5.1 Creating an international framework for JI/AIJ
5.2 Building Policy and Institutional Frameworks in Developing Countries
This report has already mentioned most of the major issues and challenges facing forestry sector carbon offset opportunities in the Asia/Pacific. Some of these challenges are common to all AIJ projects, internationally and across all sectors, some relate more directly to projects the region, and others are specific to the forestry sector. This final section presents recommendations to advance these issues in the region.
Project developers and others promoting the advancement of JI appear to be at a turning point. A pilot phase for AIJ has been established, suggesting an interest among all Parties to the FCCC in moving forward on developing an operational JI framework; but without a policy and market framework in place for JI, many potential investors, project developers, and host countries are reluctant to participate. One of the major issues identified among potential investors is the lack of value or credit during the pilot phase, and the uncertainty about future credit. Investors are seeking an international framework that will provide credible methodologies for quantifying GHG credits and a market system for valuing and trading credits. In the short term, some countries are exploring initiatives to develop consistent approaches for quantifying and valuing credits for AIJ projects within specific sectors, such as the forestry sector in Mexico. Eventually, however, such approaches will have to be reconciled among countries and between sectors. The AIJ pilot phase is helping in the development of such a framework, but the perspective of many developing countries is that there are too few projects and too little time left in the current pilot phase to determine next steps. Some developing countries believe that the pilot phase should be extended for five or ten years to ensure enough time for experience and information to determine whether to move toward an operational phase.
Developing countries in the Asia/Pacific are becoming more receptive to AIJ, primarily due to perceived opportunities for increased foreign capital being directed toward their sustainable development priorities. A number of countries are considering steps, such as domestic AIJ programmes, to increase their capacity to promote or facilitate the development of projects. It is less clear, however, whether potential investors are interested in buying into such projects. Many appear to be watching the international policy environment, waiting to see whether a market-based framework emerges and what it will look like.
Two key policy issues that need to be addressed in the context of establishing an international framework relate to (1) commitments by developed and developing countries to reduce GHG emissions and (2) sharing and pricing carbon credits. As noted earlier, the U.S. proposal for legally binding commitments among developed countries provides an impetus to strengthen the international policy framework for GHG mitigation measures. These commitments, and the form they take will have important implications for JI/AIJ. It is uncertain how developing countries will respond to these commitments with respect to AIJ. Some suggest that they are unlikely to agree that future JI or AIJ credits should be in lieu of agreed commitments and that a parallel accounting system for JI/AIJ is necessary. Developing countries are also expected to oppose commitments for themselves in the short or medium term (i.e., next several decades). Developed countries, like the U.S., however, are looking for voluntary actions by developing countries that set goals or take steps toward future commitments.
Although AIJ projects are not eligible for carbon credits during the pilot phase, the issue of sharing and pricing credits still hangs over prospective projects. From an investor perspective, AIJ projects will continue well after the pilot phase, so they eventually could be eligible for credits. Recognizing that there are no guarantees a market for credits will develop or that pilot phase projects will receive credit, some potential investors and project developers have suggested that further incentives to invest during the pilot phase are needed. Private organizations who invest now, it is argued, are the progressive risk-takers, promoting the development of AIJ, and they should receive more than simply recognition for the support. Agreements on how carbon credits will be shared between host countries and developed countries will play a critical role in determining whether AIJ becomes operational. Most developing countries would not agree to give up all of the credit for emissions reduced through AIJ, so some mechanism for sharing is needed. Proposals include a straight 50:50 split to pro-rating the credit by the share of total project investment by the AIJ investor. Credit sharing could be negotiated on a case-by-case basis, but there is a risk for developing countries in that investors will have far more bargaining power.
Similar to sharing credits, negotiating prices for carbon credits on a project-by-project basis may not be fair to developing countries. Again, investors will hold a stronger position when host countries are in desperate need of capital and technology, and when developed countries have greater capacity and expertise to analyze projects. Dr. Jyoti Parikh of the Indira Gandhi Institute for Development Research uses the analogy of a monopoly versus a free market system when describing the current AIJ situation. When there is only one buyer, then they only have to pay for the seller's incremental cost of abatement (e.g., the cost of afforestation). All of the economic "surplus," between what the buyer would be willing to pay and what the seller would be willing to accept, goes to the buyer. In a free market system, buyers all pay the same market price, regardless of the seller's marginal cost. At that price, the economic surplus is shared between buyers and sellers. Without an international market for carbon credits, how can the Parties to the FCCC ensure that benefits are shared fairly between investor and host countries? Minimum prices for carbon credits-either internationally or in a given host country - might be useful until a market system is developed.
5.2.1 Domestic Policies and Institutions
5.2.2 Domestic AIJ Task Force and Programme
5.2.3 Sectoral AIJ Workshops
5.2.4 Building Awareness and Understanding of AIJ
5.2.5 Estimating the Project Opportunity in the Region
A number of countries in the Asia/Pacific are recognizing that they must develop domestic strategies and respond proactively to the opportunities presented by the pilot phase of AIJ, if they are to take full advantage of them. Host country officials, therefore, are examining questions such as: What role should government, industry, and NGOs play in an AIJ system? What responsibilities should each of these parties have? Are additional incentives needed to encourage private sector participation in AIJ? Issues being negotiated at the international level will, of course, have a significant impact on these domestic strategies and actions, but there are a number of initiatives that countries should consider at the national level.
In many developing countries, there is a lack of clear government policy on AIJ that hampers the development of projects. For example, it is unclear whether governments - with various ministries involved - are supportive of AIJ, and there are no clear guidelines for project submissions or criteria for project evaluation. In other words, there is often little in place to encourage parties who might be interested in developing projects to do so. On the contrary, there often appear to be confusing signals and significant barriers facing potential project developers. Governments need to respond to these concerns if they wish to truly test the concept of JI through the AIJ pilot phase, and they need to involve private sector organizations, both industry and NGOs.
Who should participate in the process of developing a domestic policy framework for AIJ? At the governmental level, all ministries whose activities encompass potential AIJ projects-such as agriculture, forestry, energy, commerce, transportation, and finance - should be involved in developing a domestic strategy for AIJ. Each of these ministries need to be involved in the process of developing an AIJ system - not necessarily in the day-to-day activities - but in developing a coherent system for AIJ projects, which can be coordinated across the various sectors of the national economy.
Since AIJ is a mechanism for bringing private sector investment into the process of sustainable development, industry should play a significant role in establishing an AIJ system - from setting AIJ criteria to evaluating and monitoring projects. Private sector businesses should not only be consulted, they should be closely involved in developing the AIJ system, so that their experience and concerns can help guide the process.
NGOs also play a vital role, not only in terms of their expertise on technical issues, but by representing the concerns and needs of the people and the public interest - particularly the poor and disenfranchised - into the AIJ process. Many NGOs, domestic and international, have experience with AIJ proposals and could help develop projects. They can also play key roles in monitoring and evaluating AIJ projects, particularly with respect to concerns about the social, institutional, and environmental benefits that these projects are expected to provide at the local level.
As mentioned previously in the paper, some countries have been slow to react to the AIJ issue which might be attributed to a lack of interest or awareness - either on the part of an agency or an individual within the agency. Regardless of ones perspective, AIJ is an opportunity that deserves to be debated among several agencies within the government. Designating a focal point for AIJ activities or negotiations is an important first step toward developing a mechanism for considering AIJ.
A focal point in turn lead a task force involving government, industry, and NGOs. In general, government agencies will probably take the lead in such task forces; but, in some instances, private organizations - either industry or NGO - might provide leadership, since they too have critical roles in AIJ. Whichever type of organization is primarily responsible for leading the effort to develop an AIJ system, however, there need to be clear targets and a way to judge whether the AIJ programme is succeeding. In addition, monitoring of AIJ projects is a critical element. Although governments are ultimately responsible for reporting AIJ results to the international community, NGOs can play a key role in monitoring the domestic benefits provided by such projects and in verifying results reported by governments.
Significant funding is required to organize such a national task force and develop an effective domestic programme for AIJ. Developed countries have agreed to fund incremental costs that developing countries incur to comply with the FCCC. The GEF has had such a strong emphasis on institutional capacity building, it seems that an AIJ task force is the type of institution that developed countries should support through the GEF or another funding mechanism.
A critical element of a domestic AIJ programme-and a major job of a national task force-is to develop criteria for evaluating AIJ project proposals. These criteria should be designed to help promote the development of AIJ projects in a host country, recognizing the development benefits that such projects can provide, and they should allow flexibility to encourage a wide range of project types and experiences under the pilot phase.
Another key objective of the task force is to agree on acceptable methodologies for calculating and monitoring the reduction in GHG emissions from AIJ projects in various sectors. Again, in the interest of gaining wide experience, the methodologies do not need to be as detailed in the AIJ pilot phase, since no credits are allowed. It is important, however, to provide enough guidance on methodologies to ensure that different projects are calculating GHG reductions similarly, in a way which allows for fair comparisons between projects in the same sector and, ultimately, between projects in different sectors. A major concern in the forestry sector, especially in countries seeking to promote AIJ initiatives in this sector, has been the lack of accepted methodologies. There are common concerns about how to estimate emissions baselines and to assess the GHG benefits of different types of forestry projects, particularly the more complex projects involving integrate land-use activities.
In addition, a domestic AIJ programme should be attentive to investors concerns about risks and credibility of carbon credits associated with projects. It is important, therefore, to consider creating a national framework and mechanisms that facilitate foreign investment in new initiatives, such as the framework in Costa Rica. The establishment of a national framework, perhaps with specific programmes focused on each sector, will help position a country favourably as investors explore options among all countries.
Although some private industry groups and NGOs are well acquainted with AIJ, there are many trade associations and individual organizations which are not. Moreover, the opportunities for AIJ projects and how to implement them varies significantly by sector. Domestic AIJ programmes, therefore, should have a strong sectoral focus. A key activity to initiate this focus could be sectoral workshops, aimed at heightening awareness and knowledge about AIJ and building the capacity of domestic organizations to develop and implement AIJ projects. The workshops could also establish goals for a particular sector, solicit international donors and investor groups, and set framework for tracking progress. The principle is to devolve AIJ planning, project development, and marketing to a sectoral level, while a national task force, as mentioned above, would provide oversight and coordination among the various sectors.
Sectoral workshops should include foreign industry representatives and experts in project development, as well as domestic industry, NGOs, and government. A forestry sector workshop would not only assist in attracting potential foreign investors, it would allow foreign industry representatives to better understand the cultural differences in the region and the different business operations in the forestry sector with which they would have to deal.
Although developing countries in the Asia/Pacific are showing a more favourable response than previously to AIJ, there is a tremendous need for greater awareness and understanding of climate change issues and opportunities for AIJ. At the country level, understanding is currently limited government agencies that are involved in FCCC/AIJ activities. Other government agencies from the environment and energy sector, NGOs and private sector groups that could be instrumental in project development are relatively unaware of the AIJ dialogue. A paper by the Indonesian NGO, LATIN, states that public awareness of climate change and AIJ issues must be increased, and that "discussion on climate change and specifically AIJ have been minimal... even the academicians of forestry, agriculture and land use are not aware enough of these issues." There is a great need in developing countries for public education, outreach, and communication activities to broaden awareness and encourage discussion on these issues and programmes.
In response to the perceived bias in favour of energy sector projects, advocates of forestry sector AIJ initiatives need to develop better information and communication strategies about forestry opportunities. These strategies should address technical and social concerns about developing and implementing complex forestry projects, and should seek to clarify the advantages of projects in this sector relative to the energy sector.
Finally, the need for public education and outreach on AIJ is also great in developed countries. To help build stronger policy support for AIJ programmes in developed countries, potential project developers, investors, and the public must become more knowledgeable about AIJ. In particular, except for a small number of companies that have taken a strong interest in AIJ, potential investors in the private sector have very limited understanding of the international policy framework, concepts, and opportunities related to JI/AIJ.
As mentioned earlier, significant opportunity exists in the Asia/Pacific region for forest conservation, reforestation/rehabilitation, improved forest management, plantations, biomass energy/fuelwood and urban forestry. For example, a major amount of research has been done on opportunities to convert Imperata grasslands to forest cover. To credibly estimate the scale of the opportunity for all interventions outlined above - including the carbon implications - would require significant research.