Kyoto Mechanisms

The Kyoto Mechanisms and Global Climate Change

The Kyoto Mechanisms and Global Climate Change: Coordination Issues and Domestic Policies

Prepared for the Pew Center on Global Climate Change
September 2000

By:
Erik Haites, Margaree Consultants Inc.
Malik Amin Aslam, ENVORK Research And Development Organisation

Press Release

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Executive Summary

The Kyoto Protocol sets greenhouse gas emissions limits for 2008-2012 for 38 developed coun-tries. Developing countries have no emissions limits. The Protocol also creates three "mechanisms" that enable countries to reduce the cost of meeting their emissions limits. The nations of the world are now negotiating the detailed rules for implementing the Protocol, including the three Kyoto Mechanisms.

A number of countries have made specific proposals to restrict the use of the Mechanisms to achieve environmental or equity objectives. Other countries are arguing for an unrestrictive approach to improve economic efficiency. In addition, the lack of integration among the three Mechanisms may inadvertently restrict or bias their use. Finally, the extent to which countries may avail themselves of the Mechanisms depends both on the rules for the Mechanisms and on the domestic policies adopted by the developed countries to meet their commitments.

This report evaluates proposed rules for implementing the Kyoto Mechanisms in terms of their implications for equity, environmental integrity, and economic efficiency, and discusses coordination of domestic policies with the Kyoto Mechanisms. The authors conclude that:

The Kyoto Mechanisms have the potential to dramatically reduce the costs of meeting the Kyoto commitments. The Kyoto Protocol allows nations to fulfill part of their emissions reduction obligations by purchasing emissions reductions from other nations. Because greenhouse gases (GHG) lead to global effects, it does not matter, from an environmental perspective, where GHG reductions occur. However, because countries and businesses face widely differing control costs, it matters greatly from an economic perspective where GHG reductions occur. Hundreds of analyses using a wide array of economic models agree that the costs of controlling GHG emissions are significantly lower if emissions trading is permitted than if each nation has to meet its emission reduction responsibilities domestically. The broader the trade possibilities, the lower the costs of control.

The rules should allow substitution among the different Mechanisms. Some countries have proposed limiting substitution (fungibility) among the three Mechanisms. Others argue that the Protocol does not allow full fungibility. To limit such substitution, the rules governing use of the Mechanisms would have to be very restrictive. Even then countries could develop means to circumvent the restrictions. It would be better to simply allow substitution among the Mechanisms.

The rules for International Emissions Trading should allow "legal entities" (emitters, emissions brokers, etc.) to participate. Legal entities should be allowed to participate in emissions trading, just as they are allowed to participate in Joint Implementation, the Clean Development Mechanism, and international trading of other goods and services. If governments rather than legal entities trade, the potential efficiency gains of trading cannot be realized because governments do not know the compliance costs faced by the emitters. If the international rules don't allow legal entities to participate, individual governments could circumvent those rules, if they wish, by establishing internationally tradable "obligations to transfer." Rather than encourage the development of complex legal devices, countries should simply agree to allow legal entities to participate in emissions trading.

Lack of harmonization among the three Mechanisms may inadvertently restrict their use. There will be differences in design among the Mechanisms because their purposes vary. For example, only one of the three Mechanisms is designed to promote sustainable development in developing countries. However, an important objective of each of the Mechanisms is to allow legal entities and nations to use the most cost-effective means available to comply with their domestic and international obligations. Differences in rules among Mechanisms that are unrelated to differences in their purposes reduce economic efficiency and should be minimized to the extent possible.

Significant penalties for non-compliance and effective enforcement of those penalties are crucial to the environmental integrity of emissions trading. If the penalties for non-compliance with national emissions limitation commitments are relatively weak, emissions trading enables a country to benefit financially through non-compliance. Such behavior reduces the value of the allowances held by governments and legal entities. Liability proposals seek to limit the extent of such non-compliance by limiting sales to allowances expected to be surplus to the seller's compliance needs. Liability proposals differ in their environmental effectiveness, their economic efficiency, and their impact on the timing of transactions. Negotiators should adopt rules that are maximally effective in encouraging compliance with minimal increase in cost or environmental risk.

The Mechanisms are most amenable to use by countries that adopt domestic cap and trade systems. Countries will need to implement domestic policies to control emissions by different sources if they are to meet their emissions limitation obligations. The cost of compliance with domestic policies can be minimized by giving sources access to the Kyoto Mechanisms to the extent allowed by the international rules. Use of the Mechanisms is easiest to structure for participants in a domestic cap and trade system. However, the Mechanisms could be used, albeit with some difficulty, by countries that adopt emissions taxes or that specify the means of compliance through some types of regulations or negotiated agreements.

Erik Haites
Malik Amin Aslam
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Land Use & Global Climate Change: Forests, Land Management, and the Kyoto Protocol

Land Use & Global Climate Change: Forests, Land Management, and the Kyoto Protocol

Prepared for the Pew Center on Global Climate Change
June 2000

By:
Bernhard Schlamadinger, Joanneum Research, Austria
Gregg Marland, Environmental Sciences Division, Oak Ridge National Laboratory, USA

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Allowing nations to receive credit under the Kyoto Protocol for using lands and forests to store carbon has been, and will continue to be, controversial until key issues are settled. The Protocol sets forth a partial system for including land-use change and forestry, and negotiators are left with the difficult task of closing potentially important gaps in the rules. Without specific crediting rules, countries can posture for interpretations that could allow them to weaken commitments made under the Protocol. With this situation in mind, the Pew Center commissioned this report to identify key issues in the debate regarding terrestrial carbon.

Report authors Bernhard Schlamadinger and Gregg Marland examine how forests and other lands can be managed to slow the rate of increase in atmospheric carbon dioxide levels, review how the Kyoto Protocol deals with forests and other land uses, and identify outstanding issues that must be resolved if the Protocol is to be implemented.

The report finds the following:

  • Forests and the way we manage them provide significant opportunities to assist in climate control efforts.
  • The Kyoto Protocol includes land use, land-use change, and forestry, but it does so selectively: sometimes awarding credits for increasing carbon stored through forest and land management, and sometimes not; sometimes charging decreases in carbon stocks (e.g., as a result of deforestation) against national commitments, and sometimes not. As currently crafted, the system is only a partial one and requires further clarification and practical, effective implementation methodologies if potential benefits from land management are to be realized.
  • A climate control effort that includes forests needs to account for carbon dioxide both released and absorbed, and it needs to do so in a balanced manner that only rewards activities that contribute to slowing the rate of increase of atmospheric carbon dioxide.

While not a panacea, storing carbon could be an important part of a menu of options aimed at slowing the build-up of atmospheric carbon dioxide levels.

The authors have been part of the writing team for the Intergovernmental Panel on Climate Change’s Special Report on Land Use, Land-Use Change, and Forestry, and acknowledge the importance of discussions and interactions with other experts during that process in helping shape this report. Discussions within IEA (International Energy Agency) Bioenergy, Task 25 (Greenhouse Gas Balances of Bioenergy Systems) were also an important source of ideas and feedback. The Pew Center and authors are grateful to Don Goldberg, Mark Trexler, Kristiina Vogt, and Murray Ward, who reviewed the manuscript in draft form, and to Sandra Brown for her guidance as an expert consultant on this report. 

Executive Summary

There is increasing concern that the Earth's climate is changing because of the rising concentration of greenhouse gases in the atmosphere. The United Nations Framework Convention on Climate Change (UNFCCC), drafted in 1992, expresses this concern, and the Kyoto Protocol, negotiated in 1997, sets forth binding targets for emissions of greenhouse gases from developed countries. The Kyoto Protocol represents considerable progress in building a global consensus on how to confront the growth of greenhouse gas concentrations in the atmosphere, but it also contains many ambiguities and leaves many issues that need to be resolved before it can be implemented.

The Kyoto Protocol sets quantitative targets for countries to reduce their emissions of greenhouse gases to the atmosphere, but it recognizes that the same goal can be achieved by removing greenhouse gases from the atmosphere. There are opportunities to reduce the rate of build-up of atmospheric carbon dioxide (CO2 ) through land management activities, referred to as Land Use, Land-Use Change, and Forestry (LULUCF) activities. These opportunities include slowing the loss of carbon from plants and soils — e.g., through reduced rates of deforestation — and encouraging the return of carbon from the atmosphere to plants and soils — e.g., by planting trees (afforestation and reforestation) or improving management of forests or agricultural soils.

This paper explores whether LULUCF activities provide the same long-term benefit for the climate system as does reducing emissions from fossil-fuel combustion; sketches the development of international negotiations on LULUCF issues; looks at the consensus negotiated so far on this issue; and examines the ambiguities of the Kyoto Protocol, the issues yet to be resolved, and the decisions yet to be made before the Protocol can serve as an effective international instrument. An effective instrument would encourage countries to manage the terrestrial biosphere in a way that minimizes net emissions of greenhouse gases while serving other goals such as sustainable development.

Important issues when designing incentives for land-based climate-change mitigation are whether net carbon sequestration can be considered permanent; whether there will be excessive leakage — a phenomenon where, for example, efforts to protect or increase forests in one place hastens their loss elsewhere; whether the potential for LULUCF activities is sufficiently large to offer real opportunity for reductions in atmospheric CO2; and whether analytical techniques permit an accurate measure of carbon gained or retained (or lost) in terrestrial ecosystems.

LULUCF activities differ from emission reductions from fossil fuels because their overall potential is limited by the lands available and the amount of carbon that can be stored per unit of land (“saturation”); and because carbon offsets in the biosphere are at risk of being lost at a later time, whereas emission reductions from fossil fuels not burned in one year do not generally trigger greater emissions in a subsequent year (“permanence”). Saturation is relevant especially in the long term (several decades). Options for addressing the lack of permanence of terrestrial carbon stocks exist and are discussed in this paper.

Several articles of the Kyoto Protocol address land management issues. Article 3.3 provides that some LULUCF activities — afforestation, reforestation, and deforestation (ARD) — will be accounted for in determining compliance with national commitments to reduce greenhouse gas emissions. Many negotiators did not want to sanction credits without actions. Consequently, credits in the LULUCF sector are restricted not just to ARD, but to those ARD activities that are directly human-induced, and then only to activities that are initiated after January 1, 1990. Article 3.4 outlines the procedure for including additional LULUCF activities in commitment periods after the first (i.e., after 2012), and in the first commitment period provided that activities have taken place since 1990.

Implementation of these articles is confounded by a lack of definitions for words like “reforestation” and “forest,” and the implications of choosing among commonly used definitions are very large. The precise definitions of terms and the rules for taking account of carbon emissions and removals due to LULUCF activities will have different impacts on different countries depending on: 1) the nature of their forests, 2) whether or not the LULUCF sector is currently a source (net emitter) or sink (net remover) for atmospheric CO2, and 3) the expected emissions balance of the LULUCF sector over the coming decades. The LULUCF provisions in the Kyoto Protocol can only be implemented once the accounting rules have been determined. Inevitably there is a problem when the commitments have already been agreed to, but agreement on the opportunities and rules for meeting those commitments has not yet been fully reached.

Implementation of the LULUCF provisions of the Protocol raises at least six principal issues for domestic LULUCF activities:

  • What is meant by a “direct human-induced” activity?
  • What is a forest and what is reforestation?
  • How will uncertainty and verifiability be dealt with?
  • How will accounts deal with the issues of (non)permanence (sequestration reversed by emissions at a later date, e.g. if a new forest is destroyed by a catastrophic event) and leakage?
  • Which activities beyond ARD, if any, will be included, and what accounting rules should apply?
  • Which carbon pools and which greenhouse gases should be considered?

The last point includes the issue of whether and how to consider that harvested materials from forests can result in an increasing stock of carbon in long-lived wood products and landfills. The Kyoto Protocol does recognize that greenhouse gas emissions will be reduced when sustainably-produced biomass products are used in place of fossil fuels or energy-intensive materials. Biomass fuels, for example, can be used in place of fossil fuels, and construction wood can be used in place of other, often more energy-intensive, materials such as steel or concrete.
In addition to encouraging certain domestic LULUCF activities, the Protocol, through Articles 6 and 12, provides for mitigation projects in other countries and trading of emission credits. When projects involve only developed countries (Article 6), emission reductions or enhancement of sinks that are credited to one country are subtracted from the assigned amount of the other, and there is no change in the global total of assigned amounts. Projects involving both developed and developing countries (Article 12), referred to as clean development mechanism (CDM) projects, result in an increase in the global total of assigned amounts because credits are added to the assigned amounts of developed countries whereas, in the absence of emission limits in developing countries, no subtraction takes place elsewhere. It is therefore critical that the credits result from real emission reductions, or sink enhancements, that go beyond what would have happened without the project. Herein arises the concept of “additionality.”

Article 12 of the Kyoto Protocol does not specifically include or exclude LULUCF projects. At least two important, project-level issues for LULUCF remain to be addressed:

  • Will LULUCF activities in developing countries be accepted in the CDM and, if so, which activities?
  • What accounting mechanisms are appropriate if LULUCF projects in developing countries can generate emission credits but there is no responsibility for debits if the carbon is subsequently lost?

The potential for increasing carbon stocks in the terrestrial biosphere might be limited compared to total greenhouse gas emissions, but their impact could be considerable in relation to the reductions necessary for compliance in the first commitment period (2008-2012). However, not all changes in carbon stocks in the biosphere are treated equally in the Protocol, some yield credits or debits and some do not. It is inevitable that a system cannot be optimized by treating only a portion of that system, and the definitions and rules for LULUCF will have to be carefully crafted to provide incentives for increasing carbon stocks while recognizing the other important roles played by the terrestrial biosphere and its products. It is, however, important that the transaction costs associated with these rules are not so high that they discourage participation toward the ultimate objective of stabilizing atmospheric CO2. If all of this can be achieved, improved management of the terrestrial biosphere can provide an important contribution toward meeting climate-change objectives, and the Kyoto Protocol can provide incentives for improved management of the terrestrial biosphere.

Bernhard Schlamadinger
Gregg Marland
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