Carbon Market Watch

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Joint Implementation: CDM’s little brother grew up to be big and nasty (Newsletter #2)

04 Mar 2013

Joint Implementation (JI) offsets account for one third of all Kyoto carbon offsets that have been issued to date. Despite the fact that JI has been marred by a lack of transparency and a glut of credits with very questionable environmental integrity, they continue to be used for compliance in Europe and elsewhere. It remains to be seen if the ongoing UN reform of JI will bring the changes needed to turn JI into a mechanism that delivers real and additional emission reductions.

JI is the carbon offset mechanism for projects in countries with a reduction target under the Kyoto protocol. It has long been the little brother in the shadow of the Clean Development Mechanism (CDM). In the first years of the Kyoto Protocol only a few projects generated credits and JI was considered a minor player in the carbon market, but this has changed dramatically over the last year. JI is now responsible for over one third of all offset credits issued under the Kyoto Protocol – around 658 million JI credits (Emission Reduction Units – ERUs) issued to 582 JI projects as compared to 1.2 billion CERs issued to 6392 CDM projects (see Figure 1). 80% of all ERUs were issued in 2012.

Figure 1. Numbers of emission reduction credits in CDM, JI Track 1 and JI Track 2 as of February 2013 (based on UNFCCC data).

JI has two different tracks: Track 2 has a governance structure somewhat similar to the CDM where projects are overseen by an international body – the JI Supervisory Committee. Track 1, on the other hand, allows countries that host JI projects to set their own rules, approve projects, verify emission reductions and issue credits. Of all the credits from JI, 97% have been issued through Track 1.  As such, JI has been marred by a lack of transparency and a glut of credits with very questionable environmental integrity.

Unlike the CDM, JI offsets are issued by a host country through the conversion of its emission allowances (Assigned Amount Units – AAUs) into an equivalent number of ERUs. This ensures that there is no double counting of the emission reductions and helps to maintain environmental integrity in countries with stringent targets.  Such countries are careful not to convert AAUs to ERUs from JI projects that are not additional.  However, countries with a large surplus of AAUs, so called “hot air”, can use the JI for “hot-air laundering”, i.e. exporting surplus AAUs (which are hardly tradable now) in the form of ERUs. It is therefore not surprising that the countries that have issued most JI credits, Ukraine and Russia, are also the ones with the biggest AAU surplus as Figure 2 shows.

Figure 2. ERUs issuance by host Party as of February 2013 (based on UNFCCC data).

At current JI offset prices, high quality JI projects stop operating

Despite the integrity issues the JI faces overall, some JI projects are truly additional and have generated real emissions reductions. Unfortunately, many of these may stop operating because they are no longer economically feasible.

The severe oversupply of CDM and JI offsets has led to a market crash with current JI offset prices now below 0.2 EUR. Such low prices make it impossible for the truly additional projects to keep operating, let alone for initiating new JI projects. Even those project types which are considered the most profitable, such N2O emission reduction projects, now struggle to justify verification costs to get ERUs for emission reductions already achieved.

Weak restrictions on JI credits in the EU ETS

The shortcomings of JI are not new to European decision-makers. In January of this year, the EU Climate Change Committee, a decision-making body comprised of officials from EU Member States and the European Commission, approved the proposal to update the rules of the European Emission Trading Scheme (EU ETS) Registry Regulation. The updated regulation includes restrictions on JI credits used for compliance in the EU ETS.  The update will prohibit the use of JI offsets based on emissions reductions that occurred after 2012 if they come from projects in countries that have not joined the second Kyoto commitment period. But ERUs issued for emissions reductions that occurred before 2013 can still be kept and used in the EU ETS if they:

  1. are issued under Track 2, or
  2. are issued under Track 1 and include a statement from a JI Track 2 auditor that confirms the emission reductions took place before 2013.

The draft proposal initially caused panic in the market because market participants feared severe restrictions on JI credits and tried to sell ERUs as quickly as possible. This caused a significant drop in ERU prices. However, the impact of the updated regulation in the current version will be quite limited. Considering that some JI auditors have shown little qualms in the past to approve JI projects that are clearly not additional, the updated regulation’s requirement to confirm that emission reductions took place before 2013 is unlikely to restrict the supply of JI offsets into the EU ETS. This is especially worrying given the large number of JI Track 1 projects that were hastily registered in 2012 and are likely to claim emissions reductions that allegedly took place before 2013.

The new Registry Regulation will now be submitted for deliberation by the European Parliament and the Council. If no objections are made to the new rules within the next three months, the Commission will adopt and publish the amendment and the Regulation will enter into force. In our view the new Registry rules, if adopted as currently described, will have little effect on limiting the oversupply of low-quality credits.

Doha decisions on Joint Implementation

At COP18 in Doha, Parties agreed to extend the Kyoto Protocol and by doing so they also extended the life of Joint Implementation for the period of 2013-2020. The need for the reform of JI was also discussed, yet most decisions regarding JI were postponed. The Parties were able to agree only on a set of general principles of the future JI framework including:

  • Merging the two JI tracks  into one single track;
  • Common overarching guiding principles, including “clear, transparent and objective requirements to ensure that projects are additional to what would otherwise occur”;
  • Establishing an appeals process.

The reform of JI will be discussed again under the Subsidiary Body for Implementation (SBI) at the next meeting in Bonn in June 2013.

One of the amendments in the Kyoto Protocol (see paragraph 3.7ter), is likely to have an indirect positive effect on the JI’s environmental integrity (see article “Doha on AAUs: The Future of the Phantom Menace”). As explained, a country with weak targets and lots of “hot air” is often motivated to maximise the issuance of JI credits and set very weak rules for the projects. However, since all countries will have to have a somewhat stringent target under this new paragraph (at least one that will not result in more “hot air”) now they will not have spare AAUs they can just “give away” for JI credits.

This will not be the case though if Parties decide to allow for the use of “hot air” from the first commitment period to generate JI credits.  Under current UN rules no ERUs can be issued for the reductions achieved in the second commitment period until countries receive their new AAUs for that period. This is also unlikely to happen before 2015.  However, if the rules are changed and host countries are allowed to use their old surplus AAUs for conversion into ERUs they will have no incentive to limit issuance of ERUs to only those projects that are truly additional. This issue will likely be a controversial one in the months ahead too. Parties will get together again in June 2013 to further discuss the future of JI. Even still, it is not clear if they will come to a decision on this issue any time soon. For more details, see the Climate Action Network’s submission on JI reform.

– Carbon Market Watch would like to thank Vladyslav Zhezherin for his contributions to this article