1. The Carbon Market International Climate Change and Energy Law Spring semester 2013 Dr. Christina Voigt

2. Quiz 1.What does the KP contain and the UNFCCC doesn’t? 2.Which countries have obligations under the KP? 3.What is KP CPII? 4.Which flexibility mechanisms are set up by the KP? 2

3. Flexibility Mechanisms 4 Types of Mechanisms: Clean Development Mechanism (CDM) Art. 12 Resulting in Certified Emissions Reductions – CERs Non-Annex I/ Annex I Projects Joint Implementation (Art. 6) Resulting in Emission Reduction Units – ERUs Annex I /Annex I Projects International Emissions Trading, Art. 17 (allows for trade with AAUs, ERUs, CERs) Joint Fulfillment of Commitment (Art. 4)

4. Kyoto Protocol: Flexibility Mechanisms Eligibility Requirements: Annex I Party Ratification of KP Compliance Methodological and reporting infrastructure in place Establishment of designated national entities and registries Inventories for accounting the tradable units

5. Supplementarity Art. 17, Art. 12.3(b), Art. 6.1 (d) Kyoto Protocol Marrakesh Accords: (Decision 15/CP.7) “The Conference of the Parties:... Affirming that the use of the mechanisms shall be supplemental to domestic action and that domestic action shall thus constitute a significant element of the effort made by each Party included in Annex I to meet its quantified emission limitation and reduction commitments under Article 3, paragraph 1.” (15/CP.7, preamble) 5

6. AUS ETS (1.1.2012) L (Lithuania) Annex-I China Non-Annex I €5 NOK 50 20 mil credits = 1 Mrd NOK ERUs €3 NOK 30 20 mil CERs 100 mil NOK 20 mil ERUs 600 mil NOK CERs €0,5 NOK 5 20 mil t CO2 8 Mrd NOK IET N (Norway) Annex I International Emissions Trading Art. 17, 3.10, 3.11 KP Joint Implementation Art. 6 KP Clean Development Mechanism Art. 12 KP USA: Federal? WCI RGGI (2012) NZ ETS 2008/2009 EU ETS (2005) The Global Carbon Market Others? Japan South Korea China

7. Zooming in: CDM Art. 12 Kyoto Protocol Offset mechanism Successfull projects earn tradeable certified emission reduction credits (CERs), each equivalent to one tonne of CO2, which can be counted toward meeting Kyoto targets (compliance) or can be traded on the Carbon Market (speculation, investment) 7

8. Zooming in: CDM Purposes (Art. 12 KP) 1.Reduction of climate change mitigation costs in Annex I-States 2.Assisting developing countries in achieving sustainable development 3.Contributing to the ultimate objective of the UNFCCC 8

9. The Size of the CDM - Facts and Numbers 6060 registered projects (17.02.2013) in 70 developing countries Issued CERs: 565 mil. CERs (17.02.2012) Expected: During the time period 2008-2012: 2,700,000,000 CERs (2.7 billion t CO2 eqv.) Price: 1 secondary CER = 0.33 € (Point Carbon 20.02.2013)

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14. The Importance of the CDM ’Bridge-Builder’ between: Private actors and Governments/States Developing countries and developed countries Diverse interests: economic, environmental, social actors Unique and innovative use of market mechanisms in Public International Law Has in very short time mobilized and channelled significant investment flows into the developing world Created a market in a regulatory commodity (’Put a prize on carbon’) Has become an important element of KP CPII

15. BUT: Challenges Non-Additionality of Projects (40-70%), Art. 12.5(c) KP Carbon Leakage, Art. 12.5(b) KP Sustainable Development? (Art. 12.2 KP) Negative Impacts on: biodiversity, local communities, water quality (Marrakesh Accords) Negative Policy Incentives (national and international) Sinking Credibility: ’Cash-Machine’ for brokers and intermediaries Rich (polluting) countries bying their way out of responsibility Objective: Environmental Integrity or Economic Efficiency or Both? Video

16. The Problem of Additionality What is Additionality?: Emission reductions that would not have happened without the CDM project; no business as usual Non-additionality results in an increase in global GHG emissions If the emission reductions from the project would occur anyhow, then the CERs allow (entities in) industrialized countries to increase their emissions over their limit Additionality of a significant number of projects seems unlikely or questionable. Source: Delphi survey (Öko-Institut, 2007): “Many CDM projects would also be implemented without registration under the CDM” (71% of the participants) “In many cases, carbon revenues are the icing on the cake, but are not decisive for the investment decision” (86%)

17. Socio-economic and environmental benefits “Project participants have submitted to the DOE documentation on the analysis of the socio-economic and environmental impacts, including impacts on biodiversity and natural ecosystems, and impacts outside the project boundary of the proposed afforestation or reforestation project activity under the CDM. If any negative impact is considered significant by the project participants or the host Party, project participants have to undertake a socio-economic impact assessment and/or an environmental impact assessment in accordance with the procedures required by the host Party. Project participants shall submit a statement that confirms that they have undertaken such an assessment in accordance with the procedures required by the host Party and include a description of the planned monitoring and remedial measures to address them.” 5/CMP.1, para 12 (c) (Marrakesh Accords)

18. Sustainable Development “40. The designated operational entity shall: (a) Prior to the submission of the validation report to the Executive Board, have received from the project participants written approval of voluntary participation from the designated national authority of each Party involved, including confirmation by the host Party that the project activity assists it in achieving sustainable development;” 3/CMP.1, para 40 (a) (Marrakesh Accords)

19. Competing Interests: Who wants What and Why? Host countriesAs much investment as possible, many projects, many CERs Competitive market (technology and financial flows, prestige) Project developerAs many CERs as possible, short lead times, easier processes Maximize revenue Buyers of CERs (Banks, Investment Houses, private entities) Cheap CERsMaximise profits Annex I StatesCheap CERsReduce compliance costs

20. Criticism: Investors “The CDM has serious limitations and is very bureaucratic. …Trying to reform the CDM is like pushing water uphill. … What we need is new mechanisms – it is too complicated to undo what has been done in the CDM.” (Bjørn Stigson, President of the World Business Council for Sustainable Development at: World Future Energy Summit, Abu Dhabi, February 2009)

21. Criticism: Environmental NGOs “ Many hundreds of millions of the supposed ‘emission reduction’ credits represent not a single molecule of avoided pollution, because the offsets are being sold by projects – most commonly hydropower dams, but also wind turbines, biomass power plants, changes to industrial processes, capturing methane from coal mines and many other schemes – that never needed income from the CDM to be built.” (International Rivers, Bad Deal for the Planet, May 2008)

22. What is the Problem? Investors: “CDM is far too strict.” Civil society: “CDM is not strict enough.”

23. …it is all about Balance “ A balance must be struck between, on the one hand, removing every speck of doubt about additionality, and as a result turning down a great many perfectly good projects, and on the other hand, taking a too lax approach to additionality. I think the CDM has managed to strike the right balance.“ (UNFCCC Executive Secretary Yvo de Boer, 13. October 2008)

24. Project developer/investor Host Government DOE Executive Board DOE Executive Board DOE

25. CCS in the CDM (Durban: Decision-/CMP.7) –Benefits: Substantial potential to remove CO2 emissions Transfer of CCS technology form industrialized to developing countries Ensure (sustainable?) development and gradual withdrawal from fossil energy Stringent and robust criteria for monitoring and selection of storage sites (Appendix B to Decision – /CMP.7) Risk and liability Environmental and socio-economic impact assessment based on BAT 25

26. CCS in the CDM (Durban: Decision-/CMP.7) –”Issues” Inmature technology Divert investment away from renewable energy Will it trigger even more investments in South Atlantic oil and gas exploitation? Will it make otherwise non-economic high-CO 2 -content fossil gas discoveries economic and thus increase the share of fossil fuels in the global energy mix? Will it increase the amount of biomass power generation in Brazil or maybe intensify new-built gas power in the Middle East region? How do we avoid speculative projects, like those we have experienced in India and China with respect to HFC-23? 26

27. The Global Carbon Market: Pro and Contra Arguments Pros: More emission reductions for the same money (cost-effectiveness) Transfer of technology and financial support to developing countries Emission reductions in developing countries Income, SD, capacity building Contra Right way to go?, Artificial global market for pollution rights? Are developed countries ‘taking the lead’? Hampers development of new technology in developed countries Uncertain climate effect Abstraction Expert field: missing public debate, democratic deficit…. Video

28. Flexibility Mechanisms Catching the Sun, CDM PROJECT: 0079 Kuyasa low-cost urban housing energy upgrade, Khayelitsha (Cape Town; South Africa)

29. ADP ADP: Durban Platform for Enhanced Action a) Etablert av COP 17 i Durban b) Mandat: (1/CP.17) “Also decides to launch a process to develop a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties, through a subsidiary body under the Convention hereby established and to be known as the Ad Hoc Working Group on the Durban Platform for Enhanced Action” and: “Ad Hoc Working Group on the Durban Platform for Enhanced Action shall complete its work as early as possible but no later than 2015 in order to adopt this protocol, legal instrument or agreed outcome with legal force at COP 21 and to enter into force in 2020.

30. Durban Platform Establishment of a new body to negotiate a global agreement (Ad Hoc Working Group on the Durban Platform for Enhanced Action) by 2015 to come into effect and be implemented from 2020; The form and substance of a new agreement were not decided Parties opted for three options - ‘protocol, legal instrument or agreed outcome with legal force’ 30

31. Legal Form What is a ”Protocol, another legal instrument or an agreed outcome with legal force under the Convention”? ”Deal” between the EU (legally binding agreement/commitment) and India (legally binding outcome) ”outcome with legal force”: not a legal instrument under the UNFCCC: amendment, annex, protocol Legal force = legally binding or something different? outcome that is not legally binding? COP decision? 31

32. ADP (after Doha) Two work streams: increasing ambition before 2020/comprehensive climate agreement in 2020 Resurfacing of the «Fire-Wall», China: mentioning of equity, CBDRRC and Rio+20/USA: no! Principles of the Convention apply, but how? Universality of application but not uniformity of content

33. What Now? Bridging the Gaps: –Emission Gap (UNEP Emission Gap report 2010): Business as usual: 12 Gt Implement pledges (lowest-ambition): 9 Gt –Legal Gap: When does KP CPII enter into force? Will there be a global agreement by 2015? Will it be legally binding? –Equity Gap: What is equity and who should be doing what? 33

34. What is Equity, Art. 3 UNFCCC? Definition: The quality of being fair or impartial; fairness; impartiality Synonyms: impartiality, fair-mindedness, fairness, justness, evenhandedness, justice, objectivity In the international discourse: equity and fairness used interchangeably

35. Equity and Equality Equality of sovereign states is a fundament in Public International Law –Equality: Same rights and duties, no arbitrary discrimination among equals –Problem: States differ! Differentiation and positive discrimination (affirmative action) is necessary in order to treat different states equally.

36. The Principle of Common but Differentiated Responsibilities …..and respective capabilities! Rio Declaration: “In view of the different contributions to global environmental degradation, States have common but differentiated responsibilities. The developed countries acknowledge the responsibility that they bear in the international pursuit of sustainable development in view of the pressures their societies place on the global environment and of the technologies and financial resources they command.” Framework Convention on Climate Change; “…parties should act to protect the climate system “on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities.”

37. The Principle of Common but Differentiated Responsibilities …..and respective capabilities! How to interpret in 2013/2015/2020 and beyond? Based on which criteria should differentiation be made? Why? How politically feasible is that? …and how effective?

38. Top Fossil Fuel Emitters (Absolute) Top four emitters in 2011 covered 62% of global emissions China (28%), United States (16%), EU27 (11%), India (7%) The growing gap between EU27 and USA is due to emission decreases in Germany (45% of the 1990-2011 cumulative difference), UK (19%), Romania (13%), Czech Republic (8%), and Poland (5%) Source: CDIAC Data; Le Quéré et al. 2012; Global Carbon Project 2012CDIAC DataLe Quéré et al. 2012Global Carbon Project 2012

39. Per capita emissions 39

40. …and respective capability? The ten largest economies in the world, measured in nominal GDP (millions of USD )

41. Alternative measures of “Responsibility” Depending on perspective, the importance of individual countries changes Cumulative emissions from 1751; Production is also called Territorial; GDP: Gross Domestic Product Source: CDIAC Data; Unstats; Le Quéré et al. 2012; Global Carbon Project 2012CDIAC DataUnstatsLe Quéré et al. 2012Global Carbon Project 2012

42. Something New Under the Sun? International Climate Law – new and complex field of PIL Limitations on States’ sovereign rights New, innovative market mechanisms on a global scale Unprecedented experiment! Cost-effectiveness, differentiated commitments, technology transfer, financial assistance How to balance equity and efficiency? Is it the right way to go?

43. Something New Under the Sun? Primary responsibility of developed countries… …but developing countries’ role becomes more and more important New rules/ ’cutting edge’ i PIL Strong interest by states, IOs, economic actors, NGOs, Expanding, intense development (§ and $) Challenge for lawyers: complex field, demands multidisciplinary cooperation (with economists, political scientists, natural scientists - and other lawyers…private international law, finance law, patent law, property law, insurance law, human rights law)