project-based instruments: economic consequences of the kyoto and buenos aires framework and options...
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Project-based instruments: Project-based instruments: economic consequences of the economic consequences of the
Kyoto and Buenos Aires Kyoto and Buenos Aires framework and options for future framework and options for future
developmentdevelopment
Axel MichaelowaHamburg Institute for Economic Research, Germany
Conference “Flexible Mechanisms for an Efficient Climate Policy”,
Stuttgart, Germany, July 28, 1999
Functioning of the CDMFunctioning of the CDM
Com
pany A
Industrial country Developing country
Government
Com
pany B
Com
pany C
Com
pany D
Government
$
$
CleanDevelopmentMechanism
ApprovalCER
CER Approval
CDM enhances industrial CDM enhances industrial country emission budgetscountry emission budgets
CDM
Kyoto commitment
Kyoto commitment
Country 1
Country 2
JI
Differences CDM-JI Differences CDM-JI - CDM credits from 2000, JI credits from 2008.
- JI credits subtracted from host country emission budget
- JI credits “supplemental”; CDM credits cover “part” of the emission target.
- JI credits freely tradable; unclear for CDM credits
- JI credits from sequestration; unclear for the CDM
- Only CDM projects pay adaptation tax/administration fee
- CDM credits need independent certification; unclear for JI
- No JI credits if investor country does not meet reporting requirements; no such rule for CDM credits
- JI credits frozen if compliance is in doubt
- Institutional structure of CDM
Costs percredited tonof emissionreduction
Integrity ofthe climate
regime
Transac-tion costs
Size of posi-tive projectexternalities
Attractivenessof long-term
projects
Early CDM credit lower no impact lower no impact higherNo target for CDMhost countries
lower lower no impact higher no impact
Stricter CDM sup-plementality rules
higher no impact higher higher lower
Restricted trade inCDM credits
higher no impact higher no impact lower
Sequestration creditsin JI
lower lower no impact lower higher
CDM adaptation taxand administration fee
higher no impact higher no impact no impact
CDM credit certifica-tion
higher higher higher higher higher
JI credit blockade ifreporting is not met
higher higher no impact no impact no impact
Freezing of JI creditsif non-compliance issuspected
higher higher no impact no impact lower
Compulsory CDMstructure
higher higher higher higher higher
Advantages for JIAdvantages for JI
Lower verification and certification costs
Lower need for capacity building
No adaptation tax
Lower institutional costs
Sink projects
Advantages for CDMAdvantages for CDM Early crediting
Bigger supply of low-cost projects
Estimates for the potential of the Estimates for the potential of the CDMCDM
Annex B reductionsfrom business-as-usual
580 to 1350 Mt C;median around 1000
“Hot air” 3 to 344 Mt C
JI and other emissionstrading
64 to 110 Mt C,median around 100
CDM 67 to 723 Mt C,median around 400
CDM market share 19 to 57%
CDM prices per toncarbon
13 to 42 $,median around 20
CDM total financial flows 14 to 85 billion $
Effects of ceilings on CDM and JIEffects of ceilings on CDM and JI
• First come - first serve
• Proportional discounting
• Discretionary allocation
Unclear allocation rules
Project-oriented mechanisms disadvantaged as credits accrue
only ex-post
Institutional design of the CDMInstitutional design of the CDM
• Multilateral fundMultilateral fund– Spread of project risks – Reduction of transaction costs– Bureaucratic inefficiencies?
• International clearinghouse– Tender of projects– Reduction of transaction costs– No minimum price!
• Project exchange– Collection of information on proposals
Baseline settingBaseline settingEnvironmental effectiveness
Economic efficiency
Critical parametersCritical parameters
• Economic additionality
• Leakage
• Lifetime
Economic viability of the projectEconomic viability of the project
Costs Possible cutoff pointsProject overall costs
0
A
B
C
B: accept projects above a negative cost threshold due to barrier removal or alternative rates of return
Number of projects
A: accept all projects that reduce emissions compared to status quo
C: only accept projects with positive costs
Lifetime of the baselineLifetime of the baseline
Project start Time
Regular revision
Economic lifetime
Technical lifetime
Surprise
Simplified approachesSimplified approaches
• Top-down baselinesTop-down baselines
• BenchmarksBenchmarks
• Technology matrixTechnology matrix
• Default project type matrixDefault project type matrix
• Project baseline standardizationProject baseline standardization
All need strong capacity building in host countries
Spatial benchmarksSpatial benchmarksGlobalGlobalaverageaverage
RegionalRegionalaverageaverage
U.S.U.S.averageaverage
g CO2 per kWh electricity
Can be used at any degree of spatial aggregation
Criteria how to decide on this degree remain to be defined
TexasTexasaverageaverage
Time dimension of benchmarksTime dimension of benchmarks
Past now Future
Historical average
Average of equipment
installed during last 5 years
Projected average of equipment installed in next 5 years
Simplification: calculate Autonomous GHG Efficiency Improvement (AGEI)
Competing baseline Competing baseline approaches or a common approaches or a common
framework?framework?„Optimal“ baselines will depend on situation and project type:• forestry, infrastructure, policies, large number of projects in all sectors: highly
aggregated benchmarks, top-down• large projects, many projects in a specific sector, fuel substitution: sector-specific,
technology or default matrix• small projects such as renewables, retrofits, small number of projects: project-
related, technology or default matrix
Test different approaches!
Issues for future development of Issues for future development of CDM and JICDM and JI
• Alignment of the mechanisms– Adaptation tax on all transfers of permits– Early JI, coupled with “hot air” reduction
• Development of models for and decisions on CDM institutions
• Development of and decisions on baseline methodologies