Carbon Market Watch

For fair and effective climate protection.

Joint Implementation – Why we are worried (Newsletter #19)

08 May 2012

The future of Joint Implementation (JI) is uncertain. The mechanism will have to be revised for the next commitment period. Currently the vast majority of JI credits come from dubious projects in countries with large Assigned Amount Units (AAU) surpluses. In these countries JI can be used to ‘launder’ surplus AAUs. Parties will discuss the future of JI again at the intercessional in Bonn. We present the main issues in this article

Joint Implementation is CDM’s little brother. It is the mechanism for offset projects located in developed (Annex 1) countries. JI will need to be reformed for the next Kyoto commitment period. Parties started discussing the future of JI at the climate negotiations in Durban in November 2011 but the thorny issues were left unresolved.[1] For example, Parties have yet to decide if only countries that sign up to a second commitment period should be allowed to buy and sell JI credits. In this case Russia could no longer sell JI offsets. Parties also have to decide on the governance of JI.

JI projects are currently implemented under two different tracks. Under Track 2, much like the CDM Executive Board, the Joint Implementation Supervisory Committee (JISC) approves JI projects and issuance of credits. Under Track 1, it is the host Parties that approve projects and are responsible for the verification of emission reduction and issuance of credits.

Seven times more Emissions Reduction Unites (ERUs) have been issued under Track 1 than under Track 2 (114 million versus 17 million as of April 2012, UNEP RISOE). Even though about half the JI projects in the pipeline are from Track 2 (254) only 26 of these projects have generated ERUs. On the other hand, 199 of the 288 Track 1 projects in the pipeline have already received ERUs (see graph below).

Track 1 projects have been notorious for their lack of transparency, accountability and environmental integrity.[2]Nevertheless, the JISC in its recommendations on how to reform JI, suggests that starting in 2013 approval and registration of JI projects should be handled by the host country and that only issuance of credits into a JI registry should be administered by the JISC (or its follow up body). Giving host countries such power over these decisions is a recipe for continuing the lack of transparency, as no one is charged with checking their decisions. The experience with Track 1 is that having little or no international oversight and quality control for projects leads to offsets with little environmental integrity.

 JI: Laundromat for Hot Air

Countries with large amounts of Assigned Amount Units (AAU)[3] surpluses have started to use JI Track 1 to convert a significant number of AAUs to JI credits. Let’s take Ukraine as an example. Last year Ukraine was suspended from participating in trading AAUs because of their non-compliance with requirements under the Kyoto Protocol. At the end of August it became clear that a suspension would soon be passed. Until then Ukraine had issued a total of about 30 million ERUs. When a country issues ERUs, it has to retire the same amount of AAUs to avoid double counting. In mid October, when the final suspension was passed, 63 million ERUs had been issued. In other words, in less than 2 months the Ukrainian government issued 33 million ERUs, that’s more ERUs than it had since the start of JI! It is very unlikely that such sudden and large quantities of JI credits are real and additional. In other words, countries with large AAU surplus can use the JI for “hot-air laundering.” This not only undermines environmental integrity but also threatens the viability of carbon markets.

 Why Weak Mitigation Pledges Encourage a Weak JI

A lack of environmental integrity is not limited to Track 1 projects. There is little scrutiny of Track 2 projects and the quality of offsets from Track 2 projects has been quite varied. The quality of credits of JI projects must be improved to ensure robust environmental integrity. Unfortunately, the JISC recommends limiting international oversight on additionality and baseline criteria in favour of voluntary ‘best practice’ guidance. This is troubling, and here is why: as we have seen in the Ukrainian example, a country with weak mitigation ambition and AAU surplus provides a strong incentive to also have weak additionality and baseline criteria for JI because it offers an opportunity to sell some of the surplus AAUs as ERUs.

A country with ambitious targets on the other hand, has an incentive to have stringent additionality and baseline setting criteria. This is because such a country does not want to cheaply sell ERUs because for each one they sell, they’ll have to retire an AAU. In other words, a country increases its economic burden of achieving its reduction targets when issuing ERUs because it has to make up for the AAU deficit through other policies and measures.[4]Setting ambitious benchmarks has already shown to be successful in the current JI, for example for adipic acid projects in some countries. In those projects, only emission reductions above 90% are credited. In other words, the first 90% of the achieved emission reductions will count towards the country’s mitigation pledge and only the reductions achieved above 90% can be sold as JI credits.

Most ERUs come from JI projects located in countries that have surplus AAUs. As explained, these countries have an interest in having weak additionality and baseline requirements, to enable as many JI projects as possible to be registered.  Non-mandatory ‘best practice’ guidelines, as suggested by JISC, will not suffice to ensure the environmental integrity of JI because they allow the host countries to write their own rules to suit themselves.

CDM Watch recommends that:

  • Approval and registration of projects should be determined by an international body comprising members that have no conflict of interest. The process should be subject to rigorous and transparent accounting
  • Countries with large AAU surpluses carried over from the first Kyoto commitment period should not be allowed to host JI projects in the second commitment period
  • Mandatory criteria on additionality are developed to ensure that projects are additional to existing policies and circumstances
  • All projects that wish to earn credits post 2012 go through a review process to renew their crediting period. Renewal of crediting period reviews should be conducted by an independent international panel and not by host countries.

CDM Watch helped draft the CAN-International submission on JI which contains many more specific suggestions on how JI should be revised. The UNFCCC Secretariat will prepare a report of all the submissions in July 2012. The JISC will then draft a revised set of measures and possible changes of the JI guidelines. Parties will then discuss these at CMP-8 in Qatar in November 2012.

[1] Here the final text on JI that came out of Durban

[2] These shortcomings are outlined in the JISC recommendations and also in a recent report commissioned by the European Commission:
Recommendations on options for building on the approach embodied in joint implementation, October 2011
Alessi M. and Fujiwara N., Centre for European Policy Studies (CEPS): Briefing paper “JI Track 1 preliminary assessment”

[3] AAUs are a kind of CO2 pollution permit. AAUs are given to each country that has an emissions reduction commitment under the Kyoto protocol. 1 AAU entitles a country to emit 1 ton of CO2e. Countries have large surpluses of AAUs because their pledges for the first commitment period were so weak that they received way more AAUs than their actual emissions levels. This surplus is therefore often referred to as ‘hot air.’