Obligations under the FCCC

Under the 1997 Kyoto Protocol to the FCCC, many industrialized countries and economies in transition listed in the Convention's Annex I have undertaken quantified emission limitation or reduction commitments (QELRCs) delineated in the Protocol's Annex B, which are intended to achieve, in the aggregate, a 5 per cent reduction in these countries' emissions from 1990 levels by 2008-12.3 The Marrakesh Accords of November 2001 elaborated compliance definitions and mechanisms related to these commitments.

Were each Annex B country required to achieve its QELRC target through domestic action, the behavioural changes required would have been both costly and inefficient. The environmental benefits of reducing or sequestering a ton of carbon dioxide are independent of where the reduction occurs, but the corresponding costs of this reduction or sequestration vary significantly across countries. Requiring countries to meet their commitments domestically would make achieving a given reduction more costly and, therefore, would reduce the total reductions politically and practically achieveable. To address this, the Marrakesh Accords granted states considerable flexibility in meeting their commitments. This flexibility involves creating an emissions accounting and trading system in which countries are granted emission units corresponding to their Annex B commitments, can buy or sell additional emission units under specified conditions, and will be considered compliant if the total number of emission units they possess exceeds their actual emissions. The Marrakesh Accords established four types of emission units and usage rules, as follows:

1 assigned amount units (AAUs), which correspond to a country's Annex B commitment, and which another country can acquire through emissions trading from other Annex I countries (Article 17).

2 Emission reduction units (ERUs), which countries can acquire from other Annex I countries through joint implementation (JI) projects (Article 6).

3 Certified emission reductions (CERs), which countries can acquire from Clean Development Mechanism (CDM) projects undertaken in non-Annex I countries (Article 12).

4 Removal units (RMUs), which countries can acquire through activities in Annex I countries that remove GHGs from the atmosphere.

Countries were also allowed to 'bank' emission units in excess of their first commitment period targets and use them in future commitment periods. The banking of AAUs was not limited; the banking of ERUs and CERs was limited to 2.5 per cent of a country's original AAUs; and the banking of RMUs was prohibited. Since these provisions made emission reduction obligations dynamic, the parties created a transaction log system to track exchanges between countries and across periods and thereby provide clarity regarding each country's target at the end of the first commitment period.

The Marrakesh Accords established several other provisions. Parties were prevented from using these mechanisms unless they were compliant with mechanism-specific requirements as well as more general methodological and reporting require-ments.4 Countries were provided a period, called a 'true-up'period, during which they can acquire enough AAUs, ERUs, CERs, and/or RMUs to fulfill their commitments that extends for 100 days after completion of the expert review process for the last year of the first commitment period, i.e. 2012.5 A version of 'buyer liability' for the validity of permits was created by requiring countries to maintain a commitment period reserve of 90 per cent of their assigned amounts, calculated from the QELRCs reflected in Annex B, to reduce the risk of countries overselling emission units and failing to meet their targets.6 Developing countries were authorized to undertake unilateral CDM projects and market the resulting emission credits (Pew Center on Global Climate Change, 2001).7 In addition, a CDM Executive Board was created to develop rules governing the operation of, and verification and accounting of credits from, CDM projects, including accrediting operational entities to evaluate projects and assign project credits.

The Marrakesh Accords established a Compliance Committee, consisting of a Facilitative and an Enforcement Branch. The Facilitative Branch is tasked to promote compliance by all parties with their commitments through appropriate recommendations, advice and/or technical and financial assistance.8 The Enforcement Branch is tasked with determining the compliance of Annex I parties with their Protocol commitments, and applying consequences that can include - depending on the commitment breached - a declaration of non-compliance, submission of a plan for coming into compliance, suspension of eligibility to participate in the flexibility mechanisms, and the deduction of 100 per cent of excess emissions in the first commitment period, plus a 30 per cent penalty, from a party's assigned amount in the second commitment period.9

Flexibility, Compliance and Norm Development in the Climate Regime 69 The role of baselines

Both country baselines and project baselines influence compliance dynamics within the climate regime. Country baselines are estimates of a country's net GHG emissions during the first commitment period (2008-12), had it followed a business as usual scenario and not changed its policies or actions in response to the regime. Project baselines are estimates of net GHG emissions from a specified area over a specified time had a JI, CDM or RMU project not been undertaken.

Since Annex B targets translate into absolute emission levels, country baselines do not enter into legal determinations of Article 3.1 compliance, which depends only on a country having valid AAUs, ERUs, CERs and RMUs in excess of their actual emissions. However, country baselines are central to how difficult and costly it will be for a country to comply, and therefore how likely it is that countries will. The distance between a country's business as usual baseline and its target corresponds with the degree of behavioural change a country must make (or the amount it must spend on credits) if it seeks to comply. Because GHG emissions tend to track economic growth, declining economic conditions will make it easier or cheaper to comply, while economic booms will make it more difficult or costly.

Country baselines, even when not actually known, are likely to be central determinants of the cost of emission units in whatever emissions trading market develops. Annex B commitments ensure that at least some countries, most notably Russia and the Ukraine, can, without taking any climate-protecting action, meet their Kyoto targets and still have 'hot air' credits to sell. Most other countries will have to estimate their emissions relative to their targets and either introduce policies and programmes to meet their commitments domestically, initiate JI or CDM projects abroad, or acquire AAUs, ERUs, CERs or RMUs from other countries in the emissions market. The decision of which action to take will depend, of course, on the relative cost per ton of carbon dioxide (CO2)-equivalent of those alternatives.

The supply of, and demand for, hot air credits will influence the price of all emission units and hence the cost of compliance. Because there is no real cost of producing hot air units, Russia, Ukraine and any other countries that can confidently predict business as usual emissions below their commitments can sell those units at very low prices. Those countries will have incentives to charge as much as they can, but can undercut (and therefore drive down the price of) any other credits which those countries purchasing credits perceive as equivalent. The regime has sought to foster an emissions trading market in which AAUs, ERUs, CERs and RMUs are equivalent. Assuming the US neither ratifies Kyoto nor enters the emissions market during the first commitment period, estimates suggest that the 'overall demand for emission rights is likely to be lower than the supply of "hot air" from Russia and Ukraine [and so] the world market price will be very low' (Michaelowa, 2001, pVI). That said, two factors may create a market that differentiates hot air credits from others. First, given the buyer liability created by the 90 per cent commitment period reserve requirement, if uncertainty regarding the validity of hot air credits is greater than uncertainty associated with other credits, those credits will be priced differently (Victor, 2001a; Victor, 2001b). Second, some European states may restrict themselves in ways that go beyond the regime, including capping the amount of hot air credits they will allow themselves to apply towards their targets (David G. Victor, personal communication, 9 August 2002). Despite these caveats, hot air credits are likely to reduce significantly the attractiveness and price of project-based credits.

Project baselines pose problems that have more direct impacts on compliance, particularly the determination of non-compliance. Assessing the credits that a JI project (ERUs), CDM project (CERs) or sequestration project (RMUs) should receive requires very specific baselining. Credit assignment requires comparing emissions produced by the project to a baseline scenario 'that reasonably represents the anthropogenic emissions by sources or anthropogenic removals by sinks of GHGs that would occur in the absence of the proposed project'.10 This task is analytically and empirically complex. The CDM Executive Board must approve methods for defining project boundaries and baselines, develop monitoring and evaluating procedures and accredit operational entities charged with those tasks, and maintain the registry of CDM projects and credits. Operational entities will approve the baseline and monitoring plans included in project design documents.11 That will require clear definitions of project boundaries, i.e. the activities, area and time period to be considered part of the project, so that actual emissions for those activities, that area and that time period can be monitored and counterfactual emissions estimated. Defining projects and monitoring emissions are difficult but necessary elements in identifying reductions caused by the project, and therefore in determining the credits the project should receive.

Baselining engages 'the fundamental problem of causal inference' (King et al, 1994), the fact that we can never truly know what would have happened otherwise, and therefore can never be sure how much a given project reduced emissions. Any project has myriad, equally plausible counterfactual scenarios, each of which implies very different emission credits. Both overestimating and underestimating credit levels reduces the regime's ability to encourage emission reductions. The incentive to buy credits by funding JI, CDM and sink projects depends on the usefulness of those credits in fulfilling climate regime obligations at less cost than through emission projects undertaken at home. Excessively conservative baselines underestimate credits, reducing the incentives to fund such projects. Excessively liberal baselines overestimate credits, increasing participation in projects that are given more credits than they actually produce. Actors will have incentives for strategic behaviour aimed at establishing higher baseline emissions and therefore greater credit for a project. These and many other problems have been recognized and discussed in efforts to design systems to estimate counterfactual emissions, measure actual emissions and compare the two, in order to identify ways that mitigate, even if they do not eliminate, these problems. In practical terms, baselines and monitoring procedures that are flawed from theoretical perspectives may nonetheless be accurate enough that project participants, the regime secretariat and other contracting parties will accept them as appropriate bases for granting credits.

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