2018/11/29 Prospect and future of climate change regime: Implications of Unilateral CDM linked with CER discounting scheme for Korean commitment beyond 2012 Rae Kwon Chung Director Environment and Sustainable Development Division UNESCAP

Climate Regime-The Kyoto Protocol 2018/11/29 Climate Regime-The Kyoto Protocol International agreement (1997 adopted) Ratified by 168 countries (Jan 2007) Binding targets for 35 developed countries Target: 5.2% reduction from 1990 level (2008-2012) Mandatory targets expected post 2012 Flexibility mechanisms Emission trading Clean development mechanism (CDM) Joint implementation

Major Focus – Asian & Pacific Countries 2018/11/29 Major Focus – Asian & Pacific Countries ESCAP non-Annex I countries account for 56% of non-Annex I emissions & 33% of world GHG emissions (w/ LUCF) 63% of non-Annex I emissions & 30% of world (w/o LUCF) Source: Schmidt et al., 2005

Overview of the Global Carbon Market 2005 & 2006 (up to Sept. 30) 2018/11/29 Overview of the Global Carbon Market 2005 & 2006 (up to Sept. 30) 2005 2006 (3 quarters) Volume (Mt CO2) Value (M U$) Allowances EU ETS 324.31 8204.48 763.90 18839.79 NSW 6.11 59.13 16.19 184.07 CCX 1.45 2.83 8.25 27.15 UK-ETS 0.30 1.31 2.26 9.27 Sub total 332.17 8267.75 788.34 19051.00 Project-based transactions CDM 359.08 2651.44 214.26 2260.96 JI 20.85 100.89 11.86 93.88 Other compliance 4.51 36.72 7.92 60.02 384.44 2789.05 234.05 2414.87 Total 716.61 11056.79 1022.39 21465.87 Source: IETA & World Bank

Korea’s Commitment Issue 2018/11/29 Korea’s Commitment Issue Climate Change: will it not crush Korean Economy ? What Korea has to do? Is there any thing Korea can use for its own advantage? Yes. Unilateral CDM & CER discounting scheme

Clean Development Mechanism (CDM) 2018/11/29 Clean Development Mechanism (CDM) Clean Development Mechanism (CDM) flexibility mechanisms for Annex I target compliance    CDM can be re-designed as an incentive mechanism for Non-Annex I action an economic instrument for net global emission reduction

2018/11/29 Unilateral CDM Non-Annex I initiate CDM projects with domestic financing or purchasing agreement with Annex I countries or intermediaries Non-Annex I can take voluntary climate action as the revenue from the sales of CERs is a strong incentive

Advantages of Unilateral CDM 2018/11/29 Advantages of Unilateral CDM More independent and small scale projects by host countries Non-Annex 1 do not have to wait for investment from Annex 1 investor Uneven distribution of CDM can be balanced Project risk born by Non-Annex 1 Annex 1: just BUY, not INVEST

U/CDM, Korean Invention 2018/11/29 U/CDM, Korean Invention Korea proposed U/CDM at COP 6 in Hague,2000 Because if U/CDM is approved, Korea can recover the costs of GHG emission reduction by selling the CER from the U/CDM. Strong opposition from both EU and many G77 Only officially approved in 23 April 2005 by CDM Executive Board when tested by the first U/CDM Cuyamapa Hydro Project from Honduras. Project developers overjoyed as the door is open for many other potential CDMs to be initiated by Non-Annex 1 themselves. Nearly after 5 years since Korea proposed. Proof that Korea can negotiate through its idea at the global negotiations

Status of Unilateral CDM 2018/11/29 Status of Unilateral CDM As of 1 February 2007 919 unilateral CDM out of 1586 CDM projects in the pipeline (from the validation stage) (> 58%) 39 countries out of 55 countries Top six countries (UCDM/CDM) India (460/559) Brazil (150/250) Mexico (94/146) China (65/297) Chile (16/30) Republic of Korea (16/23)

Carbon linked to every aspect of your business 2018/11/29 Carbon linked to every aspect of your business Korean Business can package their climate change actions into U/CDM and sell CER to recover the costs. Or As a new source of finance Internalize cost and opportunity for new projects (part of the product price negotiations) Impact on your share price and your corporate image May be a factor to assess tax impact

Top 10 Developing Country Emitters for Major Industrial Sectors 2018/11/29 Top 10 Developing Country Emitters for Major Industrial Sectors Electricity Iron & Steel Chemical & Petrochemical Aluminum Cement & Limestone Paper, Pulp & Printing China India South Africa South Korea Mexico Iran Saudi Arabia Kazakhstan Indonesia Thailand Brazil Venezuela U.A.E. Chile Argentina Bahrain Macedonia Pakistan Egypt Colombia Source: Schmidt (2006)

2018/11/29 Looking beyond 2012 Combination of flexibility options to meet widely differing national circumstances and needs Strengthen and streamline the CDM Unilateral CDM linked with CER discounting scheme Sectoral approach

Increasing CDM Share in the Carbon Market 2018/11/29 Increasing CDM Share in the Carbon Market Due to rapid increase the volume of CERs from unilateral CDM projects Carbon Market will expand the market will be expanded even more if programmatic CDM projects counted Thus CDM can be a significant mechanism for carbon market There is a risk of CER flooding/ price fall: this is why we propose Unilateral CDM to be linked with CER discounting scheme

CDM Projects linked with CERs Discounting Scheme 2018/11/29 CDM Projects linked with CERs Discounting Scheme No CER Discount With CER Discount CERs discounting rate at 50% Discount CERs Retained as net global reduction All CERs traded no global reduction Non-Annex I Annex I Non-Annex I Annex I No Global Reduction Net Global Reduction

No binding target for developing countries Stabilize CER price 2018/11/29 How CER discounting scheme can function as the post Kyoto Non-Annex 1 ? No binding target for developing countries Stabilize CER price Generate net global GHG reduction

Certified Emission Reductions (CERs) Discounting Scheme 2018/11/29 Certified Emission Reductions (CERs) Discounting Scheme Rules only certain portion of CER is issued to the project and sold to the entities of Annex I Results unsold CER will remain as net global emission reduction higher the ratio of discounting, larger the volume of net global emission reduction could be expected

Why Non-Annex I should accept the idea of discounting the CER? 2018/11/29 Why Non-Annex I should accept the idea of discounting the CER? Revenue might not reduce Could even increased depending on CER price elasticity As CDM projects increased, CER discounting is needed to maintain the CER price in the long run Generate net global GHG reduction without binding targets to Non-Annex I

Innovative mechanism beyond 2012 2018/11/29 Innovative mechanism beyond 2012 Without imposing binding targets on Non-Annex I countries CER discounting can generate net global reduction Thus, resolve the deadlock over Non-Annex I commitments issues In particular, as Program CDM is going to be approved, CER discounting can justify Program CDM.

Differentiation of Discounting Ratio 2018/11/29 Differentiation of Discounting Ratio Level of development: high income country; high discounting low income country; low discounting Type of gases: CER from CFC/HFC, CH4, discounted heavily Minimum baseline for discounting: e.g. African countries exempt from discounting up to a minimum volume of CES If Korea, proposes this idea ????