International Climate Policy UNFCCC and Kyoto The economics of climate change Main Sources UNFCCC (2003), "Caring for climate: a guide to the climate change convention and the Kyoto protocol", Issued by the Climate Change Secretariat (UNFCCC) Bonn, Germany. Aldy, J.E., S. Barrett, and R. N. Stavins(2003), "Thirteen plus One: A Comparison of Global Climate Policy Architectures", NOTA DI LAVORO 64.2003. Congressional Budget Office (2003), “The Economics of Climate Change: A Primer”.

International Cooperation Problem: 􀂄Causes of climate change are global ⇒international cooperation needed 􀂄Near-term, concentrated costs, long-term future benefits 􀂄Although agreeing on research and coordination of efforts, hard to agree on whether and how much to restrict greenhouse gases Some reasons: 􀂄Free-riding incentives 􀂄Conflicting interests (e.g. oil-exporting countries might oppose reductions) 􀂄Differing Responsibility: 􀂅five countries (USA, China, Russia, Saudi-Arabia, Canada) produce more than half of world’s carbon 􀂅five countries (USA, China, Russia, Japan, India) consume account for more than 50% of carbon consumption 􀂅Industrialized countries have contributed the majority of historical emissions 􀂅Per-capita emissions in developing countries much smaller

International Policy Considerations Different options Formal treaties (binding under international law) or less rigorous, nonbinding agreements From modest commitments to share information to agreements on restrictions of emissions and penalties Underlying difficulty: Design the agreement such that every party benefits and has no incentive to drop out

International Cooperation on Climate Change The timeline: 1988: United Nations General Assembly adopted resolution urging the ‘protection of global climate for present and future generations’ IPCC established by UNEP 1990: 2ndWorld Climate Conference launches negotiations on convention on climate change 1992: UNFCCC opened for signature at Rio de Janeiro Earth Summit, entered into force in 1994

From UNFCCC to Kyoto UN Framework Convention (UNFCCC) … Parties meet regularly (COP-Conference Of the Parties) to foster and monitor implementation and continue talks on how to address climate change (leading to Kyoto) Negotiating blocks Association of Small Island States (AOSIS) Threatened with submersion by global warming G77 + China Want developed countries to take the lead in reducing European Union Willing to make early reductions US + Japan + Australia + New Zealand Higher fossil fuel dependence Reluctant to commit Russia Economic slowdown gives “surplus”

From UNFCCC to Kyoto …to Kyoto Berlin Mandate (COP1): initiated talks on commitments for industrialized countries Kyoto (COP3): protocol outlined legally binding commitments COP4-COP7: How should details of the Kyoto protocol be designed in order to make ratification possible (55% of the countries and emissions needed)? 2001: USA withdraw from Kyoto protocol 2001: Remaining countries reach compromise Kyoto protocol enters into force February 16th 2005

UNFCCC Objective: “to achieve stabilization of atmospheric concentrations of greenhouse gases at levels that would prevent dangerous anthropogenic (human- induced) interference with the climate system…” not defined what levels might be “dangerous”, but: ecosystems should be allowed to adapt naturally food supply should not be threatened economic development should be able to proceed in a sustainable manner

UNFCCC Distribute the burdens Deal with uncertainty principles of “equity” and “common but differentiated responsibilities”􀂅 industrialized countries have historically contributed the most to the problem and have more resources to address it developing countries are more vulnerable to its adverse effects while having a lower capacity to respond industrialized countries to take the lead 􀂅 by modifying their long-term emission trends by providing financial and technological resources to help developing countries Deal with uncertainty 􀂄Precautionary principle “where there are threats of serious or irreversible damage, lack of full scientific certainty should not be used as a reason for postponing such measures”

UNFCCC Non-Annex I parties: All parties to the convention: mostly developing countries All parties to the convention: Greenhouse gas inventory National communications on actions on climate policy 􀂅Mitigation measures 􀂅Provisions for developing countries 􀂅Preparations to adapt 􀂅Research plans, education, and public awareness

UNFCCC GEF – Global Environment Facility 􀂄Operates the financial mechanisms 􀂄Channels money to developing countries 􀂄Was established 1991 (WorldBank, UNEP, UNDP) 􀂄Not only climate change but also biodiversity, ozone layer, international waters 􀂄COP provides policy guidance to GEF IPCC – Intergovernmental Panel on Climate Change 􀂄Source of information 􀂄Publishes comprehensive reports on the current state of climate change research (scientific, social, economic); mitigation and adaptation

Involvement of developing countries Vulnerability to the impacts of climate change Data collection and research into (and monitoring of) climate change impacts Assessment of vulnerability and of adaptation options Capacity-building Improving early warning systems for rapid response to extreme weather events Starting to implement adaptation measures where appropriate. Response measures Promoting investment for economic diversification Developing and transferring more climate-friendly technologies Expanding the use of climate-friendly energy sources Capacity-building.

Kyoto Protocol Commitments􀂅 legally binding emissions targets Minus 5% from 1990 levels in 2008-2012 Annex I parties have individual targets, listed in Annex B EU-15, Bulgaria, Czech Republic, Estonia, Latvia, Liechtenstein, Lithuania, Monaco, Romania, Slovakia, Slovenia, Switzerland -8% US -7% Canada, Hungary, Japan, Poland -6% New Zealand, Russian Federation, Ukraine 0% Norway +1% Australia +8% Iceland +10%

Implementation mechanisms Emissions trading (Article 17):􀂅 industrialized countries are allowed to buy/sell excess emissions credits among themselves Joint implementation (Article 6)􀂅 industrialized countries can cooperatively implement projects to reduce greenhouse gas emissions investor from one country receives emissions credits equal to the amount of emission reduction as a result of the project recipient country would receive new technology Clean development mechanisms (Article 12)􀂅 Goal to promote sustainable development in developing countries Allows industrialized countries to earn emissions credits from their investments in emission-reducing projects in developing countries Requires verification that the greenhouse gas emissions reductions are real, measurable and additional to what would have occurred in the absence of project

Implementation mechanisms Accounting of greenhouse gas emissions in national registries Different names for emissions􀂅 Based on their commitment, parties receive assigned amount units (AAUs) Joint implementation projects result in emission reduction units (ERUs) CDM projects generate certified emission reductions (CERs) removal units (RMUs) are generated through sink activities in the LULUCF sector Effective emissions trading parties may exchange AAUs, CERs and ERUs, as well as RMUs each of these units equates to one ton of carbon dioxide equivalent (calculated using the Global Warming Potential index)

Some thoughts on the costs of the protocol Why did the U.S. withdraw from the Kyoto negotiations Dispute between EU and U.S. on the use of flexibility mechanisms Substantial costs for U.S. predicted No obligations for developing countries Byrd/Hagel resolution in Senate (1997) 􀂅 “the United States should not be a signatory to any protocol to, or other agreement regarding, the United Nations Framework Convention on Climate Change of 1992, at negotiations in Kyoto in December 1997, or thereafter, which would (A) mandate new commitments to limit or reduce greenhouse gas emissions for the Annex I Parties, unless the protocol or other agreement also mandates new specific scheduled commitments to limit or reduce greenhouse gas emissions for Developing Country Parties within the same compliance period, or (B) would result in serious harm to the economy of the United States”

Some thoughts on the costs of the protocol After withdrawal of U.S., new negotiations in Bonn/Marrakesh lead to agreement on use of flexibility mechanisms Implementation issues even more liberal than originally advocated by U.S. Substantial reduction in costs Substantially less effective in reducing emissions Entry into force: 2005

Marrakesh – agreement on final issues Transferability and bankability of credits Emission credits from sinks projects under Art. 3.3 (forestry management) and Art. 3.4 (agriculture) will be labelled as removal units (RMUs). Those RMUs cannot be used for banking into the 2nd commitment period, but swapping between RMUs and AAUs/CERs/ERUs is allowed. Assigned amount units (AAUs), RMUs and/or credits from JI (ERUs) and CDM (CERs) can be used for complying with the Kyoto emission reduction target Transfers of AAUs, ERUs, CERs and RMUs between Annex I Parties is unrestricted AAUs may be carried over without restrictions into the 2nd commitment period; ERUs and CERs can each be banked only up to a limit of 2.5 % of the initial assigned amount

Marrakesh – agreement on final issues Compliance: Rules for penalty and enforcement Minimizing Adverse Effects: New funding sources Postponed Review of Commitments New Funds Climate Change Fund􀂄 “complementary to” GEF Climate Change funding Adaptation, Technology Transfer, Econ. Diversification Sectors: energy, transport, industry, agriculture, forestry, waste management Least-Developed Countries Fund*􀂄 Adaptation Additional GEF, multilateral, bilateral funding For capacity building in LDCs and EITs

CDM

CDM

CDM

Project Cycle

Baselines

Baseline approaches New baseline methodologies use one of the three approaches: Existing actual or historical emissions, as applicable Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment Average emission of similar projects activities undertaken in the previous 5 years, in similar circumstances, and whose performance is among the top 20% of their category. The baseline scenario: “Covers emissions from all gases, sectors, sources in within project boundary (Marrakech Accord: Annex A)” On-site emissions -reductions that arise immediately from the project activity itself Off-site emissions -reductions occur upstream or downstream of the project Leakage

Verification Periodic independent review of the monitored project emissions during the implementation period Third party review by designated OE (different than Validation OE) Includes a review of: Data Procedures Interviews Identify concerns Confirm GHG reductions in monitoring process regular reports to CDM Executive Board = guaranteed accredited emissions reduction

Certification Certification report issued by OE The report will: Specify ownership of GHG reductions Note no further analysis is required State the quality of GHG reductions Report submitted to CDM Executive Board by OE Board then reviews report and issues CERs equal to verified amount of GHG reductions Transfers liability to the certifier

The road ahead… Pros of Kyoto Cons of Kyoto Current Market-based approach Flexibility Focus on those responsible for problem Monitoring and reporting established First step Cons of Kyoto U.S., China, India face no commitments Russia has hot air Potential of emissions leakage Potential of withdrawal Only 5 years 2008-2012 Current UNFCCC dialogue continues G8+5 (Brazil, China, India, Mexico, South Africa) talks on climate and energy