"Economic Development and the Environment"
on the Sakhalin Offshore Oil and Gas Fields II

Copyright (C) 1999 by Slavic Research Center, Hokkaido University.
All rights reserved

How to Design and Operate the Kyoto Mechanisms

Takamitsu Sawa

Joint Implementation

What is Joint Implementation?

[38] Suppose that any two Annex I countries, say A and B, can implement a joint project contributing to abatement of GHGs emissions including enhancement of sinks. If the joint project is recognized as joint implementation (JI), then the host country, i.e., the country A, in which the project is implemented, can transfer a certain amount of emission rights to the investor country, i.e., country B, which provides funds and technologies necessary for the joint project. The amount of transferred emission rights from A to B would be agreed upon, on the basis of prediction of how much emissions reduction will be attained during the commitment period from 2008 to 2012, and to how much extent the country B contributes to the project.
[39] Generally speaking, countries having opportunities to reduce GHGs emissions with the lower marginal abatement cost will play a role as the host country, while a role as the investor country will be played by countries whose marginal abatement cost is relatively higher, but who have advantages in funding and technology.
[40] In addition to abatement of GHGs emissions, JI provides a variety of benefits to the host country. For example, power plant construction projects are inherently beneficial in that they enhance the power supply capacity of the host country. Public transportation network improvement projects enhance passengers and freights transportation capacity. On the other hand, the investor country's
benefit is only limited to obtaining credit, i.e., emission rights generated by JI, whose average cost might be expected to be less than the marginal abatement cost in the investor country: otherwise, no incentive to JI is expected. Since emission rights are commodities, joint projects that bring reduction of GHGs emissions but have been unprofitable so far would become profitable by the so-called additionality of JI.

[41] JI may be regarded as one version of emissions trading, since it entails the transfer of emission rights among the Annex I countries. However, JI has its own purpose, i.e., it facilitates the project-oriented trading as mentioned above. JI is limited only to the Annex I countries, while joint projects by an Annex I country and a non-Annex I country is called CDM and distinguished from JI. It should be noted that the total amount of emission rights is unchanged before and after JI. Thus JI may be managed more flexibly than CDM, since specification of the baseline is entirely left to the two countries concerned.

Participation by the Private Sector

[42] The private sector actually possesses technologies necessary for GHGs emissions reduction, and also provides funding in most cases. Therefore, it is extremely important for the success of Kyoto mechanisms to facilitate the private sector to take an initiative in JI and CDM. Even in case when private firms in the investor country participate in JI or CDM, a certain amount of emission rights is transferred from the host country's government to the private firms in the investor country. The private firm can sell emission rights thus obtained to their own government or in the market.
[43] It should be noted that the total assigned emission rights to the Annex I countries do not increase nor decrease by JI even in case when the private sector participates in emissions trading. The host country of JI obtains actual emission reduction, while the investor country obtains emission rights, which is often called credits from the host country. The provision of credit should be regarded as the transfer of emission rights from the host country to the investor country.

Baseline and Additionality

[44] To calculate the GHGs emission reductions due to JI, i.e. the amount that is additional as provided for in the Protocol, it is necessary to identify the baseline, or the amount of GHGs that would have been emitted during the commitment period if the JI project were not carried out.
[45] For a JI project in which a coal thermal power plant is replaced with a natural gas thermal power plant or in which leakage of natural gas from pipelines is mended, the baseline, namely, the amount of emissions reduction by the projects may be easily as well as definitely settled. For a JI project in which a natural gas thermal power plant is newly established, however, the baseline cannot be assessed in a consistent manner, but would involve certain arbitrariness.
[46] If it is one of the preconditions of JI to establish a definite rule to numerically specify the baseline, its difficulty might hinder the progress of JI. If the establishment of baseline under a joint JI project between two Annex I countries is entrusted to them, then JI will be further facilitated. Naturally, this does not mean that the two countries are not obliged to notify the administrative body of the agreed baseline and the transferred amount of emission rights. Such procedure is indispensable for the administrative body to fulfill its duty to track all transfers of emission rights among the Annex I countries. Conclusion
[47] If we dare to discuss future prospects, we can write the following scenario as one of the most likely scenarios. In terms of emissions trading, the countries will reach a consensus at the future COPs. With regard to JI, the countries will reach a consensus at the COP/moP1 to be held after the Protocol becomes effective. Soon after the Protocol becomes effective, government-driven or private-driven JI or CDM projects will commence and the emissions trading market will be formed to deal with credits generated by such projects.
[48] The process of forming the marketplace for emissions trading will vary greatly depending upon to whom emission rights are transferred, governments or private firms. If they are transferred only to governments, it is unlikely that the marketplace is autonomously formed before the beginning of the commitment period. This is because governments, which have been assigned emission rights, do not need to exchange them for money in advance. If JI led by private firms is limited to a certain range, private firms will prefer transferring credit to their governments so as to save transaction cost. In such a case, there will be little motivation to create the marketplace for emissions trading. If, however, JI led by private firms is widely promoted, the marketplace for emissions trading will be automatically created.
[49] If the marketplace for emissions trading is created and if the market price of emission rights is high enough, then governments or private firms having excess emission rights will be motivated to supply them to the market. If such countries are facing economic depression or suffering from huge budget deficit as well as trade deficit, it is very likely that they will supply a large amount of emission rights to the market. As is already mentioned, since uncertainties with regard to the price of emission rights is one of the most conspicuous factors to hinder the promotion of JI, the marketplace for emissions trading had better been created so that the price of emission rights may be predicted at an early stage.