Title of paper

3. The Kyoto mechanisms

The Kyoto Protocol sets the legally binding obligations for developed countries to reduce emissions. Countries with commitments under the Kyoto Protocol have to limit or reduce greenhouse gas emissions according to set targets. They must meet their targets primarily through national measures.
As an additional means of meeting these targets, the Kyoto Protocol introduced three market-based mechanisms, thereby creating what is known as the ‘carbon market’.
The Kyoto mechanisms are:

• 
  Emission Trading (Cap and Trade)
  
• 
  Clean Development Mechanism (CDM)
  
• 
  Joint Implementation (JI)
  

While the CDM involves an Annex I country and a Non-Annex I country, the JI involves two Annex I countries.

3.1 Classification of Parties to the UNFCCC

The table depicts the classification of parties to the UNFCCC. All countries that are parties to the UNFCCC are listed in one of the following categories:


Currently, 41 countries are categorized as Annex I parties. Besides developed countries, these are economies in transition. Economies in transition are economies that changed from a centrally planned economy to a free market. Thus, the Russian Federation, the Baltic States and several Central and Eastern European States belong to this category.

Annex II parties consist of the OECD members of Annex I, excluding the EIT parties. 24 parties are listed in Annex II. They are required to provide financial and technical support to enable developing countries to undertake emission reduction activities under the convention and to help them adapt to adverse effects of climate change. In addition, they have to take all practicable steps to promote the development and transfer of environmentally friendly technologies to EIT parties and developing countries.

The parties being listed in Annex B of the Kyoto Protocol are Annex I parties with first or second round Kyoto greenhouse emission targets. First round targets applied from 2008-2012. At the Conference of the Parties (COP) in Doha, parties agreed to an amendment of Annex B, containing a list of Annex I parties who have second round Kyoto targets, and which applies from 2013-2020.

Namibia belongs to developing countries category. Certain groups of developing countries are recognized by the UNFCCC as especially vulnerable to the adverse impacts of climate change, including those prone to desertification and drought.

To 49 countries, many of them being in Africa, the special status of being a least-developed country was given. For them, it is an extraordinary challenge to adapt to the effects of climate change.

3.2 Cap and trade principle

Annex I parties made emission reduction commitments under the Kyoto Protocol.
Annex I parties apply the ‘Cap and Trade’- principle, which is explained in the following table:

Cap and Trade

• 
  The maximum use of a resource (here: a particular quantity of greenhouse gas emissions) is determined.
  
• 
  From this, individual emission allowances are derived and allocated.
  

Firms are required to hold a number of permits equivalent to their emissions.

The total number of permits may not exceed the cap limiting total emissions to that level.

• 
  Emission allowances can be traded.
  

They can be purchased and sold and they can be acquired by investing abroad.

Firms that need to increase their volume of emissions must buy permits from those who require fewer permits.

3.3 Clean Development Mechanism

One way of acquiring emission allowances is by investing in CDM projects abroad. Thus, the Clean Development Mechanism is an emission trading mechanism that allows parties to the Kyoto Protocol to buy ‘Kyoto-units’. Those emission permits for greenhouse gases are bought from other countries in order to meet the domestic emission reduction targets.

Projects under the Clean Development Mechanism involve an Annex I party, a developed country, and a Non-Annex I party, a developing country.

CDM is a way to buy Certified Emission Reduction Units (CERs) from CDM emission reduction projects in developing countries.

CDM is intended to stimulate sustainable development and emission reductions, while giving industrialized countries some flexibility in how to meet emission reduction limitation targets.

3.3.1 Project process

This table describes the project process in a nutshell:

When the project document is written during the baseline study, three theoretical questions have to be answered to qualify as a CDM project:

• 
  How much emissions do you have without the CDM project?
  
• 
  How much emissions do you have with the CDM project?
  
• 
  How much emissions do you have with alternative scenarios?
  

We plan, for example, the modernisation of a coal power plant. Such projects are the most common. They are called end of pipe-projects. Without the CDM project we would still have an old fashioned coal power plant without modern filters. Thus, a lot of emissions! In contrast, a lot of emissions will be saved after modernisation. This amount of saved emissions can then be used by the developed country at home. However, is this fair? Saving the same amount of emissions through a relatively easy modernisation, would have cost much more in a developed country much than in a developing country since the environmental standards are higher and you will have difficulties finding old fashioned power plants in developed countries that can be modernised with such little effort.

In our second example we plan a wind park in a developing country. Almost all wind parks in developing countries are registered for CDM today. Asking our three theoretical questions, we can now conclude that we would not have any emissions without the wind park as there will be no development at all. If we develop the wind park, some emissions will be released during the construction phase of the wind park and some electricity will be needed during operation. Now we ask for the emissions of an alternative scenario, a coal power plant for example. The developed country earns the equivalent of credits that are saved because of building the wind park instead of the potential coal power plant. The earned credits could then even be used for building a coal power plant in Europe. But isn’t it the aim of a modern climate change policy not to have coal power plants here and there?

3.3.2 Advantages and disadvantages

In the following table the advantages and disadvantages of CDM are summarized:

It is highly disputed among scientists as to whether the introduction of CDM has achieved its aims, namely to tackle the global challenge of climate change.

By choosing the enhancement of renewable energies as an example, there have indeed been some positive developments since the introduction of CDM.

Although CDM is not perfect, it is driving low carbon transformation in developing countries by providing a channel for investment in cost-effective renewables. For example, renewable energy CDM projects all over the world account for more renewable electricity capacity than the total power generation capacity for Africa. Doing so has created technology transfer, catalyzed foreign and domestic investment and contributed to sustainable development (Bumpus, 2012: 1).

Core to the design of CDM is its ability to reduce global greenhouse gas emissions in the most economically efficient way possible. Since there are, generally, more inefficiencies in developing countries and greater opportunities to meet rapidly growing energy demands with renewables, it makes sense to reduce emissions there, where the cost savings are greater. One can do a lot more for a lot less per tonne of GHG emissions reduced in Namibia compared to Germany (Bumpus, 2012: 2).

Analysis shows that CDM has significantly affected technology transfer to developing countries. It helps to develop local expertise by paving the way for local uptake of technologies, knowledge and understanding (Bumpus, 2012: 5).

Nevertheless, CDM has not fulfilled many expectations. First and foremost, it was not successful in reaching the Kyoto aim. Under the CDM, it is possible to import emission allowances into the emissions trading system of the investor state and thus, increase its overall assigned amount of emissions without this being counted as an increase.

Requirement stipulations for qualifying for CDM are prone to misuse. The transfer of emission reduction units to the investor state can only be justified as additional if the project is more climate-friendly than a reference project that exists or would have been established without transfer of the emission reduction units. In practice, reference projects with a bad climate balance are often chosen. Another gateway for misuse is the proof of the ‘additionality’ of the project. To qualify for CDM, the project must not have happened anyway. Taking into account that most energy generating projects are undertaken in China, it is unrealistic to assume that without CDM projects, China would not have brought any energy generating projects along the way. According to independent estimations, in between 40-80% of projects, ‘additionality’ is doubtful as they would have also been implemented without registration for CDM.

It is also argued that CDM is at odds with the principle of joint but differentiated responsibility, which requires that the industrialized countries have a duty to enact climate policies at home instead of earning emission credits abroad. Although there is technology transfer to developing countries to some extent, CDM provides no incentive to develop new low-carbon energy technologies in the developed country.

But even if one only looks at the development advantages for the developing country, CDM is not free of concerns. CDM projects can de-motivate developing countries to pursue a genuine climate protection policy. They can simply remain passive until CDM projects begin to emerge. CDM projects also direct resources of development cooperation away from other social and ecological projects into climate protection due to the side effect of earning emission reduction units.

Last but not least, all low cost emission reductions are stolen by developed countries. When developing countries take on their own commitments to reduce emissions, it will be more costly to do so.

Developing new laws on environmental issues becomes difficult for a second reason. It is likely that these laws will impact on the contracts that were signed with the investor from the developed country and they will argue that any change in domestic rules affects them negatively and amounts to an expropriation of their interests for which they have to be compensated. Through contracts under CDM, public goods like for example energy, become subject to private law contracts. In this case, even the confidentiality rules of private law contracts apply, although the public should have a right to know about far-reaching contracts on energy or water.

These arguments are often put forward by opponents of the idea who state that the climate can be traded as any other commodity.