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What is to become of JI?John Paul Miller and Egbert Liese ask what it will take for Joint Implementation to fulfil its potentialA year ago, Joint Implementation (JI) held the potential to become the rising star of the Kyoto Protocol’s flexible mechanisms. It had just arrived in a carbon credit market dominated by the Clean Development Mechanism (CDM), and promised to open new parts of the world to carbon finance. A year later, JI – which allows projects in industrialised countries to earn carbon credits – is still struggling to gain market share. A large number of JI projects are still in development, with the substantial volumes of emission reduction units (ERUs) they stand to generate remaining unpurchased. It is clear that those projects that have been contracted represent a small fraction of potential ERU supply in the Kyoto period.Yet market interest in JI is intensifying with the approach of 2008, the year that marks the beginning of both the Kyoto compliance period (2008–12) and the second phase of the EU Emissions Trading Scheme (ETS).
The market’s interest in JI is growing because of its potential size as a supplier. Some estimate that Russia and Ukraine together could produce 70 million–80 million ERUs or more per year. For example, total credit supply from JI in 2008–12 is estimated at 475 million tonnes (Mt) by New Carbon Finance. Others expect JI volumes to be significantly higher: ICF International estimates volumes from Russia alone could be 500Mt over the next five years. One big question will determine whether JI can capture its potential market share: can Russia, Ukraine and other host countries instil market confidence in their project approval and issuance processes? More than half of the emission reductions expected from validated projects thus far will be generated in Russia, with Central Europe and Ukraine sharing the rest of the potential supply (see Figure 1). Central Europe will produce fewer JI projects than envisioned when the Kyoto Protocol was drafted, because many of the greenhouse gas sources in the region are now controlled by the EU ETS or other European directives, making them ineligible for crediting to avoid ‘double-counting’ their reductions. With the highest energy intensities amongst the 25 largest global emitters, Russia and Ukraine have a huge potential to generate emission reductions. In Ukraine, energy use per unit of production is 3.3 times that of the EU 25, and 3.2 times in Russia. It is therefore not surprising that most of the emission reductions of the validated projects are expected to be generated from energy efficiency projects and reduction of fugitive gas emissions from gas transport and distribution (see Figure 2).
But, thus far, sales of certified emission reductions (CERs) from CDM projects continue to dwarf ERU sales in the global market. CER sales grew from about 350Mt of carbondioxide equivalent (CO2e) in 2005 to 450Mt in 2006, while ERU sales rose slightly from 11Mt to 16Mt over the same period. This trend results from two primary factors: CERs enjoyed a timing advantage on asset creation and use. The Kyoto Protocol allowed for CER production from 2000, while ERUs can only be generated from 2008. Hence, since CERs were issue earlier, these were valid for compliance within the EU ETS – which represents the most important source of carbon demand – from its launch in 2005. Policies and procedures for approvals and issuance were established for CDM before those for JI. While the CDM Executive Board (EB) began implementing approval and issuance processes in 2002, the equivalent JI body, the JI Supervisory Council (JISC) only adopted approval rules and procedures in 2006. While the CDM EB governs issuance of CERs, each host country is responsible for issuance of ERUs. Host governments are gradually developing procedures and infrastructure for issuance of ERUs, but none are fully in place. The JISC has made a ‘final determination’ – the final hurdle for a project to gain JI status – for only one project. However, as of the end of September 2007, the JISC pipeline contained 80 projects, with a high percentage of those located in Russia. Activity is expected to build as policy uncertainties are addressed. At the UN level, the JISC officially launched ‘Track 2’ of JI in October 2006, thereby allowing project proponents to submit project design documents to the JISC for review.Track 2 establishes an approval process supervised by the JISC, in a manner similar to the CDM process.
Meanwhile, ‘Track 1’ JI allows countries which have jumped various emissions monitoring and reporting hurdles to approve their own JI projects. No jurisdiction currently qualifies for Track 1 JI. At the host country level, too, procedures are gradually being put in place. In May 2007, Russia adopted its project approval procedures, with its Governmental Order 332 establishing its approval procedures, including four further tasks to be completed prior to project approval. Work progressed through the summer on all four tasks, as summarised in the table. The supply of ERUs from Russia will remain in a state of flux until these tasks are finalised. Two particular issues could make some projects ineligible or could limit the overall supply of credits from certain sectors. First, the efficiency standards are intended to eliminate projects that do not contribute to the Russian economy. It is difficult to estimate how many project types the standards could exclude. For example, a landfill site or coal mine methane project that flares gas rather than using it for energy could be determined to fail to contribute to the economy sufficiently, even though it may be impractical to use the gas for energy. A further concern involves potential limits that the Russian government aims to set on volumes of ERUs to be awarded to certain sectors. The government may institute caps totalling 300 million ERUs over the Kyoto period for certain credit-producing sectors. These limits are sure to provoke controversy. For example, the large number of gas pipeline leakage projects already under development could reportedly produce a volume of ERUs accounting for half of this total.
While these tasks and policies could be completed relatively easily, recent political developments in Russia may result in another set of delays. In August, Prime Minister Mikhail Fradkov and his cabinet resigned, creating a leadership vacuum. However, the recent appointment of Elvira Nabiullina as replacement to German Gref as minister of economic development and trade (MEDT) is widely viewed as a positive development. Gref was her former boss at the MEDT. Both have liberal views and vast experience in economic policy. She is therefore likely to continue on the path set out by Gref on getting the Kyoto Protocol implemented in Russia. One encouraging sign is that no significant disputes between the ministries have hampered the work on the four tasks. Nonetheless, the final JI tasks will be difficult to complete prior to the formation of a new government. Meanwhile, Ukraine implemented its approval procedures in August 2006, issuing its first letter of approval in October that year. Its government has identified several priority sectors for JI, including coal bed methane, landfill gas, renewable energy, municipal heating and gas distribution networks. Ukraine is also host to the first JI project to receive its final determination under the JISC’s Track 2 procedures. This project, at the Podilsky cement plant, could potentially generate more than 3 million carbon credits from 2009–12. However, this early success has not opened the floodgates, with only eight letters of approval issued since. Hurdles to overcome include: the low awareness of JI in Ukraine, especially among businesses; the absence of a clear national policy on the implementation of the Kyoto Protocol as a whole, which could delay the issue of ERUs; and incomplete national JI procedures. Despite elections having taken place at the end of September, negotiations to form a new government were continuing at the time of writing in mid-October. Ongoing political uncertainty makes further delays tosigning approval letters inevitable. Ukraine also established a National Agency for Environmental Investments in April 2007. This agency is now responsible for developing rules and procedures for a so-called green investment scheme and managing its sales of assigned amount units (AAUs). Green investment schemes are designed to facilitate sales of AAUs – which are granted directly to governments under Kyoto – by ensuring buyers that the revenues are used for environmentally additional projects. Ukraine plans to sell 1 billion– 1.2 billion AAUs for the Kyoto Period. The revenue will be used for further emission abatement measures, which are likely to include programmatic/ institutional and information dissemination projects. Although AAUs are not eligible for compliance in the EU ETS, nations that are parties to the Kyoto Protocol may use them for government-level compliance. If national purchasing agencies begin buying AAUs, it could reduce demand from those nations for ERUs and CERs. It is easy to remain sceptical about what JI will deliver. This would be unfair to all those, in and outside of Russia and Ukraine, who have been working hard to make it a success.The key to unlocking JI’s potential is in engaging the political will to ensure clear and transparent procedures.This is needed to give comfort to buyers of JI credits to mobilise much-needed investments. If this can be achieved before the end of this year, JI surely will step up to the mark.
John Paul Miller is an origination and transaction specialist and Egbert Liese is a managing director at carbon asset management company Natsource. E-mails: jpmiller@natsource.com, eliese@natsource.com |
