convention on Climate Change (UN FCCC)
1.4 Policy Framework for JI/AIJ
Growing international concern about the potential effects of climate change has led to increasing research, policy initiatives, and the development of innovative programmes and projects around the globe. These activities have focused on developing a better understanding of the environmental, economic, and social risks associated with climate change and seeking ways to reduce the human-induced greenhouse gas (GHG) emissions that are driving climate change concerns. Opportunities to reduce GHG emissions have been identified 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) are showing increasing policy interest in the development of a trading system for GHG emissions. Such a system would allow nations with cost-effective opportunities for reducing emissions (generally developing countries) to sell or trade those emissions reductions to public or private organizations in other nations (generally developed countries) in return for investments which support their development priorities. The current pilot phase for Activities Implemented Jointly (AIJ) provides a framework for countries to experiment and gain experience with emissions trading on a voluntary pilot basis. There are a number of governmental and private sector programmes promoting the development of AIJ pilot projects. As of October 1997, about 40 emission reduction projects are officially recognized by the UN FCCC, and the number appears likely to grow significantly as interest continues to increase. Many of these projects have focused on the forestry sector, since opportunities in the forestry sector have been shown to be low cost relative to other sectors and are characterized as "no-regrets" projects since they tend to be compatible with other environmental, economic, and social development priorities.
This report will focus on opportunities and constraints related to the development of emissions-reduction or carbon-offset projects in Asia and the Pacific region (Asia/Pacific) and specific to the forestry sector. The following section will explore the context for developing AIJ projects in the region. Subsequent sections will provide background on the international policy framework for JI/AIJ projects.
The Asia/Pacific is one of the most significant regions for consideration of future climate change impacts and strategies. From an environmental perspective, the region contains a large number of island nations and extensive coastal regions which are projected to be adversely affected by rising sea levels associated with climate change scenarios. Therefore, countries in the region feel particularly vulnerable and concerned about climate change. In addition, countries in the region contain significant portions of the world's remaining natural tropical rainforests which are not only large terrestrial sinks of GHGs, but also major global reservoirs of biological diversity.
Developing countries of the Asia/Pacific region contain several nations that are among the world's fastest growing populations and economies. Arguably all socio-economic levels within the region have benefited economically from a liberalization of the world economy. Investment by developed countries into the region is a major reason for the unprecedented growth in the region. JI/AIJ's most basic definition is an opportunity to test investment in climate friendly projects and attempt to capture the emerging market value of carbon dioxide. Such investment could be viewed as simply another form of investment fuelling not only development, but sustainable development.
Developed countries are responsible for most of the historical GHG emissions and, therefore, bear much of the responsibility for the climate change problem. However, Southeast Asia is projected to become among the world's largest contributors of GHG emissions in the coming decades. For example, China, the most populous country, recently became the third largest emitter of GHG, replacing the European Union. China, India, and Indonesia are currently among the top ten countries in GHG emissions, and their emissions, relative to other nations, are expected to grow significantly unless appropriate steps are taken (World Resources, 1994-95). China accounts for 9.9% of total global emissions, followed by India (3.7%) and Indonesia (1.9%). New technologies and strategies to reduce GHG emissions from baseline projections in these countries are therefore critical from a global perspective. The challenge is to enable countries to pursue sustainable development goals in a way that promotes energy efficient technologies and conservation of carbon sinks (forests) and thereby minimizes increase in GHG emissions.
A "carbon offset" project (which commonly refers to offsets of all GHGs, not just carbon dioxide) is a project that reduces projected GHG emissions to the atmosphere or increases the capacity of sinks for absorbing and retaining GHGs from the atmosphere (Stuart and Jones, 1995). Broadly speaking, joint implementation (JI) and AIJ are carbon offset projects through which one country invests in another to jointly reduce GHG emissions. They are attractive to investors because the cost of reducing emissions in developing countries is often much lower than in developed countries. Under the FCCC, the developing countries do not have commitments to reduce emissions - nor are they likely to in the near term. JI and AIJ are intended to mobilize private capital to fill the gap between less expensive carbon offset opportunities and the scarcity of capital in developing countries. Most of the AIJ pilot projects developed so far have focused on forestry and afforestation as a means to enhance sinks, or renewable energy technologies and efficiency improvements to reduce emissions.
JI, coined during the initial FCCC meeting, is the international term for carbon offset projects in which crediting occurs on a country-to-country basis, that is, carbon credits are transferred from one country to another. AIJ was a term developed at CoP3. The term signifies a pilot programme for JI concepts, a moderated version of JI through which carbon offset projects are encouraged, monitored, and certified, but no actual crediting occurs between countries. It is intended to test the concept and build institutional capacity before a crediting phase. While GHG reductions may not be transferred between countries under the AIJ pilot programme, they might potentially be used by companies to meet certain emission reduction goals. From a business perspective, there is very little difference between the two (Stuart and Sekhran, 1996). AIJ projects are structured as a typical business deal where all participants are subject to mutually acceptable legal parameters.
Just as businesses often open manufacturing facilities in developing countries to lower costs and increase margins, developed countries and private companies will look to the comparative advantage of developing countries for investments in carbon offsets under a JI framework. The current inefficiency of many developing countries in terms of GHG emissions per unit of economic output means that investments there could potentially achieve a greater environmental effect than the same investment in a more GHG efficient developed country. With respect to forestry sector carbon offset projects, developing countries in the tropics present attractive investment opportunities due to lower factor costs for land and labour, and substantially higher biomass growth rates than countries in temperate and boreal regions. Because the growth rates of tropical forests are so much greater than temperate forests, they can simply be viewed as more effective systems for capturing and storing atmospheric carbon. On the other hand, business operations related to forestry sector projects in developing countries in the tropics, such as forest concessionaires in many Asia/Pacific countries, are extraordinarily different than those in most developed countries. This means that there are often significant cultural and sector-specific contrasts that investors are likely to encounter, which will tend to increase transaction costs for projects and reduce some of the other advantages these investments.
International negotiations under the FCCC have set the stage and been the driving force behind the development of JI/AIJ initiatives. On December 11, 1990, the 45th session of the UN General Assembly adopted a resolution establishing the Intergovernmental Negotiating Committee for a Framework Convention on Climate Change (INC/FCCC). Supported by the UN Environment Programme (UNEP) and World Meteorological Organization (WMO), the INC was to develop an international agreement on climate change. Rather than drafting a treaty on specific policies, which might limit participation, the INC sought a consensus that could be supported by a broad majority of nations. Through a series of meetings, the INC developed the FCCC and presented it for signing at the Rio Earth Summit in 1992. In March, 1994, after receipt of ratification by the 50th nation, the FCCC came into effect. At this point, however, the agreement has no particular policy mandate or enforcement mechanisms. It is a comprehensive framework of protocols for coordinating climate change research and policy regarding economic, environmental, social, financial, and political considerations.
Participants in the INC meetings argued over a number of contentious issues regarding legally binding commitments, targets and timetables for GHG reductions, financial mechanisms, technology transfer, and the "common but differentiated" responsibilities of developed and developing countries. The phrase "common but differentiated" reflects the challenges inherent in developing a globally accepted GHG reduction strategy and suggests why it is essential to consider the perspectives of both developed and developing countries with respect to JI and AIJ.
For developing countries, which currently have low total and per-capita emissions, but high emissions per unit of economic output and high projections of population and economic growth, the basic strategy is to encourage economic growth-consistent with sustainable development objectives - while lowering the projected growth curve for GHG emissions. Most developing countries, however, have strongly asserted their right to the same emissions trajectory that once propelled the developed countries to their current levels of economic output. Some developing countries (e.g. Argentina) have made commitments to specific emissions reductions.
For developed countries, which generally have high national and per-capita GHG emission levels, but low emissions per unit of economic output (GDP) and low projections of population and economic growth, the basic strategy has been to set a limit on current GHG emissions. This strategy resulted in voluntary commitments by most developed nations to try to reduce or restrict annual GHG emissions to 1990 levels. Many governments and environmental groups believe that such voluntary goals do not go far enough for developed nations and are urging further or absolute reductions in emission levels. Several countries, most notably Germany and the Netherlands, have already committed themselves to stronger emissions reductions.
Article 4.2 of the FCCC urges the developed countries to take the lead in developing and applying GHG mitigation strategies domestically and allows countries to "implement such policies and measures jointly with other Parties and may assist other Parties in contributing to the achievement of the Convention." These provisions for JI activities are somewhat ambiguous about whether the term Parties refers only to developed countries or to both developed and developing countries. Advocates of JI have argued for the widest possible participation so that the most cost-effective opportunities will become accessible to investors, providing a means to fill the gap between less expensive mitigation opportunities and the scarcity of capital in developing countries. Others have argued, however, that participation should be limited to only developed countries for reasons that mostly reflect international equity concerns, such as (Climate Network Africa, 1995):
a. Emissions trading between a developed country with emissions caps and developing country without such caps could create a situation in which no net emissions reductions would actually occur, since industrial investors in developed countries could merely transfer high emission activities to developing countries without penalty.
b. JI is seen as a potential form of eco-colonialism, whereby developed countries might purchase emissions rights from developing countries at deep discounts relative to potential market value, thus limiting or denying the rights of developing countries to use inexpensive fossil fuels and other natural resources for economic development purposes.
c. Developed countries should not be allowed to avoid their own emissions reduction commitments and continue to use a disproportionate amount of the global atmospheric resource through low-cost options provided by JI projects.
The first session of the Conference of Parties (COP1), held in Berlin in March-April 1995 struck a compromise between the efficiency benefits promised by JI advocates and the equity concerns raised by JI opposition. COP1 established a pilot phase for AIJ to gain experience with the concept of JI. The pilot phase allow AIJ projects between Annex I parties (developed countries) and, on a voluntary basis, with non-Annex I parties (developing countries) that wish to participate.
In response to broad equity concerns and developing country concerns about the potential impact of AIJ on development, the COP1 criteria require that all AIJ projects: (1) support national development priorities; (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 emissions reductions during the pilot phase.
Furthermore, to ensure that AIJ projects provide benefits for their developing country hosts, AIJ partners must report to the COP not only the project's contribution to mitigating climate change, but also to local capacity building, technology transfer, and other social and economic benefits for the host country. The AIJ pilot phase, therefore, is an opportunity for all parties to test out this new mechanism and see whether it can work for their benefit.
To date, all commitments of developed countries to limit or reduce GHG emissions are strictly voluntary, without the binding force of domestic laws to back them up. In addition, as the year 2000 approaches, most analyses indicate that developed countries will fall far short of their goals for GHG reductions (Climate Network Europe, 1996). In this light, it is easy to question the sincere commitment of developed countries to meet GHG reduction targets. With respect to JI/AIJ, this failure by developed countries to achieve emission reduction targets has two contrary implications. On the one hand, it demonstrates how difficult emission reductions are to effect, and how much creative JI/AIJ mechanisms are needed. On the other hand, it strengthens skeptics' arguments that developed countries lack the political willpower to make hard economic decisions and that they are using JI/AIJ to avoid the pain of significant reductions.
The Second Conference of Parties of the FCCC (COP2), which met in Geneva in July, 1996, appears to have moved international policy and opinion substantially along the path toward acceptance of JI in the foreseeable future. At COP2, AIJ reports were made by Australia, Canada, Germany, the Netherlands (including a joint report with Hungary), Norway (including a joint report with Mexico), and the U.S. There were a total of 32 ongoing or planned projects, of which nine were forestry sector projects: five involved forest preservation, restoration, or reforestation, and four involved afforestation. The United States, the world's largest GHG emitter, dramatically reversed its previous position and called for legally binding limitations on GHG emissions. The U.S. proposal for a binding protocol for emissions after the year 2000 carried the caveat that the framework allow maximum flexibility in meeting emissions targets and provide for the development of emissions trading programmes.
Despite the U.S. policy shift, there is still considerable doubt as to whether the developed countries are ready to commit to legally binding mandates and to develop the internal enforcement mechanisms necessary to make such mandates meaningful. And even if emissions reduction mandates are adopted by developed countries, it is uncertain whether the developing countries will begin to move toward emissions reduction targets for themselves or to fully accept the concept of JI. Ultimately, it seems, these steps are necessary to create a market for JI investment opportunities and to convince many capable, but reluctant, organizations to develop GHG mitigation projects. To move the concept of JI/AIJ forward in this uncertain environment, advocates of JI need to identify clear reasons why host countries, project developers, and investors should participate in these activities. In addition, the trend toward stricter GHG reduction policies needs to be clearly described and its benefits demonstrated.
Several dozen carbon offset projects have already been developed throughout the world, some of which will be discussed in later sections of the report. The investment capital has 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 as small scale, pilot projects. This is consistent with the basic purpose of AIJ, to demonstrate various approaches and 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 tonne of CO2 (Dixon, et. al., 1993). Some of these estimates, however, are considered "soft" since most participating investors have leveraged support from other organizations, such as environmental and development advocacy groups, whose inputs are generally not accounted for in the 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 U.S. taxes for GHG emissions, Manne and Richels (1994) estimated that the uncertainty over future regulation of GHGs in the U.S. has influenced the decisions of electric utilities to the equivalent of a carbon tax of US $4.75 per tonne of CO2. Several other countries and some state jurisdictions in the U.S. 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 tonne 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 tonne of carbon1:
a. The International Energy Agency estimated that for developed countries (i.e., OECD), a tax of US$72 per tonne of carbon would be required to lower emissions by 12% below 1990 levels by the year 2050.
b. The U.S. Congressional Budget Office estimated that a tax of US$28 per tonne of carbon would be required to stabilize U.S. emissions at 1990 levels, reflecting the U.S. commitment to date.1 These cost estimates are for tonnes of carbon; to obtain equivalent cost estimates for CO2, divide these figures by 3.67.)