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| Kyoto's
Impact On Alberta's Energy Industry |
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| Prepared
By Alicia
Backman Beharry |
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The content of this article is intended to be informational
only. We caution you against using or relying upon any information
contained in this article without first seeking legal advice
regarding your particular matter. All matters arising from the use
of our website, including this article, shall be governed by
Alberta law and shall be within the exclusive jurisdiction of the
courts of Alberta.
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Kyoto's
impact on Alberta's energy industry: Increasing benefits and
decreasing costs with the flexibility mechanisms
The Province of Alberta single-handedly supplies over
80 percent of Canada's oil and natural gas and over half of
this country's coal.
As a result, Alberta's emissions comprise 30 percent of
Canada's carbon dioxide generation, 26 percent of Canada's
nitrogen oxides, 23 percent of Canada's sulphur oxides, and
23 percent of Canada's benzene emissions.
While the energy industry drives most of the wealth of the
Province of Alberta, a by-product of that energy generation
is, quite unsurprisingly, a contribution to global
atmospheric pollution. Atmospheric pollution may soon be
subject to a legally binding international agreement that
will cap emissions and stabilize concentrations of
greenhouse gases to their 1990 levels. Like any
international legal instrument, Kyoto only enters into force
on a national level when Canada ratifies and domestically
implements the agreement. Environment Minister David
Anderson indicates that the Prime Minister's objective is to
decide upon whether Canada will ratify the Kyoto Protocol to
the United Nations Framework Convention on Climate Change
this year, likely at the G-8 Summit in Kananaskis this June. |
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The
adoption of Kyoto will undoubtedly have significant economic
ramifications for Alberta and industry is quickly assessing
the costs and benefits of the Protocol. Perhaps the most
revolutionary aspect of Kyoto is that it is the first
international legal agreement to put an economic value on
the environment by allocating units of pollution for each
participating nation only up to a targeted amount. Canada
has a commitment to reduce its greenhouse gases to 6% below
1990 levels. The commitment only becomes legally binding
upon Canada if Canada ratifies the Kyoto Protocol and if the
Protocol comes into force internationally. At such a time,
Canada will have a legally binding emissions budget to emit
a total of 570 megatonnes for the first five years
of Kyoto's commitment period. The Protocol helps a nation to
meet its target by providing six methods to achieve emission
reductions. The methods include three flexible mechanisms.
Canada can help meet its target by supplementing domestic
measures with the international sale of emission surpluses,
the purchase of emission allocations, or the receipt of
emissions credits for projects in other parts of the globe.
The flexibility mechanisms of the Kyoto Protocol are
Emissions Trading under Article 17, Joint Implementation
under Article 6, and the Clean Development Mechanism under
Article 12. The three schemes, in concert, comprise
International Emissions Trading (IET). Alberta's energy
industry stands to gain by using IET to reduce a sizable
portion of Canada's greenhouse gas (GHG) emissions. Instead
of abruptly curtailing fossil fuel generation, industry has
an incentive to adopt cleaner, more efficient processes, or
to foster new technology in other countries where the
marginal cost of the project is more favorable. Should
reductions in GHG emissions be such that Canada has a
surplus, Canada can bank allowances into the next compliance
period or sell its allowances to other Parties under Kyoto.
International Emissions Trade will create a legally
recognized global emissions market as a means for
participating Parties to meet their international
obligations. As evidenced by private sector initiatives and
pilot projects already underway in Canada, emissions trade
is feasible. For example, TransAlta, Canada's largest
non-regulated electricity corporation and second-largest
single greenhouse gas emitter, has already engaged in North
American and Transatlantic emission offset trades primarily
to gain valuable experience with a new market before the
regulations of Kyoto take effect.
Also, BP Amoco established a trading regime in 1998 that
mimics the latest models for how IET would function under an
operational Kyoto scheme.
Much of the previous uncertainty about the
flexibility mechanisms was due to the lack of operating
guidelines for IET. While the Kyoto Protocol quantified
reduction commitments and provided the conceptual framework
for the flexibility mechanisms in 1997, it was not until
November of 2001 that the decision-making body for Kyoto
completed the Marrakech Accords.
This detailed rule-book for IET brings Kyoto one step closer
to ratification and it will likely have formative effect on
current domestic and private emissions trading markets.
Alberta's energy industry can, by understanding the newest
batch of legal rules for International Emissions Trading,
increase the benefits and decrease the costs of meeting
legally binding targets under a ratified Protocol.
Understanding current international law on IET will enable
Alberta's industry to meet participation eligibility
requirements, time its action appropriately, and implement
the most beneficial types of projects to meet near and
long-term emission budgets.
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The reason to seriously consider the dangers of
climate change is simple. Authoritative scientific experts from
around the world, in addition to panels comprised of even the most
conservative of scientists have, over the past 15 years, concluded
that global warming is real and have recommended a world-wide
reduction of the release of greenhouse gas into the atmosphere.
More pertinently, if the Kyoto Protocol to the United Nations
Framework Convention on Climate Change (UNFCCC) is ratified and
brought into force it will be the legal instrument translating
that international consensus into binding legal obligations to
reduce greenhouse gas emissions.
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It
is important to note that international law functions unlike
domestic statutory law or judge-made caselaw. International law is
consensual and voluntary and thus it reconciles conflicting
national viewpoints in a way that respects national sovereignty.
International legal agreements usually use language that leaves
nations with quite a bit of room to skirt inconvenient
obligations. Furthermore, international instruments allow nations
wide decision-making powers because it is up to each nation to
implement the international commitment in the most domestically
appropriate way. Therefore, international agreements only become
effective once a nation enacts domestic law that complies with the
international agreement. International legal agreements may be
particularly apt for issues that implicate the world community.
For example, taking action on global climate change will involve
significant economic expense, changes in patterns of consumption,
and matters of international equity between developed and
developing countries.
High levels of atmospheric greenhouse gas impact the entire planet
but significant emission reductions in only a few countries could
damage those countries' economic competitiveness in a world
market.
Consequently, a cooperative and multilateral instrument is the
most effective way to address global climate change while also
addressing the interests of very diverse stakeholders.
The
United Nations Framework Convention on Climate Change (UNFCCC) had
its beginnings in the late 1980's. In 1992, over 175 countries
ratified the agreement at the Earth Summit in Rio de Janeiro. The
two categorizations of countries that exist under the UNFCCC are
Annex I and Annex II countries. Countries that fall under Annex I
tend to include the developed nations as defined by the
Organization for Economic Cooperation and Development (OECD).
Annex II countries generally are those countries in the process of
developing or with economies in transition. The original Framework
Convention contained only a non-binding goal for developed nations
to stabilize anthropogenic greenhouse gas concentrations at a
level that would prevent dangerous interference with the
biosphere.
In 1992, a non-binding goal set by the UNFCCC was for Annex I
nations to stabilize their emissions at 1990 levels by the year
2000. However, signatory nations fell short of accomplishing this
goal. As Otto Von Bismark said, "When you say you agree to a
thing in principle you mean you have not the slightest intention
of carrying it out in practice." The typical loose language
of international agreements proved unsatisfactory in the instance
of global climate change.
A
progress review in 1995 determined that non-binding emissions
targets would not result in the necessary reduction of
anthropogenic emissions by Annex I nations. Two years later, the
third Conference of the Parties (the decision-making body
established by the UNFCCC) adopted the Kyoto Protocol.
Kyoto sets specific quantifications on emissions and limits
nations to a percentage of the level of greenhouse gas emissions
that existed in 1990. Annex B to the Protocol lists the commitment
percentages for Annex I nations; and the percentages depend upon
each nation's relative contribution to global GHG production.
Intense debate surrounded an international legal agreement that
would actually hold nations to a quantifiable number of
reductions.
However, the binding emission limits listed in Kyoto foster
environmental integrity and help to ensure that developed nations
will significantly reduce levels of carbon dioxide and other
harmful greenhouse gases. If nations officially ratify the Kyoto
Protocol to the United Nations Framework Convention on Climate
Change, then there will be international consensus on these
quantifiable commitments. Before Kyoto will enter into force as
international law, Annex I Parties who signed the UNFCCC and whose
emissions account for at least 55% of the total carbon dioxide
emissions from all Annex I countries in 1990 must ratify the Kyoto
Protocol.
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a)
Legally binding targets
The
Kyoto Protocol creates a legally binding, absolute target to
reduce emissions from 1990 levels (the amount that constitutes a
nation's 1990 level come from figures reported to the UN Climate
Secretariat and logged in national inventories). As outlined above, each
Annex I Party with binding commitments has, under Annex B of the
Protocol, a listed limitation percentage. Canada is such a Party
and has a commitment to reduce emissions within the compliance
period of 2008-2012 by 6% from 1990 levels. The percentage
reduction quantitatively limits Canada to an absolute amount of
emissions and thus fixes an emissions budget that is called an
"assigned amount." Canada can then choose to
domestically distribute a maximum of emission quotas that will fit
within its budgeted assigned amount. The assigned amounts remain
fixed and legally binding throughout the compliance period despite
external factors such as increased economic growth within the
country
or unforseen fluctuations in energy demand. The target gives teeth
to the Protocol and provides certainty because the quota sets the
level of aggregate emissions pollution. To realize these emission
reductions, Kyoto authorizes a set of flexible mechanisms that can
supplement domestic measures to reduce emissions.
b)
Six ways to meet the targets
The
Kyoto Protocol, under Article 3, lays down six options for Annex I
nations with Annex B commitments to meet those commitments.
The primary two approaches are domestic in nature and involve
policies, measures, and sinks enhancement.
The remaining four international approaches are joint fulfillment,
Joint Implementation (JI), Clean Development Mechanisms (CDM), and
Emissions Trading (ET). Together, joint implementation, clean
development mechanisms, and emissions trading are the
"flexibility mechanisms" and constitute what would
become International Emissions Trading (IET) under a ratified
Protocol. Importantly, during the first compliance period of
2008-2012, nations can only use these flexibility mechanisms to
supplement domestic policy measures and sinks enhancement. This
was articulated at the seventh Conference of the Parties where the
operational rules for IET require Parties with binding reduction
commitments to use IET in a way that "shall be supplemental
to domestic action."
In
order to hold nations publicly accountable for their promised
reductions, Kyoto mandates that flexibility mechanisms not take
the place of national efforts to reduce emissions. However, the
stringency of supplementarity was a point of debate during the
seventh Conference of the Parties (COP7). This official
decision-making body for the UNFCCC finally settled upon a wording
in the Marrakech Accords that defined supplementarity in a less
rigorous way than had the wording of previously proposed texts.
The rules now state that, "domestic action shall thus
constitute a significant element of the effort made by each Party
included in Annex I to meet its quantified emission limitation and
reduction commitments."
Therefore, once a significant element of Canada's effort is
domestic, Canada can also use International Emissions Trading to
meet its 6% reduction commitment. The first hurdle then,
before Canada or its industry can benefit from IET, is that Canada
make domestic policies and measures a significant element of
national efforts to reduce emissions.
c)
Meeting targets with IET
Emissions trading can contribute to a reduction of
the aggregate world greenhouse gas (GHG) concentration in the
atmosphere. Emissions trade can only occur with the allowances
under a pre-set targeted limitation (and this limitation is a
reduction from what nations would have otherwise emitted). The
targets for each nation listed in Annex B ensure an overall
reduction of GHGs. Because of environmental pollution's global
effect on the atmosphere, a limitation must be placed on the total
amount of greenhouse gas rather than the yearly flow of greenhouse
gas.
The aggregate amount of pollution from a Party cannot exceed its
target for all the years covered in the compliance period of
2008-2012. For example, Canada can only emit greenhouse gases up
to a total of 570 Mt during the five year period from 2008-1012. A
presentation from Sue Kirby, Associate Assistant Deputy Minister,
Energy Sector, Natural Resources Canada, estimates Canada's
commitment of 6% below 1990 levels to equate to roughly 26% below
business as usual projections for the year 2010.
If domestic action comprises a "significant element" of
Canada's efforts to reduce emissions and foster carbon sinks
within its boundaries, then Canada can buy emission allowances
from other Parties who have allowances to spare or otherwise
participate in IET.
An
analogy to what is known as the "bubble theory" may help
to explain why IET works (though it is important to note that
International Emissions Trading is distinguishable from any
domestic regime).
A functioning IET scheme would be somewhat like dropping invisible
bubbles over each Party to Kyoto with binding emission
commitments. Canada can only produce an emissions total of 570 Mt
but if, in 2012, Canada is about to exceed its allotted emissions
within its national bubble, then Canada can buy emissions
allowances from a nation that has a surplus within the confines of
its own bubble. IET allows nations to meet their national targets
with the help of market mechanisms. The aggregate level of
pollution is the element in a quota regime that is certain. The
cost of complying with carbon reductions in a quota regime is the
variable that depends upon market supply and demand.
International Emissions Trading is a way to reduce the costs of
complying with Kyoto's binding commitments at International law.
IET acts as an economic incentive to cut back in the most
cost-effective manner that Party nations can together devise.
d)
Kyoto creates a unit of trade
Emission
trading makes attaining Kyoto's targets more achievable and
provides economic incentive for nations to pollute wisely. In
effect, a ratified Kyoto Protocol will create an exclusive market
in pollution units where only participants with binding
commitments can use trading to offset their international legal
obligations. IET uses carbon dioxide equivalents (CO2eq) as the
base unit upon which trading will occur; one can think of CO2
equivalents as the currency of the trading regime. Scientifically,
carbon dioxide equivalents are the standard measurements that
assess the Global Warming Potential (GWP), or the amount of
additional energy retained in the biosphere as a result of the
release of a given greenhouse gas.
Accordingly, Kyoto regulates six specified greenhouse gases
(carbon dioxide, methane, nitrous oxide, hydrofluorocarbons,
perfluorocarbons, and sulphur hexafluoride) by simply converting
their respective Greenhouse Warming Potentials into an equivalent
amount of carbon dioxide. Converting the regulated gases to a
universal unit that measures climate change relative to carbon
dioxide thus creates the base unit of exchange for any
International Emissions Trading regime.
e)
Meeting targets with cap and trade IET
Under
Kyoto, two main methods exist upon which to trade carbon dioxide
equivalents; the first is the "cap and trade" method,
and the second is the "baseline and credit" method.
Emissions Trading, as set out in Article 17 and under the most
recent operational details adopted in the seventh Conference of
the Parties, functions on a cap and trade basis. The necessary
precursor to any emissions trading, whether it be at the sectoral,
domestic, or international level, "requires as an
indispensable condition the setting of absolute targets (caps) and
(ex-ante) allocation of emission allowances to participants."
Emissions Trading functions on the same principles described above
about the way that International Emissions Trading would function
as a whole.
These cap and trade systems predetermine an aggregate
cap, or targeted limitation, for a participant's allowable
emissions. Governments or other authoritative bodies would then
issue permits for holders to emit set quantities of CO2eq.
Article 17 of the Kyoto Protocol establishes Assigned Amount Units
(AAUs) as the target level of emissions for Parties during the
commitment period.
Canada's total AAU will equate exactly with its national
commitment of 570 Mt of pollution between the years 2008-2012.
Canada can then allocate portions of the 570 megatonne pie (its
AAU) to authorized legal entities, such as corporations involved
in energy production, that also meet participation eligibility
requirements for specific types of emissions trade. Authorized
legal entities could then only emit greenhouse gases, or carbon
dioxide equivalents, up to a limit of their portion of allowance
units. If it becomes clear that their emissions will exceed their
allotted quotas, participating entities could buy allowance units
(subject to the rules as will be explained below) from other
qualified participants. Or, if an authorized legal entity is
efficient enough to emit carbon dioxide equivalents at a level
below its allotted quota, then that entity can sell or bank its
allowance units.
f)
Meeting targets with baseline and credit IET
The
second trading system is the "baseline and credit"
method. This second flexibility method is different than cap and
trade systems. Instead of initially setting a target and then
issuing quotas up to that target, baseline and credit systems will
retrospectively award credits for projects that reduce emissions
from a hypothetical baseline. The baseline would most probably
reflect business as usual estimates. Because of the potential for
Parties to falsely set limits, entities that can participate in
projects and set their own baselines must obtain certification
from an overseeing body. Certified entities could then project a
future baseline and obtain credits for the amount of CO2eq that
they reduce in relation to that baseline. Generating credits is
important because an International Emissions Trading system needs
both buyers and sellers. Participants in baseline and credit
systems generate credits for sale and, for trading to occur,
buyers must exist who require credits or surplus allowances in
order to meet their mandatory obligations under Kyoto.
Trading approved credits could offset compliance obligations under
the cap and trade system of Article 17 emissions trading.
Alternatively, purchasing credits could also allow a duly
qualified participant to achieve reductions from its baseline
under either an Article 6 or 12 baseline and credit project.
Kyoto's
articles 6 and 12, Joint Implementation and Clean Development
Mechanisms, respectively, both use a system of baseline and
credit. Joint implementation fosters the reduction of sources or
the enhancement of removals of emissions as between Annex I
nations. Kyoto calls the credits
generated under a Joint Implementation project Emission Reduction
Units (ERUs). Clean Development Mechanisms under Article 12
similarly encourages projects that reduce and remove emissions.
CDM specifically allows Annex I parties to assist non-Annex I
parties and to receive Certified Emission Reductions (CERs) if
their efforts meet with an executive board's approval.
To meet the allowable limits of their targeted cap during Kyoto's
compliance period, participants could generate their own credits
with JI or CDM projects, or they could buy ERUs and CERs from
other projects. The details and the rules for International
Emissions Trading have only just been decided and a comprehensive
understanding of the costs and benefits of the regime will only
come through scrutinizing the operational details of Kyoto's
flexibility mechanisms. Canada, and Alberta's energy industry, can
profit from becoming conversant with incipient international law.
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What
then are the specifics of an International Emissions Trading
regime? Until a handful of months ago, rampant speculation beset
governments, policy-makers, and industry because they could only
assess a hypothetical trading regime based on draft negotiating
texts and economists' projections. Much of the uncertainty
surrounding ratification lay in predicting the outcome of
negotiations about specific operational details under Articles 6,
12, and 17. The Articles of Kyoto stipulate that Conferences of
the Parties are to establish the operational details of the
Protocol. The rules for IET were on the agenda since the fifth
Conference of the Parties in Bonn, Germany in 1999. But only now,
with the decisions of COP7 in Marrakech Morocco, does the
international community have the benefit of the completed
"rule book" of mandatory legal requirements for the use
of Joint Implementation, Emissions Trading, and the Clean
Development Mechanism.
COP7 also went further than simply outlining future rules and the
bodies that would oversee them; the Conference took the initiative
to elect the executive board for the Clean Development Mechanism,
thus enabling Parties to actively begin CDM projects. Commentators
suggest that such a step could very well portend "the
transition now being made to an operational Kyoto regime." And a press release by
the UNFCCC Secretariat announced that The Marrakech Accords open
"the way to widespread ratification by governments."
Not
only do the operational details of International Emissions Trading
mark a significant step towards ratification, the very fact that
over 160 nations could agree to the rulebook evinces an
encouraging level of acceptance amongst participants. The
international policy consensus about practical aspects of
regulating emissions trading has significant effect on industry
even without official ratification. Lisa Jacobson and Allison
Schumacher's report for The Business Council for Sustainable
Energy asserts that packages of trading rules established under
Conferences of the Parties "will likely form the foundation
for the international emissions trading market irrespective of
ratification of the Kyoto Protocol."
Definitive statements of legal policy such as the Marrakech Accord
will have huge practical application for current and emerging
systems of emissions trade. Jacobson and Schumacher assert that
clear legal rules will create a robust emissions trading system
and that once such rules exist, "recognizable market prices
for emissions reductions and credits, as well as standardized
contracts for transactions, will evolve as the market
develops."
The
Marrakech decisions at COP7 mark an important milestone on a path
where international law will apply private sector investment and
market oriented approaches to the problem of global climate
change.
Kyoto is a multilateral means for major greenhouse gas emitters to
stabilize emissions in a way that actively addresses global
climate change and also addresses concerns about international
fairness and economic competitiveness. Energy industries
throughout Canada, and particularly energy industries like those
in Alberta that account for such a large portion of Canada's
emissions, would do well to plan for the Kyoto Protocol's legal
requirements. One of the most readily accessible ways to reduce
emissions, in addition to domestic measures and policies, is to
make use of the flexibility mechanisms that the Protocol provides.
What must private sector participants meet in order to become
eligible to trade international units of emissions? The process
depends upon Canada first meeting participation eligibility
requirements, Canada then authorizing private sector actors to
participate, and finally private sector participants themselves
abiding by the rules for ET, JI, and CDM.
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While
Kyoto's impact on Alberta's energy industry may be profound, it
need not catch the province unawares. An understanding of the
Framework Convention on Climate Change and the Kyoto Protocol's
provisions for International Emissions Trade provide an essential
background for understanding Kyoto's operational rules. The
following section outlines the specific requirements for
participation in international trading and how Alberta's industry
can fit within the scheme. Thus far, the discussion of
international law applies most apparently to interactions as
between nations. How then can firms and energy producers also
partake in IET? The reason that requirements of the Kyoto Protocol
and the operational details from the seventh Conference of the
Parties also apply to the private sector is because Kyoto allows
an Annex I Party with binding commitments to authorize legal
entities to participate in IET. But the Marrakech Accords will
still hold Canada responsible for the fulfillment of its binding
commitment even when Canada authorizes firms or other legal
entities to participate in trades. In international law,
corporations or other legal organizations derive their authority
to act only through the authority of the authorizing nation. If
Canada is not eligible to participate in Kyoto, no private sector
legal entity will be able to participate in International
Emissions Trading.
COP7
sets the requirements for participant eligibility. The Marrakech
Accord's modalities have precisely the same six participant
eligibility requirements for Emissions Trading, Joint
Implementation, and for the Clean Development Mechanism. Canada,
as an Annex I Party with binding reduction commitments, must
satisfy the following requirements before it can participate in
International Emissions Trading (and before it can authorize other
legal entities to participate). Canada is a Party to Kyoto and
thus satisfies the first eligibility requirement. The second
hurdle is an accurate establishment of national Assigned Amount
Units. The third requirement is that participants have a suitable
national system for estimation of anthropogenic emissions by
sources and anthropogenic removals by sinks. Fourth, participants
must have a national registry that will scrupulously keep track of
the various International emission allowance and credit units.
Fifth, eligible participants must submit standardized annual
inventory reports. And lastly, participants must submit
supplementary information on their Assigned Amount Units as
necessary.
Eligibility
requirements send a clear signal to participants about what they
must do to partake in emissions trading. The above requirements
demand consistent reporting and transparent processes to allocate
and to account for emission allowance units at a national level.
The requirements essentially encourage nations to "take
concrete actions as soon as possible to show that their
registries, national systems, national inventories and base year
reporting are complete and accurate."
Some of the necessary national pre-requisites for the
implementation of the Kyoto Protocol are taking shape in Canada
and will make the transition to an operational IET regime easier.
For example, Canada, in keeping with part of Kyoto's requirement
to create a national Registry, now has a Canadian Green-House Gas
Credit Registry. Canada must still formulate national AAUs,
scientific systems to estimate anthropogenic emissions and
removals, and standardized annual inventories. Initiatives are
already underway.
In addition, Canada and its industry have initiated Voluntary
Challenge and Registry (VCR) programs, Pilot Emissions trading
regimes, and emissions exchanges.
Firms
or companies that want to gain authorized legal entity status from
Canada can only participate in IET once Canada meets these six
eligibility requirements and once Canada complies with the
operational rules for IET. In addition to defining who can
participate in IET through participation eligibility requirements,
the Marrakech Accords also detail the legal requirements for
international trade. One of the key operational considerations for
all participants (including countries and private sector
organizations) is that all trades between parties must be
registered and verified by the UN. Also, the rules establish a
Commitment Period Reserve that will prevent overselling of
emissions and will preempt transactions that compromise binding
targets. In terms of the functionality of the system as a whole, a
few general details are important to note. The international units
of trade (AAUs, CERs and ERUs) are highly interchangeable and will
thus work together to form one commodity in an international
emissions market. Kyoto
also provides for a viable market in international emissions
because participants can sell, buy, or bank emissions units from
ET, JI, and CDM to meet their binding reduction commitments. The
following section sets out the pertinent details of the trading
regime as a whole. Understanding these details of the Marrakech
Accords will enable energy producers to plan for the best way to
harness an emerging market under international law.
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a)
National registries and the UN Transaction Log
The flexibility mechanisms will operate under a legally
endorsed system of international trade. International Emissions
Trading under the Kyoto Protocol will only occur through the use
of national registries and under the oversight of the UN
Transaction Log. The operational rules require each Annex I Party
to construct a national registry that will account for Assigned
Amount Units (AAUs) under Emissions Trading, Certified Emission
Reductions (CERs) under the Clean Development Mechanism, and
Emission Reduction Units (ERUs) under Joint Implementation. Also,
the Marrakech Accords create another International Emissions
Trading unit called a Credit Removal Unit (RMU) that will apply to
projects in Annex I countries that create carbon sinks to
sequester carbon dioxide.
Canada, like all Parties, is responsible for tracking every
international transfer and acquisition in its national registry. A
UN Transaction Log will also verify all transactions within
national registries so as to ensure compliance. Should a Party attempt to
transfer any emissions unit without verification by the UN
Transaction Log, that Party cannot use those units to satisfy its
binding reduction target.
Parties
that wish to sell emission units must comply with the verification
procedure. In this way, buyers can be sure that the international
emission units they buy will be valid to offset their own legal
targets. Interestingly, buyers who do not themselves comply with
the requirements of national registries and verification can still
buy emission units.
Whether buyers would have to comply with the registry and
verification procedure was a hotly contested issue during
negotiations but eventually COP7 decided to simplify the matter by
only policing sellers. Though non-complying buyers can purchase
quotas of international emission units, this will not compromise
the entire system of trade. The moment that a non-complying buyer
attempts to sell its international units, it must, as a seller,
properly register and log the transaction. In effect, a Party
wishing to meet its quota would have little incentive to buy from
any unverified seller in the system that Kyoto creates. Only
verified units bought from a Party in compliance with the rules
will count towards binding targets. The operational rules thus
ensure that international trading occurs with valid units and they
will also preempt overselling of valid international units.
b)
The Commitment Period Reserve
The
Commitment Period Reserve rule exists to prevent Parties from
overselling their allotted allowances units. The Bonn Agreement in
1995 established the concept of a Reserve and the Marrakech
Accords make this Commitment Period Reserve mandatory. The reserve requirement
precludes overselling emission units that would render a Party in
breach of Kyoto's binding cap. International Emissions Trading
will only reduce the aggregate level of carbon dioxide equivalents
in the atmosphere if all the trades occur with units that are
within the preset limits of an emissions budget. Consequently, the
Protocol mandates that during the first compliance period between
2008-2012, a Party's net sum of all transfers must be less than
10% of that Party's binding reduction commitment.
In other words, before trading can occur, each Annex I nation with
binding commitments must hold at least 90% of the budgeted amount
of what they are allowed to pollute.
For example, Canada must hold International Emission units of at
least 90% of its budgeted allotment of 570 megatonnes. Canada must
therefore ensure that, at any given time, it holds 513 megatonnes
of its Assigned Amount Units in its Commitment Period Reserve.
Canada is then free to trade (or to authorize private sector
participants to trade) with as much as 57 megatonnes (10%) of its
total allotment of AAUs.
As
outlined above, the UN Transaction log has a safeguard that will
prevent trades that would put Canada below its mandatory
commitment period reserve level.
Also, the UNFCCC secretariat will notify a Party that exceeds its
commitment reserve level and that Party must bring its holdings
back to the required level within 30 days. The Commitment Period
Reserve consists of holdings of ERUs, CERs, AAUs, and RMUs and a
Party can bring its reserve commitment into compliance by
acquiring and holding any of the quota types. The combined effect
of the national registry system, the UN Transaction Log, and the
Commitment Period Reserve require Parties to comply with their
binding targets and create a standardized system of international
emissions trade in which countries can have confidence. Kyoto's
operational regime also makes a true market more viable because it
allows for high liquidity between the various flexibility
mechanisms.
c)
Transferability and Banking
International Emissions Trade uses three flexibility
mechanisms and thus creates three main types of international
emissions units. For a trading system to emerge that most
efficiently allows countries with high reduction costs to buy
emission units and countries with low reduction costs to sell
units in excess of those needed to meet binding reduction
commitments,
all units should be fully transferable. The Marrakech Accords
allow high fungibility; eligible participants who comply with the
trading rules can trade ERUs, CERs, AAUs, and RMUs multiple times.
Accordingly, the emissions units can act together as one commodity
in one market and are therefore highly interchangeable in a global
market.
Parties can also bank units if they have met their emission
reduction target and want to carry units over into another
compliance period instead of trading them. Allowance units (AAUs)
from emissions trading can carry over indefinitely. Credits under
the baseline and credit systems of Joint Implementation and the
Clean Development Mechanism can carry over but each only up to a
limit of 2.5% of a Party's assigned amount unit. The removal units
from sinks projects cannot be banked.
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The
paper has outlined the legal requirements on how Canada can
participate in IET and thus authorize private sector participants
to participate in IET. In addition, the legal requirements under
Article 17 for international trading have been discussed. What
must nations such as Canada, or its authorized private sector
participants, do to satisfy the international operational details
for baseline and credit projects? Recall that in addition to
trading international excesses of allowance units, participants
can also earn credits from JI or CDM projects and those credits
can offset binding commitments. Annex I participants can sell
credits to other participants, use the credits to meet their own
Commitment Period Reserve requirement, or bank credits that amount
to 2.5% of that Annex I Party's total Assigned Amount Unit (for
Canada as a whole this would amount to 11.4 megatonnes of bankable
credits for JI and 11.4 megatonnes of bankable credits for CDM).
While JI and CDM projects both create credits, differences in the
legal requirements for each mechanism will influence a participant
who is considering which type of project to begin.
Understanding
the legal differences between the flexibility mechanisms will
ensure that Alberta's industry implements the most beneficial
types of projects to meet near and long-term emission budgets. The
following subsections compare Joint Implementation and the Clean
Development Mechanism with respect to times when the projects can
earn accreditation, who can participate in the projects, and how
an overseeing body will monitor the project. As a general matter,
both the operational details for JI and for CDM state that
participants "are to refrain from using ERUs and CERs
generated from nuclear facilities to meet their commitments."
Participants should therefore avoid projects with other Annex I
participants or with participants from developing countries that
involve nuclear energy. Apart from that proviso, the types of
projects and the types of energy they employ will depend upon
approval by the appropriate overseeing body.
a)
When each project can earn accreditation
Under
Article 6, Joint Implementation projects that begin as of the year
2000 may be subsequently eligible for Emission Reduction Units (ERUs)
if the project meets the requirements within the Marrakech
accords. However, the ERUs will only be issued after the
compliance period actually begins in 2008. Though Canada lobbied
for eligibility of JI projects before 2008, the idea met with
little international support and ultimately did not become part of
the Marrakech Accord.
In contrast, Clean Development Mechanism projects can secure early
eligibility. The relevant time for CDM projects is not the
beginning of the compliance regime like in JI but rather the time
after a participant registers a CDM project. Project activity that
starts as of January 1, 2000 can be eligible for validation and
registration if that CDM project activity is submitted for
registration before December 31, 2005.
Once registered before December 31, 2005, a CDM project can get
credit for the action it took since January 1, 2000.
b)
Valid participants
JI
is to occur between Annex I nations (or legal entities authorized
by those Annex I nations) that have binding targets under Annex B.
Even amongst Annex I participants, however, the relative affluence
and technological capability of the participating nations range
quite substantially. Thus, the guidelines for implementation urge
more developed Parties to "facilitate the participation"
of countries "that are undergoing the process of transition
to a market economy."
Significantly, the language of this particular guideline only
"urges" parties towards this course of action and does
not firmly impose the obligation. However, the marginal costs for
fostering emissions reductions in less technologically advanced
countries will generally act as an impetus for nations seeking to
obtain credits.
CDM,
in contrast, has a dual objective to both help developed nations
meet their targets and to help the host developing nation achieve
sustainable development.
Annex I Parties are requested to assist non-Annex I countries,
particularly the least developed and small island nations, to
build their capacity to participate in CDM projects. Consequently,
CDM charges Annex I participants a 2% levy on CERs. These CERs
will go into an Adaption Fund whose proceeds aid developing
nations that are particularly susceptible to adverse effects of
climate change. Clean Development
Mechanism projects will occur between an Annex I participant and a
developing nation. But because the mechanism exists to aid
developing countries, the Marrakech Accords also allow a
developing nation to undertake a unilateral CDM project without an
Annex I partner. Developing nations who satisfy the CDM executive
board that their project qualifies for CDM accreditation will then
be able to sell the Certified Emission Unit on the market.
c)
An overseeing body monitors the project
Because JI and CDM work on a baseline and credit system,
the oversight of an accreditation agency is essential so that
projects conform to uniform standards and so that those projects
will result in tradeable credits. The Accord already elected the
CDM executive board, the overseeing body, for CDM. The Marrakech
Accord decided to establish a supervisory committee in 2008 for JI.
For JI, the supervisory committee has yet to be elected but its
function will be to oversee the verification of Emission Reduction
Units generated in legitimate Article 6 projects. In verifying
ERUs, the supervisory committee will report to the Conference of
the Parties on its activities and will be responsible for the
accreditation of independent entities. The supervisory committee
must review and
revise reporting guidelines and criteria for baselines and they must elaborate on project design documents
and any other Article 6 procedures that the next COP should
consider. In addition, both project participants will bear the
supervisory committee's administrative costs for the procedures
but the exact breakdown of cost sharing will only be decided at
Kyoto's first session after ratification.
The Marrakech
decisions about the role of the supervisory committee provide
insight into the operation of a joint implementation project. The
following salient details emerge: participants will receive
verified ERUs under a verification procedure where the supervisory
committee accredits independent entities. Accredited independent
entities determine three main questions: whether the project has
the approval of the Parties involved, whether the reduction of
anthropogenic emissions by sources or removals by sinks is
additional to reductions that would otherwise occur, and whether
the project conforms to the proper baseline and monitoring plan.
Transparency concerns are of utmost importance for any joint
implementation project and so reporting and monitoring
requirements pervade the rules and apply both to the supervisory
committee itself and also to the project participants. Creating
and reporting appropriate baselines must occur under the oversight
of the supervisory committee (through an accredited independent
entity) and participants must submit project design documents.
Similarly, the CDM executive board will oversee baseline
and credit projects and ensure that participants meet
accreditation standards. Participants will receive Certified
Emission Removal units if their ongoing CDM projects continue to
conform to Article 12 requirements and are registered. Recall that
participants must also meet the participant eligibility criteria
for International Emissions Trading as a whole (but developing
nations need not have national registries in place and developing
nations need not have a binding target to participate in CDM). The
board will decide whether to approve the baselines set by
participants and will monitor participants' plans and project
boundaries. The executive board has the power to conduct
spot-checks of participants and to suspend a participant if the
participant fails to abide by the approved baseline for the
project. Participants shall establish the baselines for their
projects "in a transparent and conservative manner regarding
the choice of approaches, assumptions, methodologies, parameters,
data sources, key factors and additionality, and taking into
account uncertainty."
When
participants choose baseline methodologies they must take
recommendations from the CDM executive board into account. They
must also choose a baseline according to whichever of the
following three methods they can justify as being appropriate for
the particular project. To set baselines, participants can use
actual existing or historical emissions, emissions from a
technology that is economically attractive (taking into account
barriers to investment), or they can average emissions of similar
projects undertaken in the previous five years. Projects in the
previous five years must have involved "similar social,
economic, environmental and technological circumstances" and
the projects must have performed in the top 20 percent of their
category.
Participants in CDM projects must adopt one of the above baseline
methodologies and decide to use it for a crediting period of their
selection. Participants can choose a crediting period of a maximum
of 7 years with the option of two renewals, provided that the
original project baseline is still valid or has been updated
taking into account new data. Alternatively, participants can
chose a crediting period of 10 years with no option of renewal.
As in JI, participants in CDM projects need to submit project
design documents for the approval of the overseeing body.
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The
state of international law may soon have significant impact on
Alberta's energy industry. The Framework Convention on Climate
Change, an international and multilateral agreement, set out
principles for greenhouse gas reductions. And the Kyoto Protocol,
if ratified by 55% of Annex I nations that emitted 1990 levels of
greenhouse gases, will quantify reduction commitments and make
them legally binding. A binding target ensures that developed
nations actually take action to control dangerous anthropogenic
interferences in the global climate equilibrium. Canada will have
a national emissions budget to emit carbon dioxide equivalents
that total 6% below 1990 levels (this works out to 570 megatonnes
of pollution). Kyoto sets this target over the entire five years
of the first compliance period of 2008-2012. But Kyoto helps to
make the target realistic by allowing Canada six methods to meet
reduction commitments and the Protocol establishes International
Emissions Trading as a legitimate economic tool in this pursuit.
Canada's domestic policies and measures must be a
"significant element" of its efforts to stabilize the
emissions of harmful greenhouse gases to roughly 26% below
business as usual projections for 2010. Then the flexibility
mechanisms can supplement domestic action and provide economic
incentives through cap and trade and baseline and credit systems
of trade.
International
law as decided by COP7 helps make IET a viable market oriented
mechanism whose operation also stabilizes the aggregate level of
greenhouse gases in the atmosphere. Participants must meet
eligibility criteria that include being a Party to Kyoto, creating
national Assigned Amount Units, establishing a national registry,
adopting a system to estimate greenhouse gas emissions and
removals, submitting standardized annual inventory reports and
supplementing information as necessary. If Canada meets the
eligibility criteria, Canada can authorize private sector
participants to also partake in International Emissions Trade. IET
as a whole will occur through Canada's national registry and the
UN Transaction Log will prevent trades with units that are in
excess of Canada's Commitment Period Reserve.
Authorized
legal entities, such as players in Alberta's energy industry, can
trade within the cap of allowances of AAUs from Article 17
Emissions Trading. Alberta's energy industry can also initiate
projects in developed nations to gain credits of ERUs from Article
6 Joint Implementation projects that work on a baseline and credit
basis. Similarly, Alberta's energy industry can engage in projects
with developing nations to gain credits of CERs from Article 12
Clean Development Mechanism projects that also work on a baseline
and credit basis. All of the international emission units are
highly fungible and can be purchased, sold, kept in the Commitment
Period Reserve, or banked into another compliance period.
Participants would do well to understand the international law on
emissions trade. Armed with such knowledge, Alberta's energy
industry can increase the benefits and decrease the costs of
complying with the legal requirements of the Kyoto Protocol. The
recent decisions of COP7 have supplied the "rule-book"
for IET and have provided the operational details for each of the
flexibility mechanisms. When Alberta's energy industry wants to
gain market experience under cap and trade systems and position
for accreditation through baseline and credit projects, knowledge
of the Marrakech Accords will allow industry to time its action
appropriately and implement the most beneficial types of projects
to meet near and long-term emission budgets
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