Impacts of sanctions on complying and noncomplying states

The features of the three different sanction mechanisms to be applied for failure to meet Article 3.1 commitments differ with respect to their impacts on non-complying and complying countries.5 Implementation of the first sanction, the deduction of tonnes from the second commitment period assigned amount, can be viewed as a penalty directly related to the degree of non-compliance. Assuming the non-complying party would otherwise be eligible to participate in emissions trading in the second commitment period, the penalty per unit of excess emission in the first commitment period will correspond to the international quota6 price in the second period multiplied by 1.3, and this penalty per unit of excess emission would be identical for all non-complying parties. If the non-complying parties' aggregate overall excess emissions in the first commitment period are small, this sanction, imposed on parties found to be in non-compliance, will have little effect on complying parties' own costs of meeting their commitments.7 However, if non-complying parties' excess emissions are large, the cost of compliance for other parties could be affected through impacts on the market price of quotas in the second commitment period.

The second sanction mechanism, development of a Compliance Action Plan, can be more costly for some non-complying countries than others, depending on the structure of their economies. However, the cost of this sanction mechanism will probably be of minor importance for non-complying parties. This sanction will surely have no impact on complying countries' costs of fulfilling their own obligations.

With respect to the third sanction mechanism, the economic cost of suspension from eligibility to sell quotas under Article 17 may differ considerably between countries, depending on their domestic abatement costs. Non-compliant countries that expected to benefit significantly from quota sales in the second commitment period would lose more than non-compliant countries that expected to sell small or no amounts of quotas. Non-complying countries that expect to be buyers of quotas will not be affected by this sanction mechanism, since it only affects a country's eligibility to sell. The suspension of a country from eligibility to sell quotas may also have an impact on the cost of compliance for other Kyoto parties, through alteration of the international price of quotas and through changes in the international prices of emission-intensive goods and fossil fuels. A suspension of non-compliant parties' eligibility to sell may drive up the international quota price. Complying countries that are net sellers will benefit from a higher international quota price, while countries that are net buyers of quotas will lose. Hence, both the first and the third sanction mechanisms may affect the cost of compliance for complying parties. This may give incentives for strategic considerations by the enforcing countries.

Axelrod and Keohane (1985) identify three sanctioning problems, each of which is relevant here:

1 The inability to identify non-compliers, because determining whether or not a country is in non-compliance requires judgement and discretion.

2 The inability to focus retaliation on non-compliers, as the suspension of eligibility to sell quotas has implications not just for the non-compliant party, but also for other parties.

3 The lack of incentive to sanction non-compliers, due to the potentially double-edged nature of the sanctions imposed.

At any point in time, ten countries will have one member each in the Enforcement Branch, with responsibility for determining whether parties are in compliance with their commitments and applying sanctions if they are not.8 After a suspension of eligibility has been applied to a party, the Enforcement Branch can reinstate eligibility on the request of the suspended party, based on its submission of a Compliance Action Plan, unless the Branch determines that the party has not demonstrated that it will meet its target in the subsequent commitment period.9 Hence, the representatives of the Enforcement Branch are in a position to make decisions with respect to sanctions on parties considered for non-compliance that may have important economic consequences for their own countries, and this may undermine the deterrent effect of the compliance system as a whole. At the same time, if a country heading for non-compliance perceives that it is in the economic interest of the members of the Enforcement Branch to allow it to sell quotas in the second commitment period, the deterrent effect of the suspension is weakened. That party may question whether sanctions will be implemented at all, and assume that even if implemented, suspension from the sale of quotas may be only temporary.

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