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Some Unanswered Questions in the Climate Change Regime

One of the mechanisms under the Kyoto Protocol to achieve reduction of greenhouse gases is through trading of emission permits, which does little to help the countries most at threat by global warming.

Some Unanswered Questions in the Climate Change Regime

One of the mechanisms under the Kyoto Protocol to achieve reduction of greenhouse gases is through trading of emission permits, which does little to help the countries most at threat by global warming.

ANWAR SADAT

T
he climate change regime is the sum total of the United Nations Framework Convention on Climate Change (UNFCCC) 1992 and the decisions taken by the annual conference of parties (CoP) to the UNFCCC aimed at fleshing out the skeletal provisions contained in the convention which sets forth a long-term policy architecture to address climate change and short-term emission reduction commitments of greenhouse gases. Some of the landmark decisions of the CoP, which include adoption of the Kyoto Protocol at its third annual meeting in 1997, and adoption of the Kyoto rule book at its seventh annual meeting in Marrakech in 2001 leave a number of questions of crucial importance unanswered. The adoption of the Marrakech Accords by the first meeting of the parties serving as the Conference of Parties to the Kyoto Protocol (hereinafter CoP/MoP 1),1 which was held in Montreal in late 2005, saw the formal launch of trading in emission reduction of greenhouse gases.2

The CoP has been lenient so far regarding specifying how much emission reduction of greenhouse gases should take place at the domestic level in Annex I countries (industrialised countries). Trading in greenhouse gases not only offers a chance of exploitation but it is also challenging to verify emission reduction.

The climate change regime is biased in favour of mitigation. It clearly says mitigation will result in the stabilisation of greenhouse gas concentrations at a sustainable level, which will allow sufficient time for ecosystems to “adapt” naturally to climate change. It is inherent in this logic that mitigation will pave the way for adaptation. But it obscures one thing: the capacity to adapt to rapid changes and new variability differs significantly from one country to another. The small islands, being vulnerable to the effects of climate change, warrant a concrete adaptation policy. Unfortunately, the response of the CoP has been insufficient to take the law on adaptation from its infancy to centre stage, which would have helped the small-island states get enough money from the financial mechanism to prepare for the adverse effects of climate change.

In terms of fairness, it is good that countries which have not joined the protocol or have no intention of doing so do not benefit from the protocol’s emission trading regime. The rules for the Clean Development Mechanism (CDM) bar nonparties to the Kyoto Protocol from participating in CDM projects. It is however possible that CDM rules are seen to conflict with international investment law, which prescribes non-discriminatory standards of treatment for foreign investors.

Article 6 of the protocol allows for and outlines emissions trading in which a party included in the Annex I countries “may transfer, or acquire from, any other such Party emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of greenhouses gases”.3 These projects, however, can only be used as supplemental measures to domestic actions. It does not specify a minimum amount of emission reduction of greenhouse gases to be made through domestic action. The principle is retained in the decision of the CoP/MoP 1 without any change, which says that emission trading in greenhouse gases should be supplementary to domestic action and that domestic action should thus constitute a significant element of effort made by each party included in Annex I to meet its emission reduction targets under Article 3(1).4 The words “significant element” do not imply a fixed percentage of domestic reduction out of their worldwide reduction target of 5.2 per cent to be achieved by the industrialised countries between 2008 and 2012. The developed countries might

Economic and Political Weekly April 28, 2007

use this loophole to fulfil their entire obligations through emission trading. Likewise at the CoP-3 in Kyoto in 1997, in the fixing of a greenhouse gas reduction target of an individual developed country the CoP/MoP 1 should have taken the opportunity to fix minimum domestic cuts of greenhouse gases of an individual developed country.

In the CoP-4 meeting in Buenos Aires, in 1998, the issue of how much of a country’s emission reduction of greenhouse gases could be met through trading was discussed. The US argued that it should be limitless while the European Union felt should be supplementary to domestic reductions. The sharp division between the EU and the US at the CoP-4 did signal that not specifying the extent of emission reduction to be made through domestic action might be misconstrued to mean that the entire obligations could be fulfilled through trading routes only. Fulfilment of the obligations through trading routes may be described as their attempt to buy their way out of their environmental responsibilities.

The trading route to meet the obligations offers the prospect of commercial exploitation. The investors from the developed countries may invest in greenhouse gas absorbing projects and they may sell the emission reduction credits in the future at a higher rate.5

Ignoring the Rio Agenda

The developed countries had agreed at the Earth Summit at Rio de Janeiro in 1992 to take the initiative in making the earliest and deepest domestic cuts in the emissions. Not making deep domestic cuts waters down the obligations on the part of the developed countries under the principle of common but differentiated responsibilities.6 The developed countries making a cut also part of the leadership principle to be shown by the developed countries. They are strongly tempted to achieve the major portion of their emission reduction targets by trading since the cost of abatement of greenhouse gases is much less in developing countries.

Trading in emission reduction through CDM projects allows industrialised countries to claim credit for funding reductions in developing countries. In other words, emissions trading enables industrialised countries to “double count” trades as both domestic reduction and assistance to developing countries required by the leadership principle.7

There is genuine fear that emission trading would undermine one of the objectives of Agenda 21of the Rio Summit and the UNFCCC relating to maximisation of new and additional resources,8 which is supposed to cover that portion of the cost of environment protection measures taken by the developing countries as per the obligations under the UNFCCC. Money for emission trading under CDM can come from both the public as well as private sectors. But investment in a CDM project coming from the public sector should not be diverted from official development assistance (ODA). The industrialised country governments may prefer diverting public funds, which have traditionally gone through ODA, to CDM projects with a view to earning Certified Emission Reduction Units (CERUs) thereby helping them meet a part their reduction obligations under the Kyoto Protocol. One of the likely sufferers may be the publicly funded Global Environment Facility (GEF) since, unlike CDM projects, GEF projects do not earn any credits for the industrialised countries.9

Verification of Greenhouse Gases

Despite rigorous monitoring of CDM project activity by the designated operational entity, there is an inherent uncertainty in verifying greenhouse gas emission reduction.10 Even the best scientific methods do not eliminate the uncertainty in the measurements. The question then arises as to how to account for this uncertainty in the measurements. One of the reasonable suggestions is that parties should only be able to trade in emission reduction projects, which represent demonstrable reductions in emissions or that are associated with sources and sectors for which there is a higher level of scientific certainty in determining emission levels. The decision taken by CoP/ MoP 1 includes a measure to prevent fraud, malfeasance or incompetence of the designated operational entities regarding proposed issuance of certified emission reduction units to an entity involved in a CDM project, which has not actually reduced the emission level of greenhouse gases from the level prior to the project. The measure is meant to review the proposed issuance of certified emission reduction units by the designated operational entities. A party involved in the project activity or at least three members of the “Executive Board” request a review of the issuance of the proposed CERUs.11 In such cases, the role of non-state entities having long experience in the field becomes crucial; future meetings of parties serving as CoP to the protocol should include in the Kyoto rule book, authorising such bodies to review proposed issuance of CERUs.

Adaptation Issues

The international climate change regime is aimed at realising two goals: (1) mitigation of greenhouse gases, and (2) adaptation. Mitigation of greenhouse gases will result in the stabilisation of greenhouse gas concentrations at a sustainable level, which will allow sufficient time to ecosystems to “adapt” naturally to climate change.12 Mitigation of greenhouse gas is integral to the goal of sustainable development. One of the imperatives of the goal is to build up “adaptive capacity” particularly in the small island states and

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Economic and Political Weekly April 28, 2007 the least developed countries as they are faced with the threat of irreversible damage.13 The building of adaptive capacity may include such measures as building sea walls to combat sea-level rise and developing heat-and drought resistant crops. These measures would incur a huge amount of money. The sixth CoP decided to set up an adaptation fund to meet adaptation costs. Money for this fund would come from 2 per cent of the share of proceeds of the implementation of the CDM projects.14 The Global Environment Facility (GEF) was entrusted with the task of running the fund. During the CoP/MoP 1, the Philippines, on behalf of the G-77/China, questioned whether the GEF council had a mandate to decide that the World Bank would be the trustee for the adaptation fund.15 The developing countries emphasised that having the GEF, and the World Bank acting as the trustee, would not be the best option for managing the fund. They preferred that the CoP control the fund. Their opposition can be traced to two reasons:16 First, the World Bank already exercises some form of influence over the financial policies of many developing countries and they prefer an alternative “window” for assistance on environmental issues. Second, they doubt the ability of the World Bank to address environmental issues and are afraid that such issues may be dealt with at the cost of social aspects. They fear a conflict of interest between the Bank’s role as lender and its role in financing the reduction of greenhouse gas emissions.

The amount of money that will accumulate from a share of the proceeds of CDM projects cannot be determined at this stage. Moreover, given the number of eligible countries involved, any allocation will only make a marginal contribution to a country’s overall effort. There is an idea that a levy on the other two mechanisms namely Joint Implementation and Emission Trading on the pattern of the CDM should be charged, which may result in more resources at the disposal of the Adaptation Fund.17

The UNFCCC assigns the developed countries the responsibility for assisting developing country parties that are “particularly vulnerable” to the adverse effects of climate change to meet the costs of adaptation without defining the term particularly vulnerable.18 Ability to adapt is severely constrained by poverty. It is generally understood that particularly vulnerable countries are the small-island developing states because they are more susceptible to the effects of a rising sea-level.

The mandate of the GEF restricts it to funding activities at the planning stage, which includes studies of possible impacts of climate change, to identify particularly vulnerable countries or regions and develop policy options for adaptation and appropriate capacity-building. The actual adaptation work aimed at building adaptive capacity, like building sea walls to combat sea-level rise and developing heatand-drought resistant crops, cannot be funded by the GEF. The GEF funds the incremental cost or additional costs of activities that provide “global benefits”. GEF funding cannot be spent on any activities, the benefits of which are intended to accrue at the local or national level. The activities aimed at building adaptive capacity qualify as general development measures.

The recent policy decision of the GEF council namely, development of a “Resource Allocation Framework” (RAF), is going to affect the funding of adaptation measures. The RAF says that resources from GEF will be governed by two criteria:

(1) a country’s potential to generate global environmental benefits, and (2) country performance. The first criterion conveys clearly that the GEF will provide funds after measuring the potential of each country to generate global environmental benefits in a particular area. The second criteria implies that GEF will measure each country’s policies and practices relevant to a successful implementation of GEF programmes and projects. The criterion may be helpful to an extent in projects where it is demonstrable that replacing a particular component of a greenhouse gas or ozone depleting substance mitigation project is going to have global environmental benefits.

The CoP/MoP 1 merely requested the GEF to report to it on how its recent policy decision will influence funding available to developing countries for the implementation of their commitments under UNFCCC.19 The financial mechanism has to function under the guidance of the CoP. It is important to note that the GEF is guided not only by its operational policy but also by the decisions of the CoP. The GEF is obligated as per the provisions of the UNFCCC to conform to the guidance of the CoP. At CoP 1, parties to the UNFCCC decided to adopt a three-stage process for adaptation measures and planning to be covered by GEF funding.20 Stages one and two deal with studies regarding possible impacts of climate

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Economic and Political Weekly April 28, 2007

change and planning required in particular regions and policy options for adaptation and capacity building. Stage three suggests measures to facilitate adequate adaptation as envisaged by Article 4(1)(b) and Article 4(4) of the convention.21 Stage three funding is contingent on the fact that the previous two stages have already been complied with. What is meant by adequate adaptation is not defined in the convention. It is being generally considered to include measures like increasing the height of sea-walls, building irrigation systems to protect agriculture from salt intrusion, or installing of air conditioning systems to avoid heat related illness or death. But the GEF does not have enough resources to meet these costs as its resources are becoming more and more inadequate as more and more areas are being assigned to it for funding.22 Another reason is that there is no objective criterion for defining a donor’s obligation. Being mandated by Article 11 of the UNFCCC to decide on the policy of the financial mechanism, the CoP may try to correct this situation by setting objective criteria for defining a donor’s obligation to provide funds.

Clean Development Mechanism

Under the Clean Development Mechanism, there will be flow of investment finance from the industrialised to developing countries for projects that reduce greenhouse gas emissions. The projects owned in whole or in part by a foreign investor would be treated as “investments” within the meaning of international investment agreement. The CDM rules bar nonparties to the Kyoto Protocol from participating in CDM projects. The eligibility to participate in the mechanism by a party included in Annex I is dependent on its methodological and reporting requirements under Article 5(1) and 2,23 and Article 7 paragraphs 1 and 4 of the Kyoto Protocol.24 This rule runs counter to nondiscriminatory standards of treatment found in international investment agreements.

The goal of the CDM project is to achieve sustainable development.25 The host is sovereign to give consent to a project. It may reject a project if it is not going to achieve sustainable development. This is a kind of performance requirement. This kind of restriction is prohibited by international investment rules. Private entities can also participate in CDM projects that are authorised by the CoP. But it is not clear whether authorisation is mandatory and if it is, whether any party can authorise a private entity from a non-party. The adoption of the Kyoto rulebook without addressing this issue might run into rough weather, as the US being a potential source of investment in the field of renewable energy happens to be a non-party to the Kyoto Protocol.

Conclusions

Meeting obligations through emission trading will do nothing to benefit the atmosphere unless a major share of the reductions is made inside the territory. Moreover, there is uncertainty involved in measuring emission reduction through trading. In such a situation, only projects having very little uncertainty should be permitted under CDM. The small-island states are definitely facing the threat of irreversible damage. Measures, which are aimed at building their adaptive capacity, should be initiated now as per the “precautionary principle”. The financial mechanisms should not be tied to the concept of global environmental benefits where only adequate adaptation measures can reduce the damage. Keeping in view the issue of climate change at the centre, only parties to the Kyoto Protocol should be given permission for emission trading. Otherwise if non-parties are permitted to trade, they will forget the basic obligations under Article 5(1) of the Kyoto Protocol.

EPW

Email: anwarsadat247@yahoo.co.in

Notes

1 It was the first ever meeting of the 157 parties to the Kyoto Protocol (CoP/MoP 1). At the same time, it was the opening of the 11th conference of the 189 Parties to the UNFCCC.

2 The Marrakech Accords comprise rules and operational details to meet emission reduction target. The accords gave in place all three market-based mechanisms – joint implementation (JI), emission trading and clean development mechanism (CDM). These mechanisms are embodied in the Kyoto Protocol pursuant to Articles 6, 17 and 12 respectively. All the three mechanisms allow Annex I parties to achieve their Article 3.1 emission reduction commitments of greenhouse gases. Under JI trading will take place between one Annex I party and another. Under emission trading, trading will take place only between those industrialised countries which have obligations to reduce greenhouses up to

5.2 per cent (during the first commitment period 2008-2012) below what it was in 1990. Under CDM, the investors (public/private) from the developed countries will invest in greenhouse gas mitigation projects, which will generate Certified Emission Reduction Units (CERUs). The CERUs with the investors from the developed country parties may be used by them to meet a part of their obligations. In this article, emission reduction “units” and “credits” have been interchangeably used, though generation of credits through trading under JI and emission trading is known as Emission Reduction Units (ERUs) and Assigned Amount Units (AAUs), respectively. These credits may also be used by the Annex I countries to meet their greenhouse gas emission reduction commitments under Article 3.1.

3 37 International Legal Material (ILM) 22 (1998), p 35.

4 Ibid, p 33. The Annex I parties have to individually or jointly reduce their emissions of six greenhouse gases mentioned in Annex A of the protocol (carbon dioxide, methane, hydrofluorocarbon, nitrous oxide, sulphur hexafluoride and perfluorocarbon) by at least 5 per cent below 1990 levels in the commitment period 2008-12.

5 See Bruce Yandle and Stuart Buck, ‘Bootleggers, Baptists, and the Global Warming Battle’, Harvard Environmental Law Review, Vol 26, No 1, (2002), pp 194-95.

6 31 ILM 849 (1992), p 854. Article 3 (1) of the climate change convention says that the parties should protect the climate system for the benefit of present and future generations of humankind on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country parties should take the lead in combating climate change and adverse effects thereof.

7 Emily Richman, ‘Emission Trading and the Development Critique: Exposing the Threat to Developing Countries’, New York University Journal of International Law and Politics, Vol 36, No 1, 2003, p 170.

8 New represents new sources of fund and additional represents what is more than the existing flow of aid under Official Development Assistance given by the Organisation of Economic Cooperation and Development countries to developing countries.

9 The Global Environment Facility 1991 is a trust fund, which is jointly operated by the International Bank for Reconstruction and Development, United Nations Development Programme, and United Nations Environment Programme. It provides an agreed to incremental cost in six focal areas – climate change, biological diversity, ozone layer depletion, international waters, persistent organic pollutant and land degradation – to a developing country party. The agreed incremental cost means the cost, covering both investment operation as well as cost of transfer of technology, which has been agreed between a developing country party and the GEF for meeting the obligations of an MEA to achieve “global environmental benefits”.

10 The designated operational entity is either a domestic legal entity or an international organisation accredited and designated, on a provisional basis until confirmed by the executive board. It has two functions: (1) It validates and subsequently requests registration of a proposed CDM project activity which will be considered valid after eight weeks if no request for review was made; (2) It verifies emission reduction of a registered CDM project

Economic and Political Weekly April 28, 2007

activity, certifies as appropriate and requests the board to issue CERUs accordingly. The entity verifies it on the basis of on-site inspections, as appropriate that comprise, inter alia, a review of performance records, interviews with project participants and local stakeholders, collection of measurements, observation of established practices and testing of the accuracy of monitoring equipment.

11 The Clean Development Mechanism executive board supervises the CDM, under the authority and guidance of the CoP/MoP and is fully accountable to the CoP/MoP. The board consists of 10 members and 10 alternates. They are drawn from all constituencies of Parties and they act in their personal capacities. The board issues the CERUs to participants involved in a CDM project.

12 See op cit, No 6, p 854, Article 2.

13 The building of adaptive capacity may be defined as the ability of a system to adapt to climate change, to moderate potential damages, to take advantage of opportunities or to cope with the consequences.

14 See op cit, No 3, p 38. This is consistent with Article 12.8 of the Kyoto Protocol. The decision to charge 2 per cent levy on the implementation of CDM projects was taken at the Marrakech CoP Meeting in 2001.

15 The GEF council functions as an independent board of directors, with primary responsibility for developing, adopting, and evaluating GEF programmes. The council consists of 32 members (16 members from developing countries, 14 from developed countries, and two from countries with transitional economies), which meet twice each year for three days.

16 Joyeeta Gupta, The Climate Change Convention and Developing Countries: From Conflict to Consensus? (Dordrecht/Boston/ London: Kluwer Academic Publishers, 1997), pp 106-07.

17 The idea to charge a levy on the other two mechanisms, ‘Joint Implementation’ and ‘Emission Trading’ was given by the Tata Energy Research Institute. The paper titled ‘Vulnerability and Adaptation to Climate Change: Concepts, Issues, Assessment Methods’ prepared by Santiago Olmos for the climate change knowledge network incorporates the idea (available at www.cckn.net).

18 See op cit, No 6, p 858.

19 Article 11(1) of the UNFCCC provides that the financial mechanism has to function under the guidance of and be accountable to the conference of parties, which takes decision on its policies, programme priorities and eligibility criteria to this convention.

20 Roda Verheyen, ‘Adaptation to the Impacts of Anthropogenic Climate Change – The International Legal Framework’, Review of European Community and International Environmental Law, Vol 11, No 2, 2002, p 138.

21 Op cit, No 7, p 855. Article 4 (1) (b) calls on all parties, in accordance with the common but differentiated responsibilities, to formulate, implement, publish and regularly update national and where appropriate, regional programmes containing measures to mitigate climate change by addressing anthropogenic emissions by sources and removals by sinks of all greenhouse gases not controlled by the Montreal Protocol, and measures to facilitate adequate adaptation to climate change.

22 At the time of GEF’s inception in 1991, there were four areas – climate change, biological diversity, ozone layer depletion and international waters. In 2002, two more areas – persistent organic pollutant and land degradation – were assigned for funding from GEF.

23 Op cit, No 3, p 35. Article 5 (1) says that each party included in Annex I should have in place, no later than one year prior to the start of the first commitment period, national system for the estimation of anthropogenic emissions by sources and removals by sinks of all greenhouse gases not controlled by the Montreal Protocol.

24 Ibid. Under Article 7, Annex I parties have to incorporate in its annual inventory of anthropogenic emissions by sources and removals by sinks of greenhouse gases not controlled by the Montreal Protocol. The guidelines for the preparation of national inventory are to be decided by the conference of parties.

25 Op cit, No 3, Article 12(2) of the Kyoto protocol provides that the purpose of clean development mechanism is to assist parties not included in Annex I, i e, developing countries in achieving sustainable development and contributing to the ultimate objective of the convention.

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    Economic and Political Weekly April 28, 2007

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