CDM BEYOND KYOTO.pdf

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311

Stretching Too Far? Developing Countries and the Role of Flexibility Mechanisms Beyond Kyoto

Harro van Asselt*

Joyeeta Gupta**

In light of the recently launched negotiations on the future of the

international legal framework addressing global climate change, it is important to understand the effectiveness of elements of proposed legal architectures. This Article focuses on a potential key element of a future climate regime, namely market-based flexibility mechanisms. The current functioning of flexibility mechanisms can be criticized on a number of grounds. In particular, this Article argues that the use of these mechanisms does not sufficiently take into account the interests and circumstances of

* Researcher, Institute for Environmental Studies, Vrije Universiteit Amsterdam, The Netherlands, and Research Fellow with the Global Governance Project (Glogov.org). ** Professor on Climate Change Policy and Law, Institute for Environmental Studies, Vrije Universiteit Amsterdam, The Netherlands; Professor of Policy and Law on Water Resources and the Environment, UNESCO-IHE Institute for Water Education in Delft, The Netherlands. The authors wish to thank Frank Biermann, Heleen de Coninck, David Driesen, Graham Erion, Constanze Haug, Michael Mehling, Claire Stockwell, and the editors for their thoughtful comments on previous versions of this Article. All errors remain the authors’ sole responsibility. This Article is written in the context of the projects “Adaptation and Mitigation Strategies: Supporting European Climate Policy” (ADAM), supported by DG Research of the European Commission under the Sixth Framework Programme 2002-2006, Priority 1.1.6.3, Global Change and Ecosystems; “The Contribution of CDM Projects to Sustainable Development: A Comparative Assessment,” supported by the Netherlands Ministry of Foreign Affairs, Policy and Operations Evaluation Department; and the VIDI project on “Inter-governmental and Private Environmental Regimes and Compatibility with Good Governance, Rule of Law and Sustainable Development,” supported by the Netherlands Organisation for Scientific Research (NWO).

Electronic copy available at: http://ssrn.com/abstract=1782753

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312 STANFORD ENVIRONMENTAL LAW JOURNAL [Vol. 28:311

developing countries. It outlines a range of concerns with respect to the use of flexibility mechanisms in general, and the Clean Development Mechanism (CDM) in particular. It argues that although flexibility mechanisms have certain virtues, they are not necessarily the best means to meet the various objectives and principles of the climate regime. Alleviating these concerns will be a key challenge in broadening participation in a future international climate change agreement. Therefore, the Article presents and discusses a number of suggestions on how to address these concerns in a future climate change treaty, and identifies the challenges in doing so. It concludes that although flexibility mechanisms are likely to remain a part of any future agreement, there are ways to address developing country concerns, in particular through reforming the CDM. However, doing so requires making new tradeoffs. Greater involvement of developing countries in the use of flexibility mechanisms by extending the coverage of international emissions trading to developing countries will require more fundamental changes to the design of the legal architecture of flexibility mechanisms.

I. INT NA CLIMAT CHANGE LAW AND POLICY FROM RIO ER TIONAL E

TO BALI ....................................................................................... 317 A. Birth of a Convention....................................................... 317 B. Giving Teeth to the UNFCCC: The Kyoto Protocol ....... 322 C. The Rocky Road After Kyoto ........................................... 325 D. Beyond Kyoto: Quo Vadis? ................................................ 328 II. DEVELOPING COUNTRIES AND FLEXIBILITY MECHANISMS IN THE CLIMA RE ........................................................................ 331 TE GIME

A. Flexibility Mechanisms in the Climate Regime: Background and History .................................................. 331 B. Flexibility Mechanisms and Developing Countries: Structural Concerns ......................................................... 336 1. Diffusing Western Structures and Values.................. 337 2. Historical Responsibility and Shunning Leadership 338 3. Differences in Negotiating Power ............................. 341 4. High Administrative Burdens .................................... 342 C. The Clean Development Mechanism and Developing Countries .......................................................................... 343 1. Additionality and Perverse Incentives ....................... 344 2. Concentration of Project Types and Sustainable Development .............................................................. 348

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2009] STRETCHING TOO FAR 313

3. Regional Concentration of Projects .......................... 352 4. Risk of Unfair Pricing ................................................ 355 5. Adaptation Levy.......................................................... 355 III. DEVELOPING COUNTRIES AND FLEXIBILITY MECHANISMS BEYOND 2012 .............................................................................. 356 A. The Role of Flexibility Mechanisms Beyond 2012.......... 356 B. Creating an Appropriate Foundation for Flexibility Mechanisms Beyond 2012................................................ 359 1. Targets for Developed Countries .............................. 359 2. Further Differentiation and Graduation................... 360 3. Defining Supplementarity ......................................... 362 4. Institutional Capacity Building.................................. 363 C. Improving the CDM ......................................................... 364 1. Incentives for Sustainability ....................................... 364 2. Incentives for Equitable Geographical Distribution 368 3. Sectoral CDM ............................................................. 369 4. Tax on Flexibility Mechanisms .................................. 372 D. Discussion ......................................................................... 373 IV. CONCLUSION .............................................................................. 376

INTRODUCTION

The entry into force of the Kyoto Protocol1 to the United Nations Framework Convention on Climate Change (UNFCCC)2 in early 2005 has been hailed as a landmark achievement in the international effort to address global climate change.3 It is widely acknowledged, however, that this legal instrument is but a first step

1. Kyoto Protocol to the United Nations Framework Convention on Climate Change, Dec. 11, 1997, 37 I.L.M. 32, available at http://unfccc.int/resource/docs/convkp/ kpeng.pdf [hereinafter Kyoto Protocol]. The Protocol entered into force on February 16, 2005. As of April12, 2009, 184 countries had ratified the treaty.

2. United Nations Framework Convention on Climate Change, May 9, 1992, 31 I.L.M. 849, available at http://unfccc.int/resource/docs/convkp/conveng.pdf [hereinafter UNFCCC]. The Convention entered into force on March 21, 1994. As of April 11, 2009, 192 countries have ratified the UNFCCC, including major greenhouse gas emitters such as the United States, the European Union, China, Russia, and Japan. See UNFCCC, Status of Ratification, available at http://unfccc.int/essential_background/ convention/status_of_ratification/items/2631.php.

3. See, e.g., Press Release, European Commission, Climate Change: Commission Hails Entry into Force of the Kyoto Protocol (Feb. 16, 2005), available at http://www.europa-eu-un.org/articles/fr/article_4367_fr.htm.

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in reducing greenhouse gas emissions, and that the Kyoto targets are not sufficient to achieve the UNFCCC’s objective to avoid “dangerous anthropogenic interference with the climate system.”4 In light of these shortcomings and the failure of some emitters to commit to greenhouse gas reductions, many commentators have argued that reductions must be much more significant after Kyoto’s first commitment period, which ends in 2012. Specifically, they call on developed countries (listed in Annex I of the UNFCCC, and thus referred to as “Annex I countries” in the context of the Kyoto Protocol) to take on more substantial emission reduction targets and on at least some developing countries (referred to as “non-Annex I countries”) to reduce the rate of growth of their greenhouse gas emissions.5 At the eleventh Conference of the Parties (COP) of the UNFCCC—also serving as the first Meeting of the Parties of the Kyoto Protocol (COP/MOP)—in Montréal, Canada in December 2005, the Parties began to focus on the next steps towards a new international climate change framework.6 Two years later, at COP-13 and COP/MOP-3 in Bali, Indonesia, the Parties launched formal

4. UNFCCC, supra note 2, art. 2. In itself, the five percent average emission reduction required by the Protocol is insufficient to avoid “dangerous anthropogenic interference.” See Michael Oppenheimer & Brian O’Neill, Dangerous Climate Change and the Kyoto Protocol, 296 SCIENCE 1971, 1971 (2002). However, it has been argued that if the Protocol’s approach is followed over a longer time span, this could avert dangerous climate change. See id. at 1972 (arguing how a scenario building on the Kyoto targets, given the uncertainties, is consistent with a goal of stabilizing carbon dioxide concentrations that would prevent dangerous climate change impacts).

5. For an overview and assessment of various post-2012 climate policy options, see generally Marcel Berk & Michel den Elzen, Options for Differentiation of Future Commitments in Climate Policy: How to Realise Timely Participation to Meet Stringent Climate Goals?, 1 CLIMATE POL’Y 465 (2001); BUILDING ON THE KYOTO PROTOCOL: OPTIONS FOR PROTECTING THE CLIMATE (Kevin A. Baumert et al. eds., 2002) [hereinafter BUILDING ON THE KYOTO PROTOCOL]; Joseph E. Aldy et al., Thirteen Plus One: A Comparison of Global Climate Policy Architectures, 3 CLIMATE POL’Y 373 (2003); DANIEL BODANSKY ET AL., INTERNATIONAL CLIMATE EFFORTS BEYOND 2012: A SURVEY OF APPROACHES (2004), available at www.pewclimate.org/docUploads/2012%20new.pdf; ARCHITECTURES FOR AGREEMENT: ADDRESSING GLOBAL CLIMATE CHANGE IN THE POST-KYOTO WORLD (Joseph E. Aldy & Robert N. Stavins eds., 2007) [hereinafter ARCHITECTURES FOR AGREEMENT]. For a discussion of the use of flexibility mechanisms under various post-2012 proposals, see generally AARON COSBEY ET AL., MARKET MECHANISMS FOR SUSTAINABLE DEVELOPMENT: HOW DO THEY FIT IN THE VARIOUS POST-2012 CLIMATE EFFORTS? (2007), available at http://www.iisd.org/pdf/2007/market_mechanisms.pdf.

6. See infra Part I.D.

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negotiations over a follow-up agreement to Kyoto, which need to be concluded by the end of 2009.

This Article focuses on one key potential element of a future climate regime: market-based flexibility mechanisms.7 These mechanisms, introduced in the Kyoto Protocol in 1997, allow Parties subject to emission reduction or limitation targets to meet their commitments by investing in emission reductions in other countries. Many post-2012 proposals envisage a significant role for such flexibility mechanisms, either through a continuation or reform of the Kyoto mechanisms, or through expansion of the geographical coverage of international emissions trading.8 However, any future climate regime needs to address criticisms of the current functioning of these mechanisms, including claims that flexibility mechanisms do not sufficiently acknowledge the circumstances and interests of developing countries.9 At times, these criticisms question the most fundamental assumptions behind the use of market-based mechanisms at the global level.

Addressing these concerns will be a key challenge in broadening participation in a future agreement. To this end, this Article outlines some of the main concerns that have been raised with respect to the use of flexibility mechanisms.10 In particular, it

7. Throughout this Article, the term “flexibility mechanisms” is used to refer to the market-based instruments introduced by the Kyoto Protocol. However, one of these mechanisms, the regional “bubble,” is not discussed further, as it is not of direct relevance to the developing country concerns outlined in this Article.

8. See infra Part III.A. 9. See generally JOYEETA GUPTA, THE CLIMATE CHANGE CONVENTION AND DEVELOPING

COUNTRIES: FROM CONFLICT TO CONSENSUS? (1997); David M. Driesen, Free Lunch or Cheap Fix: The Emissions Trading Idea and the Climate Change Convention, 26 B.C. ENVTL. AFF. L. REV. 1 (1998) [hereinafter Driesen, Free Lunch or Cheap Fix]; David M. Driesen, Choosing Environmental Instruments in a Transnational Legal Context, 27 ECOLOGY L.Q. 1 (2000); Adil Najam et al., Climate Negotiations Beyond Kyoto: Developing Countries Concerns and Interests, 3 CLIMATE POL’Y 221 (2003); Patricia Nelson, An African Dimension to the Clean Development Mechanism: Finding a Path to Sustainable Development in the Energy Sector, 32 DENV. J. INT’L L. & POL’Y 615 (2004); Emily Richman, Emissions Trading and the Development Critique: Exposing the Threat to Developing Countries, 36 N.Y.U. J. INT’L L. & POL. 133 (2004); Kristen Sheeran, Beyond Kyoto: North-South Implications of Emissions Trading and Taxes, 5 SEATTLE J. FOR SOC. JUST. 697 (2007); David M. Driesen, Sustainable Development and Market Liberalism’s Shotgun Wedding: Emissions Trading Under the Kyoto Protocol, 83 IND. L.J. 21 (2008) [hereinafter Driesen, Sustainable Development and Market Liberalism].

10. Although the term “developing countries” is used throughout this Article, we acknowledge that the group of developing countries in the climate regime is far from homogeneous, even when these countries speak with one voice in the climate change negotiations (for example, through the Group of 77—a political coalition of developing

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examines criticisms of the only flexibility mechanism that currently involves non-Annex I countries, the Clean Development Mechanism (CDM). The Article argues that although flexibility mechanisms have certain virtues, their purported cost effectiveness is but one means to achieving the goal of avoiding dangerous climate change impacts. The Article concludes, first, that while options exist to improve the CDM, even a reformed CDM might not be able to achieve its various objectives, and second, that if developing countries are to be involved in international emissions trading, more fundamental changes in the legal architecture of the climate change regime are required.

Part I of the Article provides an overview of the development of international law and policy on climate change, paying specific attention to the role and positions of developing countries. It shows that throughout the development of international law on climate change, developed and developing countries have taken diverging positions on a range of issues, but that they have nevertheless been able to progress slowly through reaching compromises. Part II focuses on the role of flexibility mechanisms in the international climate regime. It argues that the use of flexibility mechanisms in general, and the CDM in particular, raise several concerns, including the possibility for developed countries to avoid reducing emissions domestically, and the limited contribution of the CDM to non-market goals, such as the contribution to sustainable development in host countries and an equitable geographic distribution of CDM projects. Part III explores how these concerns could be addressed in the design of a

countries—and China). In particular, there is a vast gap between the position of countries in the Alliance of Small Island States (AOSIS), arguing for rapid emission reductions, and the oil-producing developing countries, emphasizing the need for increased scientific consensus and compensation measures to mitigate the costs of climate policy. See Joyeeta Gupta, International Law and Climate Change: the Challenges Facing Developing Countries, 16 Y.B. INT’L ENVTL. L. 119, 123-24 (2007) (elaborating on distinctions that can be made within the category of “developing countries”). See also LAVANYA RAJAMANI, DIFFERENTIAL TREATMENT IN INTERNATIONAL ENVIRONMENTAL LAW 165-71 (2006) (arguing that developing countries in international environmental agreements have been inconsistently and ambiguously classified as such); Will Gerber, Defining “Developing Country” in the Second Commitment Period of the Kyoto Protocol, 31 B.C. INT’L & COMP. L. REV. 327, 341 (2008) (positing that the labels of “developed” and “developing” countries “have exhausted their usefulness and should be replaced with designations that recognize finer distinctions among nations”).

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support for institutional capacity building in developing countries.

I. INTERNATIONAL CLIMATE CH LAW AND POLICY FROM RIO TO

in more depth in in Part II and is only marginally addressed here.

A.

the issue.11 After a series of scientific and intergovernmental

post-2012 climate change regime and analyzes a number of suggestions. It argues that although there are various ways to address concerns about the CDM, doing so would require new tradeoffs between the different objectives of the CDM, particularly between ensuring cost effectiveness in the short term and contributing to sustainable development in developing countries in the long term. It also argues that continued use of flexibility mechanisms through extending international emissions trading to developing countries should be accompanied by broader changes in the design of a future climate regime. These changes include the adoption of more stringent emission reduction targets, quantified limits on the use of emissions trading, and further

ANGE

BALI

Before turning to our discussion of flexibility mechanisms, we present an overview of how international climate change law and policy has developed from its nascent stages in the early 1990s to the present. This Part highlights the role of developing countries in the formation of international rules. In particular, it shows how treaty negotiations have led to differentiated treatment of developing countries in both the UNFCCC and the Kyoto Protocol. Furthermore, it indicates that even though negotiations on a future climate change treaty are underway, the design features of such a post-2012 agreement are still uncertain. The development of the role of the market-based mechanisms in the climate change regime is discussed

Birth of a Convention

In the late 1980s, the problem of human-induced climate change had gained prominence on the international political agenda, in part due to increasing scientific consensus on its causes and impacts, and in part because of increased public awareness of

11. See Daniel Bodansky, The United Nations Framework Convention on Climate Change: A Commentary, 18 YALE J. INT’L L. 451, 458-61 (1993) (explaining how the scientific consensus

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conferences on climate change, the United Nations General Assembly established the Intergovernmental Negotiating Committee for a Framework Convention on Climate Change (INC) in 1990.12

The commencement of negotiations on a multilateral climate change agreement exposed the contours of the different viewpoints of developed and developing countries.13 The initial framing of the problem as an abstract, global, technological dilemma that could be solved using market-based mechanisms and appropriate technologies, alienated many developing countries. Such a characterization of the issue, in their view, disregarded their day-to-day priorities, such as access to water, food and energy. This framing problem permeated the INC negotiations in 1991, 1992, and beyond. Initially, both developed and developing countries acknowledged that developed countries emitted the bulk of greenhouse gases during their rapid industrialization processes, and that these countries should lead the way by reducing their emissions and making room for the legitimate growth requirements of the developing countries.14 Since the problem had initially been framed in technocratic terms, it appeared logical to the Parties that the developed countries should provide new technologies and financial support to developing countries to help them reduce the growth rate of their emissions. Framing the issue this way helped to avoid highly political questions—including how the responsibility for reducing emissions should be divided among countries and what formulae should be used to compensate those particularly vulnerable to the impacts of climate change. The developing countries, however, insisted that any obligation to act be supported by the developed countries in the form of financial assistance.15

on climate change developed from the 1960s to the late 1980s, and how scientists, the discovery of the hole in the ozone layer, and a heat wave in 1988 increased attention on the i

enerations of Mankind, G.A. (Dec. 21, 1990).

g Countries in the Post-Kyoto Phase, 7 REV. EUR. CMTY. & INT’L ENVTL. L. 180, 182 (199

developing and developed

ssue). 12. See Protection of Global Climate for Present and Future GRes. 45/211, ¶ 1, U.N. Doc. A/RES/45/21213. See Bodansky, supra note 11, at 478-81. 14. See Joyeeta Gupta, Leadership in the Climate Regime: Inspiring the Commitment of

Developin8). 15. See RAJAMANI, supra note 10, at 86 (discussing how

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The adoption of the UNFCCC in 1992 at the United Nations Conference on Environment and Development in Rio de Janeiro did not resolve all of these issues. Provisions in the UNFCCC were carefully worded both to demonstrate a leadership role of developed countries and to emphasize that developing countries’ obligations under the UNFCCC would depend on the financial and technological assistance provided by the developed countries. However, the UNFCCC neither included legally binding emission reduction targets, nor specified how much support developed countries would need to provide. Some relevant provisions are discussed below.

Inspired by past political declarations,16 the ultimate objective of the UNFCCC, contained in Article 2, is to achieve “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”17 It further adds that “[s]uch a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.”18 The three qualifications regarding the time frame in which to achieve the objective can be seen as corresponding to developing countries’ needs for food security and economic development, as well as to developed countries’ needs for ecosystem protection and economic development. However, the objective remains open to many diverging interpretations.19 Although the vagueness of Article 2 did not

coun s

NVTL. REP. (BNA) 62 AM. U. J. INT’L L. & POL’Y 592 (1990).

CCC, supra note 2, art. 2.

trie have framed the issue of climate change differently). 16. For example, the 1989 Noordwijk Declaration states that “joint effort and action

should aim at limiting or reducing emissions and increasing sinks for greenhouse gases to a level consistent with the natural capacity of the planet” and that “[s]uch a level should be reached within a time frame to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and permit economic activity to develop in a sustainable and environmentally sound manner.” Noordwijk Declaration on Atmospheric Pollution and Climate Change, Nov. 7, 1989, para. 8, 12 INT’L E

4 (Dec. 13, 1989), reprinted in 517. UNF18. Id. 19. See Joyeeta Gupta & Harro van Asselt, Helping Operationalise Article 2: A

Transdisciplinary Methodological Tool for Evaluating When Climate Change is Dangerous, 16 GLOBAL ENVTL. CHANGE 83, 83 (2006) (noting that the text of Article 2 is indeterminate). For an overview of the literature involved with interpreting and quantifying Article 2, see generally Michael Oppenheimer & Annie Petsonk, Article 2 of the UN Framework Convention

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prevent countries from agreeing on the Kyoto targets, no agreement has been reached on quantification of the objective, for example, in temperature or greenhouse gas concentration targets.20 What remains, then, is an unquantified long-term objective, for which it is difficult to determine whether the short-term targets adopted under it are in line with the overall objective. This lack of determination leaves those developing countries most vulnerable to climate change impacts, such as small island developing states, mountain countries with glaciers, and countries prone to desertification, in an unenviable position, as measures that could prevent those impacts are not clearly dictated.21

One of the important outcomes of the UNFCCC from a developing country perspective was the inclusion of “principles” in Article 3.22 However, this inclusion of principles in the operative part of the UNFCCC, rather than the preamble, was accompanied by a compromise that diminished the legal status of these principles.23 The compromise was brokered at the insistence of the United States, which succeeded in adding a preamble to the provision in order to emphasize their nonbinding status.24 The UNFCCC’s principles include those of intergenerational and intra-generational equity,25 common but differentiated responsibilities and respective capabilities of developed and developing countries,26 the need for a precautionary approach subject to a cost

on Climate Change (UNFCCC): Historical Origins, Recent Interpretations, 73 CLIMATIC CHANGE 195 (2005).

20. See Oppenheimer & Petsonk, supra note 19, at 205 (arguing that after the Kyoto Protocol was signed there was a hiatus in interest in Article 2 and a new focus on the implementation of the Protocol).

21. See INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE (IPCC), CLIMATE CHANGE 2007: IMPACTS, ADAPTATION AND VULNERABILITY 796 (2007) (indicating that developing countries are the most vulnerable to climate change impacts).

22. See Bodansky, supra note 11, at 501 (observing that developing countries hoped that such a provision “would serve as the lodestar or compass to guide the parties in implementing and developing the Convention”).

23. The potential conflict was settled by including a footnote in Article 1 indicating that “[t]itles of articles are included solely to assist the reader.” Id. at 501-02 (explaining how developing countries were able to include a provision containing “principles,” but that the United States succeeded in altering the legal status of the provision).

24. Id. 25. UNFCCC, supra note 2, art. 3 para. 1. 26. Id.

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.29

effectiveness qualifier,27 the right to sustainable development,28 and the promotion of a supportive, open economic system

The principle of common but differentiated responsibilities and respective capabilities implies that all countries bear a responsibility for dealing with global problems such as climate change. The UNFCCC goes on to add that these responsibilities need to be differentiated on the basis of countries’ varying historical responsibility for the problem, as well as their capacity to deal with climate change. The principle is related to the leadership that is expected of developed countries in climate change abatement.30 The leadership paradigm implies that Annex I countries should lead in reducing greenhouse gas emissions and provide non-Annex I countries with financial assistance and the necessary clean technologies to meet the agreed incremental costs of implementation.31

Perhaps the most substantial effectuation of the principle of common but differentiated responsibilities in the UNFCCC is in Article 4. Developing countries were opposed to any quantified emission limitation or reduction obligations from the outset, but they nevertheless took on some of the general commitments in the UNFCCC that applied to all Parties. Article 4 first sets out the commitments for all Parties, such as the development of national inventories of anthropogenic greenhouse gas emissions by sources and removals by sinks,32 the formulation and implementation of programs containing climate change mitigation measures,33 consideration of climate change in relevant social, economic and environmental policies and actions,34 and scientific and

27. Id. art. 3 para. 3. The precautionary approach of the UNFCCC is linked to cost effectiveness by stating that “policies and measures should be cost-effective so as to ensure global benefits at the lowest possible cost.” Id.

28. Id. art. 3 para. 4. 29. Id. art. 3 para. 5. 30. Id. art. 3 para. 1. See also Driesen, Free Lunch or Cheap Fix, supra note 9, at 13

(explaining how the UNFCCC links the principle of common but differentiated responsibilities to Annex I country leadership).

31. See Gupta, supra note 14, at 183-86. 32. UNFCCC, supra note 2, art. 4 para. 1(a). A “sink” refers to “any process, activity

or mechanism which removes a greenhouse gas, an aerosol or a precursor of a greenhouse gas from the atmosphere.” Id. art. 1 para. 8.

33. Id. art. 4 para. 1(b). 34. Id. art. 4 para. 1(f).

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technological cooperation.35 It goes on to specify further commitments for the Annex I countries, requiring them to adopt policies and measures to limit their greenhouse gas emissions and enhance their sinks and reservoirs, with the aim of returning individually or jointly to their 1990 emission levels by 2000.36 Article 4 also gives an elaboration of the leadership paradigm, by stating that developed countries “shall provide such financial resources, including for the transfer of technology . . . to meet the agreed full incremental costs of implementing measures.”37 The importance of these Annex I Party obligations is underlined by the provision that implementation of the commitments by non-Annex I countries is made conditional on “the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology.”38

The UNFCCC has been a crucial first step in global climate change abatement efforts. Although developed and developing countries diverged on a number of issues in the negotiations leading up to the treaty, they were able to reach a compromise. Importantly, the UNFCCC differentiates between developed and developing countries by embracing the principles of common but differentiated responsibilities and developed country leadership.

B. Giving Teeth to the UNFCCC: The Kyoto Protocol

Even though the UNFCCC was an important step in the right direction, it lacked “teeth” in the form of legally binding quantified emission limitation and reduction obligations for developed countries. Although a critical difference in the UNFCCC between Annex I and non-Annex I countries concerns the obligation of the former to reduce their emissions to 1990 levels by 2000, this obligation was significantly weakened.39 Parties’ diverging views on whether and how to include “targets and

35. Id. art. 4 para. 1(g). 36. Id. art. 4 paras. 2(a) & (b). 37. UNFCCC, supra note 2, art. 4 para. 3. 38. Id. art. 4 para. 7. 39. See Bodansky, supra note 11, at 515-16 (noting the rather ambiguous formulation

of the 2000 target, and doubting whether the UNFCCC’s approach could even be properly seen as “targets-and-timetables”).

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timetables” in the UNFCCC resulted in a compromise provision that is subject to further qualifications and lacks both a specific target and a clear timetable.40 The actual differentiation of obligations between Annex I and non-Annex I countries in terms of emission reduction or limitation commitments was thus quite minimal. This deficiency was acknowledged at the first COP held in Berlin in 1995, where Parties agreed to “take appropriate action for the period beyond 2000, including the strengthening of the commitments of Annex I Parties . . . through the adoption of a protocol or another legal instrument.”41 This “Berlin Mandate” made it clear that the negotiations were not to lead to new commitments for developing country Parties,42 an issue that had become increasingly sensitive for developing countries as the political and practical implications of climate change became more obvious.

After two years of negotiations, the Kyoto Protocol was adopted at COP-3 in 1997.43 The Protocol introduces legally binding greenhouse gas emission targets for industrialized countries. Countries listed in Annex B—corresponding to a large extent with Annex I of the UNFCCC—committed to reduce net44 greenhouse gas emissions by five percent compared to 1990 levels between 2008 and 2012.45 The Protocol is not targeted at one greenhouse

40. Id. 41. Conference of the Parties to the UNFCCC, First Session, Berlin, F.R.G., Mar. 27-

Apr. 5, 1995, The Berlin Mandate: Review of the Adequacy of Article 4, paragraph 2(a) and (b), of the Convention, including proposals related to the protocol and decisions on follow-up, U.N. Doc. FCCC/CP/1995/7/Add.1, Decision 1/CP.1. (June 6, 1995).

42. Id. para. 2(b). 43. For an analysis of the Kyoto Protocol, see generally MICHAEL GRUBB ET AL., THE

KYOTO PROTOCOL: A GUIDE AND ASSESSMENT (1999); SEBASTIAN OBERTHÜR & HERMANN E. OTT, THE KYOTO PROTOCOL: INTERNATIONAL CLIMATE POLICY FOR THE 21ST

CENTURY (1999); UNFCCC, Tracing the Origins of the Kyoto Protocol: An Article-by-Article Textual History, U.N. Doc. FCCC/TP/2000/2 (Nov. 25, 2000), available at http://unfccc.int/resource/ docs/tp/tp0200.htm#_Toc498339873 (prepared by Joanna Depledge).

44. “Net” emissions refer to emissions from sources minus removals through sinks. 45. Kyoto Protocol, supra note 1, art. 3. The five percent emission reduction in 2008-

2012 is an average for all countries. The European Union committed itself to an overall eight percent reduction to be achieved through internal differentiation in the EU as agreed in the Burden-Sharing Agreement. See Council Decision 2002/358/EC, 2002 O.J. (L 130) 1, 1-3, available at http://europa.eu/scadplus/leg/en/lvb/l28060.htm. This means that whereas some European countries committed themselves to large emission reductions (e.g. Germany and Denmark), others (e.g. Portugal, Greece, and Spain) are allowed to increase their emissions. Kyoto targets for other countries include the United

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gas in particular, but rather uses a “basket” approach under which the aggregate emissions of six greenhouse gases, measured in carbon dioxide (CO2) equivalent emissions, need to be reduced.46 The targets set by the Kyoto Protocol can be seen as problematic, not only because they allow some Annex B countries to substantially increase their emissions, but also because they are not based on clear and predictable underlying principles that would provide countries with more certainty about their responsibility for addressing the climate change by mitigating its impacts and reducing emissions.47

Like the UNFCCC, the Protocol does not require developing (non-Annex B) countries to reduce or limit their emissions. The differentiation between developed and developing countries is also clear in other provisions. For example, Article 10, containing obligations for all Parties to develop cost-effective programs to improve the quality of national inventories and national programs to mitigate and adapt to climate change, states that Parties need to take into account “their common but differentiated responsibilities and their specific national and regional development priorities, objectives and circumstances, without introducing any new commitments for Parties not included in Annex I.”48

The Protocol provides a non-exhaustive list of policies and measures that Annex B Parties can implement to achieve the Kyoto targets, including energy efficiency measures, the protection and enhancement of sinks and reservoirs, sustainable forestry practices, sustainable agriculture, research on and promotion of the use of renewable energy, reducing and phasing out market imperfections, and measures in the transport sector.49 Furthermore, the Protocol introduces three flexibility mechanisms to assist developed countries in achieving their targets: Joint

States (7% reduction), Japan and Canada (6% reductions), Australia (8% increase), and Russ

arbons (PFCs), and sulfur hexafluoride (SF6). Kyot

note 1, art. 10. ara. 1(a).

ia (no increase). Kyoto Protocol, supra note 1, Annex B. 46. The six gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O),

hydrofluorocarbons (HFCs), perfluoroco Protocol, supra note 1, Annex A. 47. See Gupta, supra note 10, at 127. 48. Kyoto Protocol, supra49. Id. art. 2 p

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he chief focus of this Article and are discussed in detail in Part II.

C.

otocol’s flexibility mechanisms and its com

Implementation (JI),50 the CDM,51 and international emissions trading.52 The latter two are t

The Rocky Road After Kyoto

Although the Kyoto Protocol was a major step forward in terms of specifying targets and timetables for Annex B countries, it left many important details for future negotiations. In particular, the Conference of the Parties was mandated to further elaborate on the design of the Pr

pliance procedure. The lack of quantitative commitments for key developing

countries, such as China and India, did not meet the United States Senate’s demand for meaningful action by developing countries following the Senate’s unanimous adoption (95-0) of the Byrd-Hagel resolution in 1997.53 The resolution, adopted before the Protocol was agreed upon, indicated that the United States should not agree to binding commitments if an international agreement would not be accompanied by meaningful action by key developing countries or would cause serious harm to the American economy.54 Even though the United States had signed the Protocol, it was far from clear whether it would ratify the agreement. In the face of this uncertainty, other Annex I Parties, such as the European Union, Canada, and Japan, were reluctant to ratify the treaty. Thus, the issue of developing country commitments was a key issue at COP-4 in Buenos Aires in 1998, where Argentina’s proposal to take on a voluntary commitment to reduce its greenhouse gas emissions intensity—i.e. emissions per unit of economic output—was met with skepticism from most developing countries.55 This doubt stemmed from the failure of developed countries to show the promised leadership in stabilizing

50. Id. art. 6. 51. Id. art. 12. 52. Id. art. 17. 53. S. Res. 98, 105th Cong. (1997) (enacted). 54. Id. 55. See generally Daniel Bouille & Osvaldo Girardin, Learning from the Argentine

Voluntary Commitment, in BUILDING ON THE KYOTO PROTOCOL, supra note 5, at 135; see also RAJAMANI, supra note 10, at 219.

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Bonn in 2001, the result was a political

their emissions at 1990 levels by 2000, to individually adopt emission reduction targets, and to provide technological and financial assistance to developing countries. In sum, developing countries felt that the unconditional leadership paradigm was degenerating into a conditional one.56

Disagreement over several contentious issues related to operationalizing the Kyoto Protocol’s provisions culminated in the failure of COP-6, held in The Hague in 2000.57 Despite efforts to come to a last minute package deal on several of the disputed issues—capacity building and technology transfer; modalities of the CDM; the role of land use change and forestry; and the Protocol’s compliance mechanism—a compromise could not be brokered, and the COP was suspended. Following the failed COP-6, the new Unite d States administration rejected the Kyoto Protocol in 2001 as an agreement that was “fatally flawed in fundamental ways.”58

The failed COP, combined with the prospect that the world’s largest emitter would not be a part of the Kyoto Protocol, could have dealt a fatal blow to the Protocol. However, quite the opposite happened, or as Bodansky put it, “[r]eports of Kyoto’s death seem to have been exaggerated.”59 After the United States withdrew, the European Union seemed more determined than ever to press ahead and encourage ratification of the Kyoto Protocol by Russia and Japan to ensure that it would enter into force.60 At the resumed COP-6 in

56. See Joyeeta Gupta & Nicolien van der Grijp, Perceptions of the EU’s Role, in CLIMATE CHANGE AND EUROPEAN LEADERSHIP: A SUSTAINABLE ROLE FOR EUROPE 67, 81 (Joyeeta Gupta & Michael Grubb eds., 2000).

57. For an analysis of COP-6, see generally Michael Grubb & Farhana Yamin, Climatic Collapse at The Hague: What Happened, Why, and Where Do We Go from Here?, 77 INT’L AFF. 261 (2001).

58. President Bush Discusses Global Climate Change, June 11, 2001, http://georgewbush-whitehouse.archives.gov/news/releases/2001/06/20010611-2.html (last visited Apr. 11, 2009).

59. Daniel Bodansky, Bonn Voyage. Kyoto’s Uncertain Revival, THE NAT’L INTEREST 45, 45 (2001), available at http://www.iddri.org/Activites/Conferences/bodansky.pdf.

60. For a possible explanation of why the European Union has persevered, see Jon Hovi et al., The Persistence of the Kyoto Protocol: Why Other Annex I Countries Move on without the United States, 3 GLOBAL ENVTL. POL. 1, 20-21 (2003) (indicating that the momentum created by the European Union’s domestic climate change institutions restricted the available policy space, and that the European Union’s leadership ambitions in international climate change policy provided an important incentive).

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agr

sible to developing countries—the

ratify after a bargain was struck with the European Un

eement on many of the outstanding issues that resulted in the failure a year before.

The political agreement reached in Bonn was fleshed out in the Marrakech Accords, adopted at COP-7 later that year.61 The Marrakech Accords clarified many issues regarding the use of the flexibility mechanisms of the Protocol, such as the eligibility for participation in the mechanisms, and the extent to which these mechanisms should be “supplemental” to domestic mitigation action in Annex B countries.62 Furthermore, the Accords established a technology framework to enhance the implementation of technology transfer commitments. The Accords also included a decision to increase funding for the Global Environment Facility, the UNFCCC’s financial mechanism, and established three new funds acces

Special Climate Change Fund, the Least Developed Countries Fund, and the Adaptation Fund.63

The Marrakech Accords thus paved the way for the entry into force of the Kyoto Protocol. This agreement required that fifty-five Parties, accounting for at least fifty-five percent of the total Annex I carbon dioxide emissions in 1990, ratify the Protocol.64 Effectively, this meant that in the absence of the United States and Australia, which had also stated that it would not ratify, entry into force was contingent on ratification by the Russian Federation. Eventually, Russia agreed to

ion relating to trade concessions under the World Trade Organization.65

61. See Conference of the Parties to the UNFCCC, Marrakech, Morocco, Seventh Session, Oct. 29-Nov. 10, 2001, Addendum: Action Taken by the Conference of the Parties at Its Seventh Session, U.N. Doc. FCCC/CP/2001/13/Add.1, FCCC/CP/2001/13/Add.2, FCCC/CP/2001/13/ Add.3 [hereinafter Marrakesh Accords] (Jan. 21, 2002).

62. Suraje Dessai and Emma Lisa Schipper, The Marrakech Accords to the Kyoto Protocol: Analysis and Future Prospects, 13 GLOBAL ENVTL. CHANGE 149, 150-51 (2003). On the issue of “supplementarity,” the EU was unable to push for a quantitative definition. Id.

63. See generally Saleemul Huq, The Bonn-Marrakech Agreements on Funding, 2 CLIMATE POL’Y 243 (2002).

64. Kyoto Protocol, supra note 1, art. 25 para. 1. 65. See, e.g., Wybe Th. Douma, The European Union, Russia and the Kyoto Protocol, in EU

CLIMATE CHANGE POLICY: THE CHALLENGE OF NEW REGULATORY INITIATIVES 51, 61-62 (Kurt Deketelaere & Marjan Peeters eds., 2006) (arguing that a link exists between Russia’s WTO accession and Kyoto ratification).

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l echanisms.66 The issue of developing ot make it to the formal negotiation pts of industrialized countries to put

it o

Kyoto Protocol.70 In Montréal, it became apparent that developing

In the COPs following Marrakech, attention shifted towards implementation of the Protocol, and agreements were reached on further details regarding the project-based flexibility mechanisms and the Protocol’s financia mcountry commitments did nagenda, despite several attem

n the negotiating table.67

D. Beyond Kyoto: Quo Vadis?

With the Protocol’s rulebook largely in place, and implementation having begun in most of the ratifying countries, the question of how to proceed beyond Kyoto’s commitment period became a key issue in international discussions. At COP-11 and COP/MOP-1, held in Montréal in December 2005, a first set of small steps was made to discuss and negotiate the future of international climate change governance.68 First, in the context of the UNFCCC, an agreement to start an open, nonbinding dialogue was reached.69 Second, discussions on new commitments for developed countries were initiated on the basis of Article 3.9 of the

66. It is not our intention here to provide an in-depth analysis of the various COPs. For an analysis of COP-9, held in Milan in 2003, see, e.g., Suraje Dessai et al., Challenges and Outcomes at the Ninth Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change, 5 INT’L ENVTL. AGREEMENTS: POL. L. & ECON. 2, 105 (2005). For an analysis of COP-10, held in Buenos Aires in 2004, see, e.g., Hermann E. Ott et al., It Takes Two to Tango: Climate Policy at COP 10 in Buenos Aires and Beyond, 2 J. EUR. ENVTL. & PLAN

Meeting of the Parties to the Kyoto Protocol, 15 REV

exchange of views” and “will not open any negotiations leading t

first commitment period ends in 2012, these discussions were to start

NING L. 84 (2005). 67. See RAJAMANI, supra note 10, at 224-25. 68. For an analysis of COP-11 and COP/MOP-1, see, for example, Camilla Bausch &

Michael Mehling, “Alive and Kicking:” The First . EUR. CMTY. & INT’L ENVTL. L. 255 (2006). 69. See Conference of the Parties to the UNFCCC, Seventh Session, Montréal, Can.,

Mar. 30, 2006, Dialogue on Long-Term Cooperative Action to Address Climate Change by Enhancing Implementation of the Convention, ¶ 2, U.N. Doc. FCCC/CP/2005/5/Add.1, Decision 1/ CP.11. (Mar. 20,2006). The Decision states that the “dialogue will take the form of an open and non-binding

o new commitments.” Id. 70. The Kyoto Protocol provides that “[c]ommitments for subsequent periods for

Parties included in Annex I shall be established in amendments to Annex B to this Protocol. . . . The Conference of the Parties serving as the meeting of the Parties to this Protocol shall initiate the consideration of such commitments at least seven years before the end of the first commitment period.” Kyoto Protocol, supra note 1, art. 3 para. 9 (emphasis added). Because the

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tually, the Parties agreed to establish an Ad Hoc Wo

UNFCCC process to set in motion neg

countries still vigorously opposed even discussing the remote possibility of commitments. This option was raised by some Parties, including the European Union, Canada and Japan, which tried to broaden the discussion of new commitments for Annex I countries to a review of the Kyoto Protocol, which was due for the second COP/MOP.71 Even

rking Group to address the issue of future commitments for Annex I Parties.72

The issue of future commitments was once again on the agenda at COP-12 and COP/MOP-2, held in Nairobi in November 2006. A decision was made there to hold a second review at the fourth COP/MOP in 2008, but that this review “shall not lead to new commitments for any Party.”73 The Nairobi talks can be seen as merely a prelude to the discussions at the following COP and COP/MOP in Bali, Indonesia in December 2007. The Bali meeting was a crucial moment in the

otiations on a follow-up agreement to be concluded before the current Kyoto targets expire.

After intense negotiations that extended one day beyond schedule, Parties to the UNFCCC finally adopted a series of decisions referred to collectively as the “Bali Road Map.”74 The key decision of COP-13 is known as the “Bali Action Plan.”75 It launches “a comprehensive process to enable the full, effective and sustained implementation of the Convention through long-term

in 20

n of the Conference of the Parties serving as the meeting of the P

ph 9, of the Kyoto Protocol, ¶ 2, U.N. Doc. FCC

oc. FCCC/KP/CMP/2006/10/Add.1, Decision 7/C

rst Step on the Difficult Journey to a Post-Kyoto Protocol Agreement, 17 J. ENV’T & DE

Thirt . Doc. FCCC/CP/2007/6/Add.1, Decision 1/CP.13 (Mar. 14, 2008).

05 at the latest. 71. Kyoto Protocol, supra note 1, art. 9 para. 2 (stating that “[t]he first review shall

take place at the second sessioarties to this Protocol”). 72. See Conference of the Parties to the UNFCCC, Seventh Session, Montreal, Can.,

Nov. 28-Dec. 10, 2005, Consideration of Commitments for Subsequent Periods for Parties Included in Annex I to the Convention Under Article 3, paragra

C/KP/CMP/2005/8/Add.1 (Mar. 30, 2006). 73. See Conference of the Parties to the UNFCCC Serving as the Meeting of the

Parties, Second Session, Nairobi, Kenya, Nov. 6-17, 2006, Review of the Kyoto Protocol Pursuant to its Article 9, ¶ 6, U.N. D

MP.2 (Jan. 26, 2007). 74. For an analysis of the COP in Bali, see, for example, Raymond Clémençon, The

Bali Road Map: A FiV. 70 (2008). 75. See Conference of the Parties to the UNFCCC, Thirteenth Session, Bali,

Indonesia, Dec. 3-15, 2007, Part Two: Action taken by the Conference of the Parties at its eenth Session, U.N

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discussions under the Ad Hoc Working Group to Article 3.9,

cooperative action, now, up to, and beyond 2012, in order to reach an agreed outcome and adopt a decision at its fifteenth session.”76 The negotiation process takes place within the Ad Hoc Working Group on Long-term, Cooperative Action, which meets more frequently than the COP. The decision leaves open a number of key issues: it avoids any explicit, quantitative reference to a long-term objective, calling only for “deep cuts.”77 It also does not specify any desirable short- to medium-term targets. Furthermore, the decision leaves open a wide range of possibilities for how a post-2012 agreement might look, and it does not explicitly preclude the option that negotiations under Article 3.9 of the Kyoto Protocol—on new commitments for Annex I countries—are linked to the negotiations under the UNFCCC. The decision also addresses the way in which developing countries could participate in a future agreement through “nationally appropriate mitigation commitments or actions.”78 Although there was considerable pressure on developing countries to adopt “measurable, reportable and verifiable nationally appropriate mitigation actions,” they were able to renegotiate the text to link the phrase “measurable, reportable and verifiable” to support by developed countries in the form of “technology, financing and capacity building,” rather than to mitigation actions in developing countries.79

With respect to the Kyoto Protocol, another important document coming out of the Bali meeting is the report of

76. Id. para. 1 77. Id. pmbl. 78. Id. para. 1(b)(ii). 79. Id. See, e.g., Int’l Inst. for Sustainable Dev., Summary of the First Session of the Ad Hoc

Working Group on Long-term Cooperative Action and the Fifth Session of the Ad Hoc Working Group on Further Commitments for Annex I Parties Under the Kyoto Protocol: 31 March - 4 April 2008, 12 EARTH NEGOTIATIONS BULL. 1, 6 (Apr. 7, 2008), available at http://www.iisd.ca/ download/pdf/enb12362e.pdf (showing how some developed countries preferred simultaneous discussion of measuring, reporting and verifying mitigation actions for both developed and developing countries, whereas some developing countries suggested discussing these issues separately). See also Clémençon, supra note 74, at 76. In the run-up to the first post-Bali discussions in Bangkok in April 2008, it became clear that interpretations differ, and that there is no common view on whether the “measurable, reportable and verifiable” provision refers to technology, finance and capacity building to be provided by developed countries, to the mitigation actions by developing countries, or to both.

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missions in a range of 2

legal agreement on climate change policy beyond 2012 will take.

II. DEVELOPING COUNT TY MECHANISMS IN THE

CLIMATE REGIME

A.

gas emission reductions take place where they are cheapest.83

established in Montréal.80 Unlike the Bali Action Plan, the report provides an indication of possible ranges for short to medium term targets for Annex I countries, stating that achieving low greenhouse gas stabilization levels as indicated by the IPCC “would require Annex I Parties as a group to reduce e

5-40 per cent below 1990 levels by 2020.”81 The Bali Action Plan and the Ad Hoc Working Group report

provide two tracks to a post-2012 treaty under the UNFCCC. It is unclear how the two processes will interact, or whether they will eventually merge, but it seems that the Parties want to keep all options open at present.82 In any case, it remains to be seen what shape an international

RIES AND FLEXIBILI

Flexibility Mechanisms in the Climate Regime: Background and History

As explained in Part I.B, the Kyoto Protocol introduced three new market-based flexibility instruments: International emissions trading, JI, and the CDM. The main rationale behind these flexibility mechanisms is cost effectiveness—ensuring that greenhouse

80. See Ad Hoc Working Group on Further Commitments for Annex I Parties under the K o

Kyoto Protocol: 1-12 December 2008, 12 EARTH NEGOTIATIONS BULL. 1, 19 (Dec. 15, 2

Robert N. Stavins, Policy Instruments for Climate Change: How Can National

yot Protocol, Resumed Fourth Session, U.N. Doc FCCC/KP/AWG/2007/5 (Feb. 5, 2008), available at http://unfccc.int/resource/docs/2007/awg4/eng/05.pdf.

81. Id. para. 16. 82. At COP-14 and COP/MOP-4, held in Poznań, Poland in December 2008, it

became clear that some developing countries and the United States were—for different reasons—opposed to merging the two tracks, while some industrialized countries were in favor. See International Institute for Sustainable Development, Summary of the Fourteenth Conference of Parties to the UN Framework Convention on Climate Change and Fourth Meeting of Parties to the

008), available at http://www.iisd.ca/download/pdf/enb12395e.pdf; see also Lavanya Rajamani, From Berlin to Bali and Beyond: Killing Kyoto Softly, 57 INT’L & COMP. L.Q. 909, 924-25 (2008).

83. For an outline of the potential advantages of emissions trading at the domestic and international levels, see generally Bruce A. Ackerman & Richard B. Stewart, Reforming Environmental Law, 37 STAN. L. REV. 1333 (1985); Robert W. Hahn & Robert N. Stavins, Incentive-Based Environmental Regulation: A New Era from an Old Idea?, 18 ECOLOGY L.Q. 1 (1991);

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International emissions trading can be classified as a “cap-and-trade” system, where a certain emission cap is set, and a fixed number of emission allowances are distributed. Article 17 of the Kyoto Protocol, in conjunction with Annex B—indicating the list of countries with binding targets—provides developed countries with an opportunity to realize the necessary emission reductions under the cap through emissions trading. If a country has low marginal abatement costs, it can sell its surplus allowances on the international market. Likewise, those countries with high marginal abatement costs can buy allowances at the market price. By putting a price on emissions, emissions trading can provide economic incentives for technological innovation, since new technologies can lead to greater reductions.84

In implementing emissions trading, two broad methods for the initial allocation of allowances are commonly distinguished: allowances can be sold to the highest bidder (“auctioning”), or they can be allocated for free on the basis of historical or current emissions (“grandfathering”). Allocation of emission allowances could also take place based on other factors (e.g. on a per capita basis or based on geographical circumstances) or through hybrid methods, whereby allowances are partly granted and partly sold. If allowances were allocated per capita, a large majority of allowances would flow to the developing world (mainly China and India).85 The Kyoto Protocol adopted the grandfathering approach: allowances are distributed on the basis of past emissions, with arbitrary adjustments for national conditions, such as wealth, growth projections, and domestic emission reduction potential. However, there was no standard formula underlying the division of allowances—rather, they were allocated mainly through “horse-

Governments Address a Global Problem?, 1997 U. CHI. LEGAL F. 293 (1997); Jonathan Baert Wiener, Global Environmental Regulation: Instrument Choice in Legal Context, 108 YALE L.J. 671 (199

out research and

en that the majority of the world’s popu

9). 84. See, e.g., Hahn & Stavins, supra note 83, at 13 (“Market-oriented policies . . .

provide significant inducements for firms to adopt new pollution control technologies. In turn, these policies create incentives for those same firms or others to carry

development of cheaper and better pollution abatement techniques.”). 85. See Theodore Panayotou et al., Compensation for “Meaningful Participation” in

Climate Change Control: A Modest Proposal and Empirical Analysis, 43 J. ENVTL. ECON. & MGMT. (arguing that such a wealth transfer is likely giv

lation is to be found in the developing world).

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trad

uce greenhouse gas emissions; instead, they allo

itative

ing” between the industrialized countries at the negotiating table.86

In contrast with international emissions trading, both the CDM and JI can be classified as “baseline-and-credit” systems,87 through which credits can be earned by reducing greenhouse gas emissions against a constructed baseline.88 It is important to note that the mechanisms do not red

w developed country investors to increase their emissions when they purchase credits.

Under the CDM, developed (Annex B) countries may form voluntary partnerships with non-Annex B countries to undertake greenhouse gas emission reduction projects. The dual purpose of the CDM as outlined in the Kyoto Protocol is to assist non-Annex B countries in achieving sustainable development through new technologies and efficiency techniques, while allowing Annex B countries to achieve their Kyoto targets at lower cost through certified emissions reductions (CERs),89 which may be counted against their national emission reduction targets.90 Whereas the CDM establishes the possibility for developed countries to cooperate with developing countries on greenhouse gas emission reduction projects, JI enables cooperation between two Parties to the Kyoto Protocol that both have binding quant

86. See Najam et al., supra note 9, at 224 (arguing that equity was one of the first victims of the horse-trading that led to the Kyoto Protocol).

87. JI has also been described as a “hybrid” mechanism, as it contains elements of both international cap-and-trade and baseline-and-credit mechanisms. See FARHANA YAMIN & JOANNA DEPLEDGE, THE INTERNATIONAL CLIMATE CHANGE REGIME: A GUIDE TO RULES, INSTITUTIONS AND PROCEDURES, 187-88 (2004).

88. For an overview of the CDM, see generally Jacob Werksman, The Clean Development Mechanism: Unwrapping the “Kyoto Surprise,” 7 REV. EUR. CMTY. & INT’L ENVTL. L. 147 (1998); Anita M. Halvorssen, The Kyoto Protocol and Developing Countries: The Clean Development Mechanism, 16 COLO. J. INT’L ENVTL. L. & POL’Y 353 (2005). For an overview of JI, see generally Charlotte Streck, Joint Implementation: History, Requirements, and Challenges, in LEGAL ASPECTS OF IMPLEMENTING THE KYOTO PROTOCOL MECHANISMS: MAKING KYOTO WORK 107 (David Freestone & Charlotte Streck eds., 2005).

89. One CER amounts to one ton of carbon dioxide equivalent. See Conference of the Parties to the UNFCCC, Seventh Session, Marrakesh, Morocco, Oct. 29-Nov. 10, 2001, Modalities and Procedures for a Clean Development Mechanism, as Defined in Article 12 of the Kyoto Protocol, Annex, ¶ 1, U.N. Doc. FCCC/CP/2001/13/Add.2, Decision 17/CP.7, (Jan. 21, 2002) [hereinafter Decision 17/CP.7].

90. See generally Kyoto Protocol, supra note 1, art. 12, para. 2.

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ed Jointly (AIJ) at the first COP in 1995.92 There was con

f

ol (Article 16bis, later renumbered to Article 17) as a way to reduce emissions for Annex B Parties.98 The main reason underlying its inclusion was to ensure that the United

commitments. Given that JI does not involve developing countries, the instrument will not be examined in depth in this Article.

International emissions trading had already been discussed in the early 1990s, but it was not incorporated into the UNFCCC. The UNFCCC’s notion of JI,91 however, developed into the Activities Implement

siderable resistance from developing countries to the idea of JI,93 but AIJ was eventually made possible by adding the term “voluntary” and by prohibiting the issuance of credits for AIJ projects.94

In the preparations for Kyoto, the United States proposed a model Protocol that included international emissions trading.95 The European Union, however, was sensitive to the fact that the developing countries wanted to wait for the results of the pilot phase before going ahead with full- ledged JI or international emissions trading. Furthermore, the European countries were not enthusiastic about emissions trading because of challenges in allocating emissions96 and the possibility that the scheme would not require domestic emission reductions.97 Nevertheless, international emissions trading was included as a last minute provision of the Kyoto Protoc

91. Although emissions trading as such was not included, the UNFCCC contains language that hints at its possibility. UNFCCC, supra note 4, art. 4 paras. 2(a) & (b) (stating that “Parties may implement such policies and measures jointly with other Parties” and

NFCCC, First Session, Berlin, F.R.G, Mar. 25-A N. Doc. 995).

ing Brazil’s suspicions regarding AIJ).

the process, see generally Joyeeta Gupta & Nicolien van der Grijp, Lead Union in the Looking Glass, 2 INT’L J. SUST

nhouse Gas Emissions Trad

.pdf

“with the aim of returning individually or jointly to their 1990 levels”); see Driesen, Free Lunch or Cheap Fix, supra note 9, at 28.

92. See Conference of the Parties to the Upr. 7, 1995, Part Two: Actions Taken by the Conference of the Parties at its First Session, U. FCCC/CP/1995/7/Add.1 (June 6, 193. See, e.g., Gupta, supra note 14, at 184 (cit94. See GUPTA, supra note 9, at 128. 95. See Depledge, supra note 43, ¶¶ 166-67. 96. For details on ership in the Climate Change Regime: The European. DEV. 303 (1999). 97. See GRUBB ET AL., supra note 43, at 92. 98. See Peter Zapfel & Matti Vainio, Pathways to European Greeing: History and Misconceptions, 6 (Oct., 2002), available at http://www.feem.it/NR/

rdonlyres/1E13804B-424D-461D-A777-C3C23E870090/188/8502

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Sta

this process, the additional goal of sup

tes accepted the draft Protocol, as it was not willing to accept binding targets without flexibility.99

Additional factors can explain the introduction of the CDM. In the negotiation process, Brazil had proposed a Clean Development Fund, which would be financed by the fines levied on Annex I countries in non-compliance with their quantitative emission reduction commitments.100 The financial resources would subsequently be distributed amongst non-Annex I countries for both adaptation and mitigation projects.101 This proposal was formally endorsed by other developing countries,102 but it was turned on its head during the negotiations of the Kyoto Protocol, eventually leading to the uncoupling of the mechanism from Annex I country non-compliance, and the coupling with project-based emissions trading.103 In

porting Annex I countries’ compliance with their Kyoto commitments was introduced.

Although the Kyoto Protocol was unique in that it introduced partial emissions trading at the global level, some countries had previously used the policy instrument for domestic pollution reduction programs. The United States, for example, launched a domestic trading scheme for sulfur dioxide in 1990.104 Hence, it is

99. JON BIRGER SKJÆRSETH & JØRGEN WETTESTAD, EU EMISSIONS TRADING: INITIATION

oposals from Part

proposal suggested a cap of ten percent of the total fund

Note by the Secre

about, see Werksman, supra note 88, at 15

fur dioxide

, DECISION-MAKING AND IMPLEMENTATION 67 (2008). 100. The fund was part of the comprehensive “Brazilian Proposal” made during the

Kyoto Protocol negotiations. The proposal differentiated between commitments of Annex I countries by linking the greenhouse gas emissions of Parties over a period of time to the climate change effects of these emissions, measured by the increase in global mean surface temperature. See Ad Hoc Group on the Berlin Mandate, UNFCCC, Seventh Session, Bonn, F.R.G, July 31-Aug. 7, 1997, Implementation of the Berlin Mandate, Additional Pr

ies, 5-27, U.N. Doc. FCCC/AGBM/1997/MISC.1/Add.3 (May 30, 1997). 101. For adaptation projects, theing per year. Id. at 8. 102. See Ad Hoc Group on the Berlin Mandate, UNFCCC, Eighth Session, Bonn,

F.R.G. Oct. 22-31, 1997, Implementation of the Berlin Mandate, Proposals from Parties,tariat, 16-17, U.N. Doc. FCCC/ABGM/1997/Misc.1/Add.6 (Oct. 23, 1997). 103. For a description of how this change came 1-52. See also Depledge, supra note 43, ¶¶ 134-41. 104. On the United States’ experience with sulfur dioxide allowance trading, see

generally Robert N. Stavins, What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading, 12 J. ECON. PERSP. 69 (1998); A. DENNY ELLERMAN ET AL., MARKETS FOR CLEAN AIR: THE US ACID RAIN PROGRAM (2000). For a critical view, see Jonathan Remy Nash, Too Much Market? Conflict Between Tradable Pollution Allowances and the “Polluter Pays Principle,” 24 HARV. ENVTL. L. REV. 465 (showing how parts of the sul

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o s trading reduced the costs

em

milar origins, and reflect concerns with market-based flexibility

logical that the United States pushed for the inclusion of emissions trading in the Kyoto Protocol. With the rejection of the Kyoto Protocol by the Bush Administration in 2001, it is rather ironic that the European Union—initially opposed to the idea of emissions trading105—has now ended up as the main proponent of the instrument.106 Possibly a key consideration for putting so much effort in developing emissions trading was the hope that the United States would ultimately ratify the Protocol, but self interest probably also played a role, as emissi nof emission reductions within the European Union. The European Union started the first regional scheme for trading carbon dioxide

ission allowances in January 2005.107

B. Flexibility Mechanisms and Developing Countries: Structural Concerns

Having outlined the context of the international climate change treaties and introduced flexibility mechanisms, the following sections provide a critical assessment of the use of flexibility mechanisms. In this Part, we discuss some of the main concerns that have been voiced about the use of these mechanisms. We focus on the CDM, the flexibility mechanism that actively involves developing countries in Part II.C. While critiques of both the CDM and international emissions trading have si

trading scheme can be seen as inconsistent with the “polluter pays principle”). 105. See Axel Michaelowa & Sonja Butzengeiger, EU Emissions Trading: Navigating

Between Scylla and Charybdis, 5 CLIMATE POL’Y 1, 2 (2005). The opposition of the European Union to emissions trading should not be exaggerated. First, the European Union pushed for inclusion of the “EU bubble” in the Kyoto Protocol, which essentially allows for flexibility that is similar to the instrument of emissions trading. Second, emissions trading was already discussed as an option in the European Union in the 1990s. Third, some member states (United Kingdom and Denmark) had already built up experience with domestic emissions trading schemes, whereas others (Norway and Sweden) had examined the possibility. See A. Denny Ellerman & Barbara K. Buchner, The European Emissions Trading Scheme: Origins, Allocation, and Early Results, 1 REV. ENVTL. ECON. & POL’Y 66, 67-68 (2007).

106. For a discussion of this “flip-flop” between the United States and the European Union, see generally Atle C. Christiansen & Jørgen Wettestad, The EU as a Frontrunner on Greenhouse Gas Emissions Trading: How Did It Happen and Will the EU Succeed?, 3 CLIMATE POL’Y 3 (2003).

107. Council Directive 2003/87/EC, 2003 O.J. (L 275/32). This Directive was amended in 2004 by Council Directive 2004/101/EC, 2004 O.J. (L 338/18).

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me ked particular criticism of i

of the environment, emissions trading schemes tend to be limited authorizations rather than actual property rights,110 following

chanisms in general, the CDM has provots functioning and design, meriting a separate discussion.

1. Diffusing Western structures and values.

The first general objection to flexibility mechanisms is an ideological one that opposes imposition of one policy instrument on all countries. Through international emissions trading, Richman argues, Western structures and values are being diffused to developing countries.108 Some have deemed this to be a form of “carbon colonialism.”109 The concept of emissions trading, and other market-based mechanisms to control environmental pollution, is compatible with Western, neo-liberal conceptions of achieving cost effectiveness through markets and the establishment of property rights. In the case of emissions trading, environmental management is often associated with property rights. One cannot trade what one does not own. In other words, emissions trading calls for the allocation of property rights to Parties to enable Parties to trade in such rights. However, while property rights seem to imply long-term ownership in the interest

108. Richman, supra note 9, at 155 (arguing that trading schemes “will likely embody the goals and values of Western countries”); Todd B. Adams, Is There a Legal Future for Sustainable Development in Global Warming? Justice, Economics, and Protecting the Environment, 16 GEO. INT’L ENVTL. L. REV. 77, 113 (2003) (stating that “[t]he limited cap-and-trade prog

itivism”).

ate Change, Privatisation and Power, in DEVELOPMENT DIALOGUE

ram in the Kyoto Protocol draws primarily from a Western intellectual and legal tradition related to free markets economics, utilitarianism, and legal pos

109. Heidi Bachram, Climate Fraud and Carbon Colonialism: The New Trade in Greenhouse Gases, 15 CAPITALISM, NATURE, SOCIALISM 1, 5 (2004).

110. The United States’ sulfur dioxide trading scheme clearly specifies that emission rights should not be seen as “property rights” but as “limited authorizations.” United States Clean Air Act, § 403(f), 42 U.S.C. § 7651b(f) (Westlaw 2009). Tietenberg argues that this does not result in privatization of the resource, but rather privatizes the access to the resource as a somewhat “uneasy compromise.” Tom Tietenberg, The Tradeable Permits Approach to Protecting the Commons: What Have We Learned?, in THE DRAMA OF THE COMMONS 197, 205 (Elinor Ostrom et al. eds. 2002). Others would also argue that emissions trading does not really lead to property rights to the atmosphere, but that it results in limited authorization or quasi-privatization. However, an emission allowance de facto amounts to a temporary property right. As Junker puts it, “[o]f course, one must question whether a simple unilateral declaration that a property right is not established is sufficient to prevent the right from being recognized de facto.” Kirk W. Junker, Ethical Emissions Trading and the Law, 13 U. BALT. J. ENVTL. L. 149, 153 (2006). See also Larry Lohmann, Carbon Trading: A Critical Conversation on Clim

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i path dependency, favo 113

o

which enterprises are free to pursue economic activities as long as they do not cause environmental damage.111 This commodification of the atmosphere could contribute to the diffusion of Western notions of cost effectiveness, free markets, law and economics, and property rights, even when it is unclear whether such notions favor, and are favored by devel po ing countries, or are compatible with environmental protection.112

Although the potential diffusion of the instrument and its corresponding structures and values could thus have a fundamental impact on future policy choices of developing countries, it should be noted that emissions trading is but one possible greenhouse-gas-reduction instrument available to Kyoto signatories, and that its use is not mandatory. However, the theoretical attractiveness and the rapidly increased use of trading in a range of countries produce a certa n

ring emissions trading in climate policy.

2. Historical responsibility and shunning leadership.

For the second concern, the basic contention is that because developed countries have emitted greenhouse gases without regulatory constraints since preindustrial times, they are responsible for the observed and projected climate change impacts.114 Through emissions trading, however, developed countries can, to some extent, buy themselves out of their commitment to reduce emissions domestically, and receive credit for carbon reductions that result from their assistance to other countries. Even though the Kyoto Protocol demands that the use of flexibility mechanisms should be supplemental to d mestic

NO.

man, supra note 9, at 159-60. See also Adams, supra note 108, at 114.

g and developing the i m

48, at 77 (2006) (arguing that “[j]ust because something is temporary doesn’t mean it’s not a property right”).

111. See GUPTA, supra note 9, at 143. 112. See Rich113. Cf. Jan-Peter Voß, Innovation Processes in Governance: The Development of “Emissions

Trading” as a New Policy Instrument, 34 SCI. & PUB. POL’Y 329, 340 (2007) (indicating that “[t]he ‘carbon industry’ creates powerful economic interests in retainin

nstru ent”). 114. See Eric Neumayer, In Defence of Historical Accountability for Greenhouse Gas

Emissions, 33 ECOLOGICAL ECON. 185, 187-90 (2000) (providing arguments in favor of historical responsibility, and refuting several objections to the concept).

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e—tech

emission reductions, this “supplementarity” is not defined.115 Thus, it is possible for developed countries to evade their responsibility and leadership obligation,116 as there would be “‘virtual’ compliance without physical compliance.”117 By permitting credits from emissions trading, the incentives for domestic action are reduced, which could result in less—rather than mor

nological innovation in the countries buying the credits.118 Moreover, acceptance of the idea of grandfathering brings with

it a rejection of the idea of allocations based on other rights.119 Under grandfathering, the polluter gets paid as countries are allocated emission rights more or less in accordance with their current emission levels, and the largest polluters can get compensated for reducing their emissions beyond their commitment levels.120 If this principle is accepted as legitimate, then allocating on the basis of other principles, such as the per capita principle, inevitably gets labeled as “hot air.” “Hot air” in this context refers to providing allocations to countries in excess of

115. Kyoto Protocol, supra note 1, art. 17 (“Any such trading shall be supplemental to domestic actions for the purpose of meeting quantified emission limitation

x I”). Yamin and Depledge find that the wording now only defines “supplementarity” in a

: LEGAL AND ECONOMIC ASPECTS 182 (Onno Kuik enables rich countries to cont t

d pressure for technological innovation). But see Edw The EU Proposal on Supplementarity, 29 ECOF RESE 15-16 (2001).

and reduction commitments.”). Decision 15/CP.7 gives no additional information on what is meant by “supplemental.” See Conference of the Parties to the UNFCCC, Seventh Session, Marrakesh, Morocco, Oct. 29-Nov. 10, 2001, Principles, Nature and Scope of the Mechanisms Pursuant to Articles 6, 12, and 17, of the Kyoto Protocol, U.N. Doc. FCCC/CP/2001/13/Add.2, Decision 15/CP.7, preamble (Jan. 12, 2002) (stating that “the use of the mechanisms shall be supplemental to domestic action and that domestic action shall thus constitute a significant element of the effort made by each Party included in Anne

qualitative—and not in a quantitative—way. See YAMIN & DEPLEDGE, supra note 87, at 145.

116. See Richman, supra note 9, at 170-71 (assessing how developed countries can use emissions trading to count for domestic emissions reductions, while fulfilling their leadership responsibility by providing assistance to developing countries); JOINT IMPLEMENTATION TO CURB CLIMATE CHANGE

et al. eds., 1994) (indicating that “[j]oint implementationinue heir excessive, wasteful lifestyles”). 117. Driesen, Free Lunch or Cheap Fix, supra note 9, at 30. 118. See id. at 41-46 (arguing that trading may incentivize countries to disseminate

existing technologies abroad, rather than innovate at home); Terry Barker et al., The Role of EU Internal Policies in Implementing Greenhouse Gas Mitigation Options to Achieve Kyoto Targets, 1 INT’L ENVTL. AGREEMENTS: POL. L. & ECON. 243, 262 (2001) (arguing that emissions trading could lead to reduce

in Woerdman, Limiting Emissions Trading:ARCH MEMORANDUM

119. See Gupta, supra note 10, at 130-31. 120. See id. at 131.

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ies] most vulnerable to climate change, the possibility of failure, even if remote, is both unacceptable and unimaginable.”126

their current pollution levels. The issue of hot air has also provoked other responses, not only in developing countries.121 It has been defined as the “degree to which a country’s assigned amount exceeds what its emissions would be in the absence of any abatement measures.”122 Effectively, it allows developed countries to increase their emissions by purchasing emission allowances from countries with economies in transition—mainly the countries that were part of the Former Soviet Union and its satellite states. Many of these latter countries are emitting far below their allocated levels as their economies have undergone extensive restructuring in the transition phase, and it will take some time before their economies recover.123 These countries could thus benefit from selling their surplus emissions.124 Buying emission allowances from these countries through international emissions trading would endanger the environmental integrity of the Kyoto Protocol, as the countries with economies in transition do not have to take any particular steps, at least in the short term, to reduce emissions. Although hot air would not technically lead Annex I countries to exceed their emission targe s,t the practical and ethical argument against it is that it can lead to higher emissions than would occur without emissions trading.125

Underlying the concerns expressed above is a fear that the focus on the use of market-based mechanisms is simply a distraction from the real objective of the UNFCCC: to avoid dangerous climate impacts. As Najam et al. put it: “[f]or the emitter countries of Annex 1, it makes full sense to pin their hopes on a successful global market in carbon trade; for low-lying [least-developed countr

121. See generally Christine Batruch, Hot Air as Precedent for Developing Countries? Equity Considerations, 17 UCLA J. ENVTL. L. & POL’Y 45 (1999); Edwin Woerdman, Hot Air Trading Under the Kyoto Protocol: An Environmental Problem or Not?, 14 EUR. ENVTL. L. REV. 71 (2005).

122. Michael Grubb, International Emissions Trading Under the Kyoto Protocol: Core Issues in Implementation, 7 REV. EUR. CMTY. & INT’L ENVTL. L. 140, 142 (1998).

123. See Woerdman, supra note 121, at 72-73. 124. Id. at 73. 125. Id. at 76. 126. Najam et al., supra note 9, at 226.

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3. Differences in negotiating power.

After the adoption of the Kyoto Protocol, an extensive rulebook has developed on international emissions trading127 and the CDM.128 It is a daunting task for anyone to understand the detailed, and often complicated, rules and procedures. However, whereas developed countries often send large delegations to climate change negotiations, developing countries’ delegations usually consist of one to four persons.129 For any delegate, it is a formidable challenge to master all the ins and outs of, for example, requirements related to monitoring, reporting and verifying emissions, modalities and procedures of the CDM, technology transfer, adaptation funding, and so on. Developed countries, however, have at least some domestic experience with emissions trading schemes (for example, the member states of the European Union have established a supranational cap-and-trade system for greenhouse gases, and the United States gained experience through its sulfur dioxide trading scheme), with either staff devoted to flexibility mechanism negotiation, or easy access to independent experts. As a result, it is likely that the details of emissions trading at the global level will be based on experiences and proposals stemming from developed countries. The establishment of a Trust Fund for Participation in the UNFCCC Process, which is aimed at facilitating developing countries’ participation in climate change negotiations, has mitigated this concern to some extent.130 However, any contributions to this fund

127. See generally Conference of the Parties to the UNFCCC, Seventh Session, Marrakesh, Morocco Oct. 29-Nov. 10, 2001, Modalities, Rules and Guidelines for Emissions Trading under Article 17 of the Kyoto Protocol, U.N. Doc. FCCC/CP/2001/13/Add.2, Decision 18/CP.7 (Jan. 12, 2002) [hereinafter Decision 18/CP.7].

128. See infra Part II.C. 129. Mumma provides an example of COP-4 in 1998, where the United States had a

delegation of eighty-three, and the European Union had forty-five, while African countries typically had two to four delegates each. Furthermore, the European Union and United States delegations were informally supported by think tanks. These inequities frustrated efforts to articulate an African position on the CDM. See Albert Mumma, The Poverty of Africa’s Position at the Climate Change Convention Negotiations, 19 UCLA J. ENVTL. L. & POL’Y 181, 202-03 (2001). Over time, the European Union and the United States delegations have only grown larger, while delegations of the small and poor developing countries have remained around the same size.

130. See Conference of the Parties to the UNFCCC, First Session, Berlin, F.R.G, Mar 28-Apr. 7, 1995, Part Two: Action Taken by the Conference of the Parties at its First Session, Annex, ¶ 15, U.N. Doc. FCCC/CP/1995/7/Add.1 (June 6, 1995).

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are made on a voluntary basis, and the fund only sponsors a limited number of delegates per country.131 While nongovernmental organizations provide negotiator training, capacity building exercises, and ad hoc legal assistance for some small developing countries, these efforts are more focused on medium-term issues than short-term negotiations. Furthermore, where they are focused on short-term negotiation, they are generally only available for, and utilized by, small developing island states, rather than all developing countries.132

4. High administrative burdens.

The design and implementation of emissions trading schemes pose new challenges to developed nations, as is illustrated by the European Union’s struggle with the European emissions trading scheme.133 For developing countries, where institutional structures take different forms, this undertaking would be even more challenging.134 For any emissions trading scheme to function properly, countries need to fulfill certain basic conditions, which could imply high administrative costs.135 This includes establishing a reliable emissions monitoring, reporting and verification system, as well as putting in place a national registry for emission allowances.136 As Baumert et al. point out, “developing countries

131. Furthermore, there have been other inconveniences for developing country participants that received funding. See Yamin & Depledge, supra note 87, at 495.

132. On capacity building in the climate regime, see generally Joyeeta Gupta, Capacity Building and Sustainability Knowledge in the Climate Regime, in PROCEEDINGS OF THE 2002 BERLIN CONFERENCE ON THE HUMAN DIMENSIONS OF GLOBAL ENVIRONMENTAL CHANGE ‘KNOWLEDGE FOR THE SUSTAINABILITY TRANSITION. THE CHALLENGE FOR SOCIAL SCIENCE’ 154 (Frank Biermann et al. eds., 2004).

133. See generally Ellerman & Buchner, supra note 105; Michaelowa & Butzengeiger, supra note 105.

134. As Greenspan Bell asks: “is it realistic to expect that countries only beginning the process of environmental protection can start with the most difficult environmental instruments?” Her answer is “no.” Ruth Greenspan Bell, Choosing Environmental Policy Instruments in the Real World, OECD CCNM/GF/SD/ENV(2003)10/FINAL, at 20 (2003), available at http://www.oecd.org/dataoecd/11/9/2957706.pdf.

135. For example, Winkler et al. point out that, for African countries, the establishment of the institutions required is not proportional to the emissions that need to be reduced in Africa. See Harald Winkler et al., Developing Institutions for the Clean Development Mechanism (CDM): African Perspectives, 5 CLIMATE POL’Y 209, 210 (2005).

136. See Decision 18/CP.7, supra note 127 (providing an overview of the eligibility requirements for international emissions trading under the Kyoto Protocol).

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will need to weigh the potential benefits of financial inflows through international emissions trading against the costs of adhering to their eligibility requirements. It is net benefits that matter.”137 Without sufficient resources, developing countries would thus not be able to participate on equal footing in an international emissions trading scheme or reap the benefits from the CDM.138 Developing countries could be further at a disadvantage, because they lack the “infrastructure and managerial capabilities necessary to evaluate and negotiate potential bargains.”139 Although the Kyoto Protocol does not yet extend international emissions trading to developing countries, it is important to keep this concern in mind in the light of calls to create a global carbon market.140

C. The Clean Development Mechanism and Developing Countries

The CDM has been under continuous development, and every meeting since the Kyoto conference has added to the increasingly complex CDM rulebook. The most important decisions were made in 2001 at COP-7 in Marrakech, where the modalities and procedures for the mechanism were agreed upon, and in 2003 at COP-9 in Milan, where the controversial issue of the use of sinks in the CDM was largely resolved. The Marrakech Accords included a “prompt start” decision, allowing CDM projects started from 2000 onwards to receive credit retroactively after the Kyoto Protocol’s entry into force.141 Furthermore, the Accords established the governing body for the CDM, the Executive Board, which is responsible for approving and registering projects, as well as

137. Kevin A. Baumert et al., Great Expectations: Can International Emissions Trading Deliver an Equitable Climate Regime?, 3 CLIMATE POL’Y 137, 141 (2003).

138. Furthermore, Baumert et al. add that if a developing country would indeed be found ineligible, and would thus be excluded from trading, this would have severe impacts on the market if this country happens to be an active market participant (i.e. a large buyer or seller). Id.

139. Richman, supra note 9, at 166. 140. See, e.g., Communication from the Commission to the Council, the European Parliament,

the European Economic and Social Committee and the Committee of the Regions. Building a Global Carbon Market—Report Pursuant to Article 30 of Directive 2003/87, at 2, COM (2006) 676 final (Nov. 13, 2006) (“The EU is committed to a global carbon market as a key instrument for tackling climate change.”).

141. See also Decision 17/CP.7, supra note 89, para. 1.

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issuing credits.142 The Executive Board meets frequently, and has provided additional guidance to the various actors involved in CDM projects. In the last few years, the number of CDM projects registered with the UNFCCC has mushroomed.143 This surge in projects has increased the burden on the Executive Board, which has to approve each CDM project.

Increasingly, observers note that there is an inherent tension between the mechanism’s objectives, and that tradeoffs are inevitable.144 The main criticism can be summarized as follows: the CDM focuses too much on ensuring that Annex B countries achieve their targets in a cost-effective fashion, and too little on ensuring sustainable development in non-Annex B countries. More specific concerns regarding the design of the mechanism are discussed below.

1. Additionality and perverse incentives.

One of the key issues in the debate over the CDM involves the concept of additionality, the idea that a specific project activity would not have occurred without the CDM.145 The term

142. See id. Annex, para. 5. 143. See Jørgen Fenhann et al., UNEP Risø Centre, CDM Pipeline Overview (Mar. 1,

2009), http://cdmpipeline.org/overview.htm; see also Lambert Schneider, Is the CDM Fulfilling its Environmental and Sustainable Development Objectives? An Evaluation of the CDM and Options for Improvement, 21-22 (Nov. 5, 2007), available at http://www.oeko.de/ oeko

market liberalism, see Driesen, Sustainable Development and Market Liberalism, supra note 9.

doc/ 622/2007-162-en.pdf. 144. See, e.g., Hans H. Kolshus et al., Can the Clean Development Mechanism Attain Both

Cost-effectiveness and Sustainable Development Objectives? Cicero Working Paper 19 (2001), available at http://www.cicero.uio.no/media/1316.pdf (“[T]here can be a built-in conflict in some CDM projects between fulfilling cost-effectiveness criteria and meeting Sustainability [sic] criteria, especially at the same time.”); CHRISTOPH SUTTER, SUSTAINABILITY CHECK-UP FOR CDM PROJECTS: HOW TO ASSESS THE SUSTAINABILITY OF INTERNATIONAL PROJECTS UNDER THE KYOTO PROTOCOL 66 (2003), http://www.up.ethz.ch/research/group_imboden/cdm_assessment/Sutter_2003_Sustainability_Check-Up_for_CDM_Projects__e-book_.pdf (explaining that “there exists a clear trade-off between the two objectives of the CDM”); Karen Holm Olsen, The Clean Development Mechanism’s Contribution to Sustainable Development: A Review of the Literature, 84 CLIMATIC CHANGE 59, 67 (2007) (stating that “[i]t is widely documented that this involves trade-offs between the two goals of the mechanism in favour of producing low-cost emission reductions at the expense of achieving [sustainable development] benefits”). For a broader view of how the CDM is exemplary of tensions between sustainable development and

145. Kyoto Protocol, supra note 1, art. 12 para. 5(c). See also Decision 17/CP.7, supra

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“additionality” has various dimensions. A project could imply a trend break from current technological practice resulting in the transfer of best available technologies to the host country, which would make it technologically additional. A project could also be a more costly, but lower-emitting, alternative to common (baseline) practice, through which the project would satisfy the requirement of investment additionality.146 The additionality requirement aims to ensure that Annex B countries do not comply with their obligations under the Kyoto Protocol through the purchase of credits from projects that would have also been realized if this purchase had not taken place.

To estimate a project’s emission reductions, the project developer proposes a baseline emission scenario of what would happen in the absence of the CDM project activity. Against this baseline, the emission reductions of the CDM project activity are measured and credited. If the emissions in such a baseline scenario—indicating what is business-as-usual—are unrealistically high, the project developer could claim more credits. In the most extreme cases, project developers could even get paid for activities that would have occurred anyway. This creates an inherent incentive for both the host and the investing party to cheat. Adding to the challenge is that it is often difficult to obtain the necessary data for baseline development. It is, of course, impossible to verify baseline data with absolute certainty, because the CDM activity ensures that the business-as-usual scenario will not occur.

To address these concerns, the CDM Executive Board only approves projects using approved baseline methodologies, and it has developed a complex additionality test.147 However, there has

note 89, Annex, para. 43 (explaining that “[a] CDM project activity is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that wou

from and not counted towa

ld have occurred in the absence of the registered CDM project activity”). 146. There are also other types of additionality, which have been described in the

literature. See, e.g., Sandra Greiner & Axel Michaelowa, Defining Investment Additionality for CDM Projects—Practical Approaches, 31 ENERGY POL’Y 1007, 1008 (2003). Another form of additionality is financial additionality, which means that CDM investments should not result in diversion of Official Development Assistance. See Decision 17/CP.7, supra note 89, pmbl. (“[P]ublic funding for [CDM] projects from Parties in Annex I is not to result in the diversion of official development assistance and is to be separate

rds the financial obligations of Parties included in Annex I.”). 147. The most recent version of the tool was adopted in May 2008. See Exec. Bd. of

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been pressure from business associations and some Annex B countries to open the door for an “environmental additionality” test that would merely require that emission reductions be below the business-as-usual scenario.148 The difference is subtle, yet important, as Pearson and Loong clarify: “environmental additionality compares the difference in emissions ‘with’ and ‘without’ the project, but does not test the difference in emissions ‘with’ and ‘without’ the CDM.”149 The former would merely require project proponents to show that emission reductions would occur below the constructed baseline, whereas the latter adds up to a more stringent requirement of showing that the project would not have happened without the investments made through the CDM. Although the Executive Board has not fully embraced this form of additionality, it adopted a decision in 2006 to combine the tests for baseline methodology and additionality for some project activities.150 In other words, if a certain baseline methodology is approved, these projects will automatically be considered additional.

Weakening the additionality requirement not only endangers the environmental integrity of the CDM, but it also allows Annex B countries to feign leadership in reducing greenhouse gas emissions.151 If emission reductions are not truly additional, but nevertheless generate credits, Annex B countries are able to claim that they are taking the lead in reducing greenhouse gas

the Clean Development Mechanism of the Kyoto Protocol, Thirty-Ninth Meeting Report, Annex 10, U.N. Doc. CDM-EB-39 (May 16, 2008), available at http://cdm.unfccc.int /EB/039/eb39_repan10.pdf. Even with this tool, it remains a formidable challenge to assess whether a project is truly additional. Schneider, supra note 143, at 27-45.

148. See AARON COSBEY ET AL., MAKING DEVELOPMENT WORK IN THE CDM: PHASE II OF THE DEVELOPMENT DIVIDEND PROJECT 61 (2006), available at http://www.iisd.org/ pdf/2007/ making_dev_work_cdm.pdf.

149. BEN PEARSON & YIN SHAO LOONG, THIRD WORLD NETWORK, THE CDM: REDUCING GREENHOUSE GAS EMISSIONS OR RELABELLING BUSINESS AS USUAL? 5 (2003), available at http://www.twnside.org.sg/title/cdm.doc.

150. The additionality tool is only applicable to “project activities where all identified alternative baseline scenarios are under the control of the project participants.” Exec. Bd. of the Clean Development Mechanism, supra note 147, at 63.

151. Driesen, Free Lunch or Cheap Fix, supra note 9, at 49-55 (discussing the relation between emissions trading and developed country leadership); Taishi Sugiyama & Axel Michaelowa, Reconciling the Design of CDM with Inborn Paradox of Additionality Concept, 1 CLIMATE POL’Y 75, 76 (2001) (noting that inflated baselines “might undermine the integrity of numerical commitment of industrial countries”).

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emissions, even though such emission reductions may not have taken place to the extent claimed.

The concept of additionality also leads to consideration of another drawback of the CDM. Existing policies in CDM host countries naturally count as business-as-usual developments, and therefore emission reductions under these policies do not count. This creates a perverse incentive for host country governments to abstain from formulating greenhouse-gas-reducing policies and measures. The perversity lies in the fact that if countries adopt new and stricter environmental policies, their prospects of getting emission reductions funded under the CDM are reduced.152 This is not solely a theoretical concern: for example, several Latin American countries have expressed their fear of losing out on CDM funding.153 Many developing country policy documents list a number of policy options that they wish to support, such as renewable energy and energy efficiency measures. However, there may be limited resources to fund projects in these areas. Should developing countries then refrain from adopting such policies in the hope of obtaining CDM funding? The Executive Board partially addressed this problem by categorizing projects as additional if their implementing policies had been agreed upon after 2001.154 Furthermore, the Board has adopted a decision to approve programs of activities as single CDM projects, known as “programmatic CDM.”155 These programs could potentially provide support for climate change mitigation policies in developing

152. Jyoti Parikh & Kirit Parikh, The Kyoto Protocol: An Indian Perspective, 5 INT’L REV. ENVTL. STRATEGIES 127, 139-40 (2004).

153. Christiana Figueres, Sectoral CDM: Opening the CDM to the Yet Unrealized Goal of Sustainable Development, 2 MCGILL INT’L J. SUST. DEV. L. & POL’Y 5, 12-13 (2006).

154. See Exec. Bd. of the Clean Development Mechanism, Twenty-Second Meeting Report, Annex 3, ¶ 7(b), U.N. Doc. CDM-EB-22 (Nov. 25, 2005), available at http://cdm.unfccc.int/ EB/022/eb22_repan3.pdf.

155. See Exec. Bd. of the Clean Development Mechanism, Twenty-Eighth Meeting Report, Annex 15, U.N. Doc. CDM-EB-28 (Dec. 16, 2006), available at http://cdm.unfccc.int/EB/028/eb28_repan15.pdf. A program of activities is “a voluntary coordinated action by a private or public entity which coordinates and implements any policy/measure or stated goal (i.e. incentive schemes and voluntary programmes), which leads to anthropogenic GHG emission reductions or net anthropogenic greenhouse gas removals by sinks that are additional to any that would occur in the absence of the [programme].” Exec. Bd. of the Clean Development Mechanism, Glossary of CDM Terms (Version 04), UN. Doc. CDM-Glos-04, at 24 (Aug. 2, 2008), available at http://cdm.unfccc.int/Reference/Guidclarif/glos_CDM_v04.pdf.

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countries and may potentially cancel out some of the perverse incentives.156

Although the initiatives of the Executive Board aim to tackle the perverse incentive issue and encourage developing countries to pursue a cleaner development path, they simultaneously dilute the additionality requirement, as business-as-usual activities may be credited. There is thus a clear tradeoff between the pursuit of environmental integrity and developed country leadership on the one hand, and the need to support climate-friendly policy initiatives in developing countries on the other.

2. Concentration of project types and sustainable development.

The Kyoto Protocol’s Article 12 can be interpreted in such a way that it does not allow projects that do not contribute to sustainable development to be funded through the CDM.157 Determining which projects contribute to sustainable development and which ones do not, however, is highly context-specific and subjective. This difficulty is part of the reason why the definition of sustainable development is left up to the non-Annex B host countries.158 However, it is perhaps possible to indicate which projects have more benefits than others in terms of their contribution to sustainable development. At the very least, we would argue that contributing to sustainable development means something more than just reducing greenhouse gas emissions. Otherwise, every project that reduces emissions against a baseline would qualify as a CDM project that contributes to sustainable development.159 Yet, the reality is that most CDM funding flows to

156. See, e.g., Patrick Matschoss, The Programmatic Approach to CDM: Benefits for Energy Efficiency Projects, 1 CARBON & CLIMATE L. REV. 119, 128 (2007) (arguing that although “‘programmatic CDM’ still needs to prove itself, it holds potential to increase the number of energy efficiency projects”).

157. This is based on the reasoning that projects that do not contribute to sustainable development are not serving all purposes for which the CDM was created.

158. See Decision 17/CP.7, supra note 89, pmbl. (stating that “it is the host Party’s prerogative to confirm whether a [CDM] project activity assists it in achieving sustainable development”) & ¶ 40(a) (describing the role of the host countries’ designated national authority in determining whether a project contributes to sustainable development).

159. Although we acknowledge that greenhouse gas emissions are an important part of determining whether projects contribute to sustainable development, we would argue against viewing it as the only determinant. After all, if the reduction of greenhouse gas emissions were the only determinant of a “good” CDM project, there would be no

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projects with high greenhouse gas emission reduction potential, but no or questionable non-climate sustainable development benefits.160 While developing host countries could try to influence this development, for instance by setting higher sustainable development standards, they are unlikely to do so individually, as this might mean that CDM projects move to neighboring countries that offer better returns on investment.161 Eventually, these countries are confronted with the simple facts that CDM investors will search for projects that are low cost and relatively easy to initiate,162 and that contributions to sustainable development have no monetary value under the CDM.163

Pearson argues that “[t]he question of whether the CDM is promoting sustainable development can be framed primarily in terms of whether it is promoting [renewable energy] in developing countries and thus assisting in the transition away from fossil fuels.”164 The CDM projects currently under development demonstrate some clear trends. Although, in terms of numbers, a majority of the projects are in the area of renewable energy, most of the expected credits until 2012 are generated through projects that reduce emissions of greenhouse gases with high global warming potential,165 such as hydrofluorocarbons (HFCs), nitrous

particular reason to include a separate sustainable development objective for the CDM. 160. See, e.g., JANE ELLIS ET AL., ORGANIZATION FOR ECONOMIC COOPERATION AND

DEVELOPMENT, TAKING STOCK OF PROGRESS UNDER THE CLEAN DEVELOPMENT MECHANISM (CDM) 32 (2004), available at http://www.oecd.org/dataoecd/58/58/32141417.pdf (arguing that “a large and rapidly growing portion of the CDM project portfolio has few direct environmental, economic or social effects other than [greenhouse gas] mitigation, and produces few outputs other than emissions credits”).

161. Schneider, supra note 143, at 47. 162. This relates to another concern that has been voiced frequently, namely that of

“low-hanging fruit.” The argument here is that Annex I countries are looking for the cheapest options worldwide to reduce their emissions, so they will primarily invest in those projects which reduce most emissions—and hence result in the greatest number of CERs—at the least cost. However, if one accepts that developing countries will need to take on commitments in the future, irrespective of the form of these commitments, this would leave them with only the more costly greenhouse gas emission abatement options. See Driesen, Free Lunch or Cheap Fix, supra note 9, at 49; Richman, supra note 9, at 161-62.

163. Schneider, supra note 143, at 61. 164. Ben Pearson, The CDM is Failing, 56 TIEMPO 12 (July 2005), available at

http://www.tiempocyberclimate.org/portal/archive/pdf/tiempo56low.pdf. 165. Global warming potential is a way to estimate the relative impact on the climate

system by emissions of different greenhouse gases. IPCC, CLIMATE CHANGE 2007: THE PHYSICAL SCIENCE BASIS: CONTRIBUTION OF WORKING GROUP I TO THE FOURTH

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oxide (N2O), and methane (CH4).166 Although these projects may result in considerable emission reductions, “a project’s local impact on sustainable development does not depend on the number of CERs it generates.”167 It is not by definition the case that a renewable energy CDM project provides more sustainable development benefits than nonrenewable energy projects;168 in fact, studies point out that most of the nonrenewable energy projects that are now flooding the carbon market do not score

ASSESSMENT REPORT OF THE INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE 946 (Susan Solo

the question of the CDM’s contribution to susta

tions and Ways Forward, 6 INT’L ENVTL. AGR

ies to mee

mon et al. eds., 2007). 166. On March 1, 2008, there were a total of 4541 CDM projects at various stages of

the CDM project cycle (excluding projects withdrawn and rejected by the CDM Executive Board). See Jørgen Fenhann et al., UNEP Risø Centre, CDM Projects Overview, http://cdmpipeline.org/overview.htm. In numbers of projects, renewable energy such as hydro (1195), biomass energy (688), and wind (661) dominate, as compared to HFC (23) or N2O (66) projects. However, the latter two still account for twenty-six percent of the total generated CERs until 2012 and seventy-six percent of all CERs issued. See Jørgen Fenhann et al., UNEP Risø Centre, CDM Projects by Type (Mar. 1, 2009), available at http://cdmpipeline.org/cdm-projects-type.htm; see also KJETIL RØINE & HENRIK HASSELKNIPPE, POINTCARBON, CARBON 2007: A NEW CLIMATE FOR CARBON TRADING, 32 (Mar. 13, 2007), available at http://www.pointcarbon.com/polopoly_fs/1.189!Carbon_ 2007_final.pdf (noting that “a huge chunk of the volumes contracted in 2006 were from HFC-23 and N2O adipic acid projects”). It should be noted, however, that the share of renewable energy is increasing, not only in terms of numbers of projects, but also with regard to credits issued. Source on file with author, updated data available at http://cdmpipeline.org/cdm-projects-region.htm. We acknowledge that concerns over the sustainable development contribution of HFC and N2O projects may decrease over time, as the mitigation potential of these and other non-CO2 gases is much smaller than that of CO2. See CAMES ET AL., FEDERAL MINISTRY OF ENVIRONMENT, NATURE CONSERVATION AND NUCLEAR SAFETY, LONG-TERM PROSPECTS OF CDM AND JOINT 43 (2007), available at http://www.umweltdaten.de/publikationen/fpdf-l/3294.pdf. However, as long as there are ways to earn credits through these types of projects, or other projects which result in large-scale reductions at low cost, it is likely that

inable development will remain pertinent. 167. Wolfgang Sterk & Bettina Wittneben, Enhancing the Clean Development Mechanism

Through Sectoral Approaches: Definitions, ApplicaEEMENTS: POL. L. & ECON. 271, 276 (2006). 168. In particular, there has been widespread criticism about large hydroelectric

projects, perhaps best expressed by the World Commission on Dams, which concluded that although dams have made an important contribution to human development, large dams bring “an unacceptable, and often unnecessary price . . . especially in social and environmental terms.” WORLD COMMISSION ON DAMS, DAMS AND DEVELOPMENT: A NEW FRAMEWORK FOR DECISION-MAKING 310 (2000). Furthermore, the use of nuclear energy remains controversial. For the CDM, Parties to the Kyoto Protocol have determined that “Annex I Parties are to refrain from using [CERs] generated from nuclear facilit

t their commitments under Article 3.1.” Decision 17/CP.7, supra note 89, pmbl.

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o contribution to sus

high on certain sustainable development indicators.169 Looking at indicators for economic, social and environmental development, Sutter and Parreño show that the greatest amounts of CERs are being generated by projects with the lowest or n

tainable development in the host countries.170 The problem is that there are a number of barriers to

widespread use of the CDM in the promotion of renewable energy and energy efficiency. One of these problems is achieving additionality; since energy efficiency projects often pay for themselves through reduced energy costs over time,171 and both (small-scale) renewable energy and energy efficiency projects typically generate few credits, this makes it difficult to prove that without the CDM these projects would not have happened.172 In contrast, it is quite easy to prove additionality for end-of-pipe projects involving gases such as HFCs and N2O, especially when there are no national regulations on these gases and when CERs form the only return on the investment.173 Another hurdle for renewable energy and energy efficiency projects is that, in general,

169. See AARON COSBEY ET AL., INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT, REALIZING THE DEVELOPMENT DIVIDEND: MAKING THE CDM WORK FOR DEVELOPING COUNTRIES. PHASE 1 REPORT 14-15 (2005), available at http://www.iisd.org/pdf/2005/climate_realizing_dividend.pdf (noting that HFC23 projects would be unlikely to score highly on sustainable development aspects); Schneider, supra note 143, at 48 (stating that “these projects types appear to have very few or no benefits for sustainable development”).

170. Christoph Sutter & Juan Carlos Parreño, Does the Current Clean Development Mechanism (CDM) Deliver its Sustainable Development Claim? An Analysis of Officially Registered CDM Projects, 84 CLIMATIC CHANGE 75, 88 (2007). But see BOYD ET AL., TYNDALL CENTRE FOR CLIMATE CHANGE RESEARCH, THE CLEAN DEVELOPMENT MECHANISM: AN ASSESSMENT OF CURRENT PRACTICE AND FUTURE APPROACHES FOR POLICY 20 (2007) (noting that a review of the contribution to sustainable development of 10 CDM projects “shows no causal relationship between project types and sustainable development outcomes”). The projects they examined, however, did not include HFC and N2O projects. See id. at 18-20.

171. See David M. Driesen, Links Between European Emissions Trading and CDM Credits for Renewable Energy and Energy Efficiency Projects 18 (Sept. 8, 2006) (unpublished manuscript), available at http://ssrn.com/abstract=881830.

172. See MARTIN BURIAN, THE CLEAN DEVELOPMENT MECHANISM, SUSTAINABLE DEVELOPMENT AND ITS ASSESSMENT 64 (Thomas Straubhaar et al. eds., 2006) (mentioning the example of small-scale hydro projects); Matschoss, supra note 156, at 119 (noting that energy savings are likely to be dispersed and not constrained to one project site); Driesen, supra note 172, at 18 (noting that energy efficiency projects “typically involve many low volume steps”).

173. See JANE ELLIS & FRÉDÉRIC GAGNON-LEBRUN, ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT, THE CDM PORTFOLIO: UPDATE ON NON-ELECTRICITY PROJECTS 6-7 (2004), available at www.oecd.org/dataoecd/25/32/34008610.pdf.

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countries in .178

these projects require more investment per generated carbon credit than other options.174 The result is that renewable energy and energy efficiency projects have been “crowded out” by the low-cost, high-credit projects.175 Finally, the lengthy process to register CDM projects has been cited as a major hurdle for starting projects with potential sustainable development benefits.176

The sobering conclusion is that the CDM in its current form has the potential to promote technology transfer and contribute to local sustainable development in many ways, but practical constraints orient projects primarily toward reducing greenhouse gas emissions. This trend results in only marginal additional benefits for the host countries.177 It thus seems that these projects are designed more to help Annex B countries achieve compliance with their international commitments than to aid non Annex-B

achieving sustainable development

3. Regional concentration of projects.

The CDM ideally provides an incentive for climate change mitigation projects throughout the developing world. However, soon after the start of the mechanism, it became clear that not everyone would benefit in the same way from the resources flowing from Annex B countries.179 The division of projects is very skewed,

174. See Pearson, supra note 164, at 13; Matschoss, supra note 156, at 119. 175. See BURIAN, supra note 172, at 63 (“As demand for CERs is not completely

inelastic, it must be concluded that the existence of gas capture and destruction projects showing hardly any development impact . . . decreases the CER price significantly and thereby reduces CDM’s capability to co-finance high impact renewable energy projects in Non-

yoto requirements and to promote susta

ctions. Left out of the market, how

ment path

F CDM PROJECTS AMONG

Annex I countries.”). 176. See, e.g., Mindy Nigoff, The Clean Development Mechanism: Does the Current Structure

Facilitate Kyoto Protocol Compliance? 18 GEO. INT’L ENVTL. L. REV. 249, 271 (2006) (arguing that “the lengthy registration process is a substantial hurdle to the effective use of the CDM to assist Annex I countries in meeting their K

inable development in non-Annex I countries”). 177. See Holm Olsen, supra note 144, at 67 (“The real problem is that the CDM works

perfectly as it produces the lowest-cost emission reduever, are the [sustainable development] benefits.”). 178. Cf. Kevin A. Baumert, Participation of Developing Countries in the International

Climate Change Regime: Lessons for the Future, 38 GEO. WASH. INT’L L. REV. 365, 387 (2006) (arguing that “the mechanism has little capacity to assist developing countries in ‘achieving sustainable development’. . . . [and that] genuine altering of develop

s is likely to require policy interventions of the kind precluded by CDM rules”). 179. See generally ALAN SILAYAN, EQUITABLE DISTRIBUTION O

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and in particular sub-Saharan African countries seem to have missed the boat when it comes to the CDM. The unbalanced regional concentration of projects is obvious when looking at the number of CDM projects in the pipeline. Whereas in the Asia-Pacific region, 3493 projects are at some stage of the project cycle (of which 1682 are in China and 1208 are in India), for sub-Saharan Africa this number is only 69 (of which 28 are in South Africa).180 This inequity can also be observed if we examine the number of credits generated in various regions. China alone, for example, accounts for more than twenty-three times the amount of expected total CERs until 2012 than sub-Saharan Africa.181 It can be argued that the distributional concerns regarding the CDM should be moderated to some extent if other variables—such as population, gross domestic product, and energy use—are taken into account.182 Cosbey et al. put it succinctly: “nobody would expect China and Fiji to have similar CDM profiles.”183 Nevertheless, on a regional level the project division is at odds with the “equitable geographic distribution of clean development mechanism project activities at regional and subregional levels” envisaged in the Marrakech Accords.184 Explanatory factors for this situation are likely to be related to the possibilities of emission reductions (mitigation potential) in certain non-Annex B countries relative to others.185 A further explanation for the situation in Africa points to the greater institutional bottlenecks in Africa that would make it much more difficult to undertake projects within a short time frame. Addressing this issue thus also

DEVELOPING COUNTRIES (Thomas Straubhaar et al. eds., 2005). 180. See Jørgen Fenhann et al., UNEP Risø Centre, CDM Projects by Host Region

(Mar. 1, 2009), on file with author, updated data available at http://cdmpipeline.org/cdm-projects-region.htm.

181. Id. According to this overview, China may generate 1,567,120 kCERs (1 kCER = 1,000 CERs) by 2012, whereas the whole of sub-Saharan Africa—i.e. the African countries excluding Egypt, Morocco and Tunisia—is expected to generate only of 67,585 kCERs.

182. See COSBEY ET AL., supra note 148, at 26. 183. Id. 184. Decision 17/CP.7, supra note 89, pmbl. 185. In addition, Jung identifies institutional CDM capacity and general investment

climate as important indicators for a host country’s attractiveness. See Martina Jung, Host Country Attractiveness for Non-sink CDM Projects, 34 ENERGY POL’Y 15, 2173-74 (2006). This idea should be kept in mind, as it implies that it is insufficient to address the inequitable geographical division merely by dealing with the scope of cost-efficient emission reductions.

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requires dealing with broader institutional capacity questions that have an impact on the investment climate of a particular country or region.186

At COP/MOP-2 in 2006, the lack of equitable geographical distribution came to the forefront. United Nations Secretary-General Kofi Annan, in an address to the Parties, announced the “Nairobi Framework,” a joint initiative of the UNFCCC secretariat, the United Nations Development Programme, the United Nations Environment Programme, the World Bank, and the African Development Bank, which is aimed at strengthening Africa’s position in obtaining CDM projects. It is, however, still too early to evaluate the effectiveness of the initiative. The COP/MOP also addressed the issue in a number of decisions, stressing “that further efforts are necessary to promote equitable regional distribution of [CDM] project activities.”187 At the COP/MOP in Poznań in 2008, the Parties not only encouraged further capacity building to address the geographical distribution, but they also requested that the Executive Board streamline the process for countries hosting less than ten CDM projects.188 Although efforts are thus underway to address the geographical imbalances in the

186. See also COSBEY ET AL., supra note 148, at 28 (arguing that “[s]etting up a conducive environment in which to foster CDM investment is a difficult and resource-inte e

m, ¶¶ 48-63, D

elating to the Clean Development Mechanism, Draft Decision, -/CM 187, ¶ 53.

nsive ffort, which simply may not make sense for some countries”). 187. Conference of the Parties of the UNFCCC Second Session Serving as the

Meeting of the Parties to the Kyoto Protocol, Second Session, Nairobi, Kenya, Nov. 6-17, 2006, Report of the Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol on Its Second Session, Further Guidance Relating to the Clean Development Mechanism, ¶ 38, U.N. Doc. FCCC/KP/CMP/2006/10/Add.1, Decision 1/CMP.2 (Mar. 2, 2007); see also Conference of the Parties of the UNFCCC Serving as the Meeting of the Parties to the Kyoto Protocol, Second Session, Nairobi, Kenya, Nov. 6-17, 2006, Report of the Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol on Its Second Session, Capacity-building Under the Kyoto Protocol, U.N. Doc. FCCC/KP/CMP/2006/10/Add.1, Decision 6/CMP.2 (Mar. 2, 2007); Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol Serving as the Meeting of the Parties to the Kyoto Protocol, Third Session, Bali, Indonesia, Dec. 3-15, 2007, Further Guidance Relating to the Clean Development Mechanism, ¶¶ 26-42, U.N. Doc. FCCC/KP/CMP/2007/9/Add.1, Decision 2/CMP.3 (Mar. 14, 2008); Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol, Third Session, Further Guidance Relating to the Clean Development Mechanis

raft Decision-/CMP.4, U.N. Doc. FCCC/KP/CMP/2008/L.6 (Dec. 12, 2008). 188. See Further Guidance RP.4, supra note

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CD pertinent, as indicated by the Parties in Poz

een as compatible with market principles is likely to be a sticking point. Furthermore, not all countries have the same market power and would thus be able to set such a minimum pric

M, the concern remains nań.189

4. Risk of unfair pricing.

It has been argued that the “commercial paradigm” surrounding the CDM leads to a number of problems, which can be summarized as follows: “[t]he current CDM regime does not establish fair pricing, due to the asymmetry of information that host countries have about the purchasing countries. On the other hand, all details from host countries are available to the purchasing countries.”190 They argue that markets cannot function in a fair and equitable fashion, and that there is no information to assist developing countries to demand a fair price for the carbon that is being sold.191 A way out of this dilemma is to introduce a minimum price for developing countries as a whole, but whether that is s

e.

5. Adaptation levy.

Finally, one criticism is that the CDM—unlike the similar mechanisms set up for emissions trading between Annex B countries—imposes costs on projects implemented in non-Annex B countries through charging an “adaptation levy” of two percent on the share of proceeds of each project, designed to cover the costs of the impacts of climate change on developing countries.192 Although the levy could provide an important source of revenues for adaptation activities in the South,193 it is only charged for CDM

189. Id. ¶ 50. 190. Parikh & Parikh, supra note 152, at 142.

Package for Developing Countries, 8 REV. EUR. CMTY. & INT’L ENVTL. L. 198,

C and GEF Deve

191. Id. at 135, 139. 192. Kyoto Protocol, supra note 1, art. 12 para. 8; Decision 17/CP.7, supra note 89,

para. 15(a). Least-developed countries are exempt from the levy. Id. para. 15(b). For a critique, see, e.g., Joyeeta Gupta, North-South Aspects of the Climate Change Issue: Towards a Constructive Negotiating

204-05 (1999). 193. The revenues from the levy are channelled toward the Kyoto Protocol’s

Adaptation Fund. See M.J. Mace, Funding for Adaptation to Climate Change: UNFCClopments since COP-7, 14 REV. EUR. CMTY. & INT’L ENVTL. L. 226, 240 (2005).

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oto Protocol.194 Extending the levy t address this inequity, but it for additional funding for adaptation.195

ECHANISMS BEYOND

developing country considerations.196 It is very likely that flexibility mechanisms will be part of any future climate regime,197 given that

projects, and not for JI projects or transaction in the context of international emissions trading. No basis for such differentiation can be found in the UNFCCC or the Ky

o JI and international emissions trading would not onlycould also provide an important source

III. DEVELOPING COUNTRIES AND FLEXIBILITY M2012

A. The Role of Flexibility Mechanisms Beyond 2012

The previous Part has shown a range of concerns that can be raised with regard to the use of flexibility mechanisms under the Kyoto Protocol. As we will discuss below, these criticisms have increasingly been addressed in the decision-making process. Nevertheless, the post-2012 negotiations launched in Bali provide an important window of opportunity for taking into account

194. Given the many uncertainties still surrounding the instrument of JI and the relatively small size of the tax, the adaptation levy itself most likely would not drive inve

itional USD ten to fifty million. See UNFCCC Secretariat,

Inves

on Further Com

t al., Post-2012

stors away from the CDM. However, this does not make our point moot, as there is still no legal basis for any differentiation between the CDM and the other flexibility mechanisms.

195. The UNFCCC Secretariat estimated that the extension of the share of proceedscould contribute an add

tment and Financial Flows to Address Climate Change, 203 (Oct. 2007), available at http://unfccc.int/files/cooperation_and_support/financial_mechanism/application/pdf/background_paper.pdf.

196. For example, flexibility mechanisms were on the agenda at the Ad Hoc Working Group on Further Commitments for Annex I Parties Under the Kyoto Protocol in August 2008. See Ad Hoc Working Group on Further Commitments for Annex I Parties Under the Kyoto Protocol, Emissions Trading and the Project-based Mechanisms, Draft Conclusions Proposed by the Chair, U.N. Doc. FCCC/KP/AWG/L.12 (Aug. 27, 2008). The Parties have provided a number of suggestions on how the design of flexibility mechanisms could be improved. For a synthesis of these views, see Ad Hoc Working Group

mitments for Annex I Parties Under the Kyoto Protocol, Elaboration of Possible Improvements to Emissions Trading and the Project-based Mechanisms Under the Kyoto Protocol, Note by the Chair, U.N. Doc. FCCC/KP/AWG/2008/INF.3 (Nov. 24, 2008).

197. Reviewing the role of market mechanisms for sustainable development in various post-2012 proposals, Cosbey et al. conclude that “perhaps the one thing on which there is broad consensus in the international talks on a post-2012 climate change regime is the need for some perpetuation of the CDM—a market mechanism for sustainable development.” COSBEY ET AL., supra note 5, at 34. See also Onno Kuik e

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for non-Annex I countries, as well as the env

gradually even the most critical developing countries have embraced the mechanisms.198 However, the design of these mechanisms could be improved in such a way that they result in greater benefits

ironment.199 Although it is still too early to tell how a post-2012 climate

regime will take shape, there are at least two ways in which developing countries could be involved in flexibility mechanisms. First, international emissions trading could be extended to developing countries.200 As noted above, there are calls to create a global carbon market, with not only developed countries, but also developing countries participating over time.201 If such a regime would include the possibility for project-based credit trading à la JI, this would come very close to the existing structure, with the important exception: that there would be no explicit objective to achieve sustainable development in host countries.202 Second, the CDM in its current or in an altered form could continue to exist.203 The CDM could also be used as a mechanism to accommodate those countries that do not ratify any future agreement. After all, the aforementioned AIJ mechanism continues to coexist alongside the CDM, allowing the United States to participate in flexibility mechanisms even though it has not ratified the Kyoto Protocol. One way a non-ratifying country can participate is through bilateral agreements with other countries providing for the mutual recognition of credits, provided that adequate monitoring, reporting and verification systems are in place. It is also still possible that a follow-up agreement to the Kyoto Protocol may not

Climate Change Policy Dilemmas: How Do Current Proposals Deal With Them?, 8 CLIMATE POL’Y 317

n be witnessed by China’s large share in the CDM project pipeline. See infra

715 (arguing that “it is imperative that these mec

discussing post-2012 proposals that envi g schemes, but without the CDM).

ntinued use of CDM).

(2008) (assessing different policy options suggested in forty different proposals, and concluding that a substantial number focus on market-based mechanisms).

198. This ca Part III.D. See also Michael Wara, Is the Global Carbon Market Working?, 445 NATURE

595, 595 (2007). 199. Cf. Sheeran, supra note 9, at

hanisms are used deliberately to distribute the net benefits of climate control fairly and not just to increase efficiency”).

200. See COSBEY ET AL., supra note 5, at 7-10 (sage international or domestic emissions tradin201. See European Commission, supra note 140. 202. See COSBEY ET AL., supra note 5, at 9-10. 203. Id. at 5-7 (discussing proposals that would see the co

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nalysis of options

include flexibility mechanisms at all,204 or that no agreement may be reached in the first place. For the purposes of this Article, however, these scenarios will not be discussed.

The positive features of flexibility mechanisms are currently overshadowed by the emphasis on cost-effective emission reductions, the core rationale of market-based instruments. Potentially, flexibility mechanisms could: 1) accelerate the transfer of climate-friendly technologies to developing countries;205 2) spread awareness of the greenhouse gas emission implications of investment decisions; 3) enable developing countries to gain experience and build capacity in implementing climate-friendly projects;206 4) contribute to funding for adaptation in developing countries;207 5) provide an incentive for developed countries to commit to more stringent targets; and last but not least, 6) provide a significant source of revenues for developing countries.208 The challenge is to exploit these strengths, while at the same time addressing the concerns related to the use of flexibility mechanisms as outlined in Part II. This Part will explore suggestions to improve the design of a post-2012 agreement with a focus on flexibility mechanisms. It will first discuss some essential elements of a post-2012 architecture that could provide an enabling framework for the effective and fair use of flexibility mechanisms in general. This is followed by an ato address the various concerns about the CDM.

204. See id. at 20-24 (discussing a range of proposals for future climate policy that do not envisage the use of market-based flexibility mechanisms).

205. See generally Erik Haites et al., Technology Transfer by CDM Projects, 6 CLIMATE POL’Y 327 (2006).

206. See ELLIS ET AL., supra note 160, at 9. 207. This would be achieved through the “adaptation levy.” See supra Part II.5. 208. See, e.g., Cédric Philibert, How Could Emissions Trading Benefit Developing Countries,

28 ENERGY POL’Y 947, 955 (2000). Other possible benefits of flexibility mechanisms include: its potential contribution to local sustainable development, its potential to steer investments to community-based initiatives that would otherwise be unattractive to investors, and its involvement of the private sector in climate change mitigation. See COSBEY ET AL., supra note 169, at 6-7.

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i

percent in 2020).214 This would require these countries to cut their

B. Creating an Appropriate Foundation for Flexibility Mechanisms Beyond 2012

1. Targets for developed countries.

A first suggestion for establishing a sound basis for the use of flexibility mechanisms beyond 2012 flows from the waning credibility of the leadership principle, as well as considerations regarding the environmental effectiveness of a future climate change treaty. The suggestion is therefore primarily a med at addressing the concern that developed countries do not meet the objective and principles of Articles 2 and 3 of the UNFCCC. The adoption of clear and ambitious short- to medium-term targets could ensure that countries could achieve long-term greenhouse gas concentration stabilization targets,209 and could provide sufficient demand for credits from flexibility mechanisms.210 In this regard, Baer et al. show how one can derive short- to medium-term targets from a long-term greenhouse gas concentration stabilization target on the basis of historical responsibility and capacity.211 They define capacity as “the portion of national wealth that can be reasonably tapped to respond to the climate crisis,”212 and historical responsibility as “cumulative CO2 emissions from fossil fuel consumption since 1990.”213 Combining these two principles, they calculate that a significant share of the global mitigation burden would need to be achieved by some of the richer developed countries, notably the United States (twenty-nine percent in 2020) and the enlarged European Union (twenty-three

209. Most notably, the Fourth Assessment Report of the Intergovernmental Panel on Climate Change indicates that reaching greenhouse gas concentrations in the atmosphere of 450 parts per million (ppm) CO2-equivalent, would require Annex I countries as a group to reduce emissions by 25 to 40 percent by 2020 compared to 1990 levels. See INTE CHANGE (IPCC), CLIMATE CHANGE 2007: MITIGATIO

ELOPMENT RIGHTS FRAMEWORK: THE RIGH PMENT IN A CLIMATE CONSTRAINED WORLD (2008), http:// www ocs/TheGDRsFramework.pdf.

t 70.

RGOVERNMENTAL PANEL ON CLIMATE N OF CLIMATE CHANGE 776 (2007).

210. COSBEY ET AL., supra note 5, at 25. 211. PAUL BAER ET AL., THE GREENHOUSE DEVT TO DEVELO

.ecoequity.org/d212. Id. at 45. 213. Id. at 53. 214. Id. a

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215

2 .218 However, these targets are only politically binding, and not e pledged to achieve equivalent the upcoming post-201

this will also imply that all countries are treated alike. of post-2012 policy proposals

sug

domestic greenhouse gas emissions drastically—perhaps more than ninety p re cent in 2050 from 1990. Stringent targets could lead to the early identification of low-carbon technologies and provide a substantial contribution to the decarbonization of economies in the developing world.216 At the same time, targets could provide stable demand for credits from project-based mechanisms.217

There are some positive signs that developed countries are willing to take on more ambitious targets. For example, the European Union has already set an unconditional twenty percent—and conditional thirty percent—midterm target for itself for 20 0

all other developed countries havdomestic emission reductions. In

2 negotiations, repeating mistakes made in the run-up to Kyoto can be avoided by agreeing on clear and predictable target-setting rules.219

2. Further differentiation and graduation.

A second suggestion aims to enhance the predictability of a future climate regime. It posits that countries should be able to know or assess what the possible consequences of a particular policy choice will be in the coming years. This principle would make it possible for countries to internalize future obligations into current investment decisions, and would send out a clear message to all Parties. Where such a scheme is based on a simple formula,

In this context, a large numbergest ways of gradually increasing the participation level of

215. Id. at 71. 216. Id. 217. See COSBEY ET AL., supra note 5, at 25. 218. See Press Release, Council of the European Union, Council Conclusions,

Climate Change, (Feb. 20, 2007), available at http://www.consilium.europa.eu/ueDocs/ cms_Data/docs/pressData/en/envir/92864.pdf.

219. Professor Frankel proposes a way to achieve transparency and predictability in setting targets. Jeffrey Frankel, Formulas for Quantitative Emission Targets, in ARCHITECTURES FOR AGREEMENT, supra note 5, at 43-46.

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heir diff

developing countries in the global climate regime.220 These multistage proposals require that developing countries assume emissions limitation or reduction commitments that become more stringent over time. The incremental move from one group of countries to another could be based on ad-hoc criteria or on predefined rules for participation and differentiation,221 with the latter increasing the predictability of the system. The underlying rationale of these types of proposals is that 1) to achieve the ultimate objective of the UNFCCC it is eventually necessary that developing countries also take on some kind of commitment; and 2) that not all developing countries are in the same stage of economic development, and that further differentiation between developing countries is possible and desirable given t

erences in areas like economic development, per capita emissions, and capacity to reduce greenhouse gas emissions.222

A method for classifying countries into different categories with each category subject to specific responsibilities would go a long way toward creating long-term clarity, equity and predictability. Countries would then know in advance that pursuing a certain development path will have consequences for their classification in the climate change regime. This would help them take the long-term implications of their investment strategies into account in current planning processes. Such categorization also dissolves the current division of the world into rich and poor, or “developed” and “developing,” and creates space for intermediate categories of countries with different capabilities and responsibilities.223 This shift is especially important as the current

220. See, e.g., Berk & den Elzen, supra note 5; Joyeeta Gupta, Engaging Developing tries in Climate Change: (KISS and Make-Up!), in CLIMATE POLICY FOR THE 21ST

CENTURY: MEETING THE LONG-TERM CHALLENGE OF GLOBAL WARMING 233 (David Michel ed., 2003); Axel Michaelowa et al., Graduation and Deepening: An Ambitious Post-2012 Climate Policy Scenario, 5 INT’L ENVTL. AGREEMENTS: POL. L. & ECONO. 25 (2005); Harald Winkler et al., Future Mitigation Commitments: Differentiating Among Non-Annex I Countries, 5 CLIMATE POL’Y,

Coun

469 (2006); Anita Halvorssen, Common, But Differentiated Commitments in the Future Climate Change Regime—Amending the Kyoto Protocol to Include Annex C and the Annex C Mitigation Fund, 18 COLO. J. INT’L ENVTL. L. & POL’Y 247 (2007).

221. See Berk & den Elzen, supra note 5, at 466. 222. It can be argued that the Kyoto Protocol is itself a multistage approach in that it

distinguishes between Annex B and non-Annex B countries. The proposals mentioned here take this division a step further by making a distinction within these categories.

223. See also Gerber, supra note 10, at 341.

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i may reap more benefits from the use of the CDM, as wealthier developing countries increasingly assume commitments, leaving a greater sha

developed countries could be strict enough to maintain sufficient demand for credits from CDM projects.

Both Parties to the UNFCCC and nongovernmental organizations have suggested quantitative caps in the climate

division of the world under the climate regime is based more on political affiliations than economic or environmental ones. Differentiation would incorporate variations among these political groups, reflecting more accurately the different capacities to act and the responsibilities for causing the climate problem.

With regard to the concerns expressed in Part II, this suggestion reflects the differentiated responsibility also within the broad category of developing countries. Furthermore, through differentiation and graduation, least-developed countr es

re of the CDM market to the poorer developing countries.224 However, where there is no stable and predictable institutional framework, concerns about the use of market-based flexibility mechanisms may persist. Furthermore, it should be noted that differentiation among non-Annex I countries remains an extremely sensitive subject,225 and that predefining categories of countries may thus not be a politically feasible option.226

3. Defining supplementarity.

Even with stringent emission targets, developed countries could evade responsibility by purchasing emission reduction credits abroad. Placing a quantitative cap on the use of credits could avoid this problem.227 A stringent quantitative cap for project-based mechanisms would ensure that most mitigation activities take place in Annex B countries, and that they cannot buy themselves out through emission reductions abroad. At the same time, in conjunction with the first suggestion, the targets of

224. COSBEY ET AL., supra note 5, at 9. 225. See Rajamani, supra note 82, at 925 (noting that “[m]ost developing countries

are o926-28 (arguing that differentiation through auto-election is more

polit

pposed to any efforts to differentiate between them”). 226. Id. at ically feasible compared to differentiation based on definitions and lists). 227. Richman, supra note 9, at 175. See also Driesen, Free Lunch or Cheap Fix, supra

note 9, at 84-85.

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,228 but oth

ple does not only require Annex I countries to reduce emissions, but in addition also to gical support to non-Annex I cou

change negotiations. In 1999, the European Union had advocated a quantitative, differentiated definition of supplementarity

er countries at COP-6 rejected it. Before COP-6, the environmental nongovernmental organization Climate Action Network suggested limiting the use of credits from project-based mechanisms by Annex B countries to thirty percent (with the other seventy percent to be achieved through domestic action).229

Although any intervention in the market might be regarded as problematic by some economists, achieving domestic emission reductions in Annex I countries suggests a need for a clear, quantified restriction on the use of flexibility mechanisms.230 One could argue that, through emissions trading, Annex I countries would also pay for emission reductions, and that the location where this reduction takes place is irrelevant. However, as Driesen points out, the UNFCCC’s leadership princi

provide financial and technolontries.231 Hence, there is a need for Annex I countries to

reduce domestic emissions while at the same time supporting non-Annex I countries in reducing their emissions.

4. Institutional capacity building.

Finally, institutional capacity building in developing countries could mitigate concerns about insufficient information on emissions trading in developing countries, reduce the administrative costs of flexibility mechanisms, and at the very least prepare developing country policymakers for potential implementation of domestic emissions trading systems. However, building institutional capacity for these particular purposes should complement, not substitute for the general capacity-building commitments of Annex I countries as specified in the UNFCCC.232

228. European Council Directive 8346/99, Council Conclusions on a Community Strategy on Climate Change, Annex 1, 1999, 3. See generally Woerdman, supra note 118 (discussing the unde roposal).

(2000), available at http

82.

on capacity building).

rlying rationale of the European Union’s supplementarity p229. CLIMATE ACTION NETWORK, COP6 POSITION PAPER

://www.climnet.org/pubs/cancop6pos.html#cdm. 230. See BAER ET AL., supra note 211, at231. See Driesen, Free Lunch or Cheap Fix, supra note 9, at 51-52. 232. See generally YAMIN & DEPLEDGE, supra note 87, at 315-26 (explaining the

UNFCCC provisions

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especially when the mitigation is low.235 Furthermore, capacity building in olve the problem of geographical inequity,

as s nding projects in countries where investment risks are high due to reasons unrelated to the inst

mdeveloping countries are competing for CDM investments, many will probably choose to accept whichever projects come their

Moreover, in building this capacity, the aim should be to promote investments in projects con rit buting to sustainable development, rather than projects that simply maximize returns to Annex I investors.233 Lastly, capacity building should primarily be directed to those countries with least experience in project-based mechanisms to ensure that the geographical imbalance of CDM projects is not exacerbated.234

In this regard, the “Nairobi Framework” announced at the COP/MOP-2 to address the geographical imbalance in the distribution of CDM projects, as well as the various COP/MOP decisions addressing this issue, appear to be well designed, although it remains to be seen what the effects of these initiatives will be. Capacity building just to ensure a geographical balance does not always make sense,potential in a countryitself does not always s

ome investors are averse to fu

itutional capacity for CDM.

C. Improving the CDM

1. Incentives for sustainability.

To ensure the CDM’s contribution to sustainable development in host countries, it is crucial that host Parties clearly determine which criteria projects should meet and that investor country governments indicate to domestic investors the criteria that the projects need to meet. However, given that a great nu ber of

way.236 Nevertheless, China has set an example by introducing a

233. See also Winkler et al., supra note 135, at 219 (arguing that “[t]he African approach to climate change should focus more broadly on investment in sustainable development”).

234. This is in line with the most recent COP/MOP Decision on the regional distribution of CDM project activities. See Draft Decision-/CMP.4, supra note 187, para. 55.

235. Jung, supra note 185, at 2181. 236. Driesen argues that the emphasis should be on projects that generate credits by

using innovative technologies that address the needs of developing countries. This might

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at the project-bas

differentiated income tax for HFC and N2O projects because of their low sustainable development benefits and low costs.237 Such a tax generates revenue for host countries that could be used for sustainable development purposes and provides incentives to move away from projects with low or no sustainability benefits.238 At the same time, Annex I investor countries could set an example by only investing in projects that have demonstrated sustainable development benefits.239 Labels such as the World Wildlife Fund’s CDM Gold Standard, which review and certify projects contributing to local sustainable development, have been developed for this purpose.240 They aim to ensure th

ed flexibility mechanisms of the Kyoto Protocol contribute to local sustainable development in the host countries.

Additionally, CDM could be reformed to focus solely on renewable technologies and energy security for poorer communities,241 or to exclude certain types of projects according to their impacts on sustainable development.242 Wara, for example, argues that a separate HFC protocol could serve to reduce emissions from HFC installations and that HFC projects should

be good advice for larger developing countries like China and India. See Driesen, Free Lunch or Cheap Fix, supra note 9, at 79.

237. Axel Michaelowa & John O’Brien, Domestic UNFCCC Kyoto Protocol Mechanisms Project Supply Coordination Through Tendering—Lessons from the New Zealand Experience, 11 MITIGATION AND ADAPTATION STRATEGIES FOR GLOBAL CHANGE 711, 716 (2006); see also

FC projects, thirty percent for N O projects, and two percent for renewable energy proj activities that support climate change. Not all c

For a background on the Gold Stan Lèbre La Rovere, Criteria and Indicators for Appr

supra note 239. n Development Mechanism and Sustainable

Deve MENTATION OF THE KYOTO PROTOCOL 73, 90 (Prodipto Ghosh ed., 2000).

242. See Schneider, supra note 143, at 66-67.

Adrian Muller, How to Make the Clean Development Mechanism Sustainable—The Potential of Rent Extraction, 35 ENERGY POL’Y 3203, 3207 (2007). The tax has a rate of sixty-five percent for H 2

ects. The proceeds of the tax are used forountries, however, will have the same political clout as China to implement a similar

tax. 238. Muller, supra note 237, at 3210-11. 239. See Schneider, supra note 143, at 61 (suggesting that Annex I countries could

themselves establish quotas for a minimum amount of “sustainable” CERs). For more information on the CDM Gold Standard, see Gold Standard, http:// www.cdmgoldstandard.org (last visited Feb. 13, 2009).

dard criteria see Steve Thorne & Emilioaising Clean Development Mechanism (CDM) Projects (2002), available at http://www.helio-

international.org/Helio/anglais/climate/ climate.html. 240. See Gold Standard, 241. Tariq Banuri & Sujata Gupta, The Clea

lopment: An Economic Analysis, in IMPLE

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thus be excluded from the CDM.243 Such a protocol could establish a fund, comparable to the Montreal Protocol’s uM ltilateral Fund, which finances the additional costs incurred by developing countries in their transition away from the use of ozone-depleting substances.244 In a similar vein, a “climate fund” could finance project types with low marginal abatement costs.245

Another option is to differentiate in the approval process between projects that clearly contribute to sustainable development and those that do not by relaxing the additionality test for the former and introducing a more stringent test for the latter.246 The drawback of such an approach is that it could adversely affect the environmental integrity of the CDM, as the additionality test is essential for ensuring that CDM projects result in real emission reductions.

A further option for discouraging unsustainable projects, often referred to as “discounting,” would be to issue only a limited number of credits or, in extreme cases (for instance, projects with negative impacts on sustainable development), no credits at all.247 For example, if a project with a low contribution to sustainable development in the host country reduces a hundred tons of CO2-equivalent emissions, only fifty (or twenty, sixty, eighty, etc.) CERs could be issued, while a project with a high contribution to sustainable development would still obtain one CER per ton of emission reductions. Judgments on how much to discount for what type of projects would have a bearing on the revenues of a CDM

243. See Wara, supra note 198, at 596.

tegories of project activities” for which a simplified addi l

eko.de/oekodoc/779/2008-227-en.pdf. See also Rae Kwon Chung, A CER Disco

244. See Michael Wara, Measuring the Clean Development Mechanism’s Performance and Potential, 55 UCLA L. REV. 1759, 1801 (2008).

245. Id., at 1801-02. 246. For example, projects that prove a contribution to sustainable development

could be one of the “defined cationa ity test is applied. Cf. UNFCCC, Analysis of Possible Means to Reach Emission

Reduction Targets and of Relevant Methodological Issues, Technical Paper, ¶ 48, U.N. Doc. FCCC/TP/2008/2 (Aug. 6, 2008).

247. LAMBERT SCHNEIDER, A CLEAN DEVELOPMENT MECHANISM (CDM) WITH ATMOSPHERIC BENEFITS FOR A POST-2012 CLIMATE REGIME (2008), available at http://www.o

unting Scheme Could Save Climate Change Regime after 2012, 7 CLIMATE POL’Y 171 (2007); Andrew Schatz, Discounting the Clean Development Mechanism, 20 GEO. INT’L ENVTL. L. REV. 703 (2008).

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asures would imply additional costs to a CDM project dev

rried out without any policy intervention.”249 Hence, it is not of crucial importance that the most cost-effective projects are financed under the project-based me

project. An important decision for this option would be choosing an appropriate discount rate.248

The options discussed here underline the importance of monitoring and evaluating a project’s contribution to sustainable development, both ex ante and ex post. Therefore, monitoring mechanisms must be in place in developing countries. Although these me

eloper, as well as administrative costs to the developing countries, there would be a clear signal that CDM credits will be issued only when the project creates sustainable development benefits.

As argued in this Article, a project that does not contribute to sustainable development does not pursue one of the goals of the CDM, and should therefore not be eligible to receive CERs. Some of the abovementioned options could exclude very cost-effective projects that reduce large amounts of greenhouse gases, such as the aforementioned HFC and N2O projects. We do not advocate that these projects are undesirable per se—it is their use for Annex B compliance purposes in the absence of sustainable development benefits that should be avoided. Other means of financing these very cost-effective projects are, however, imaginable. As Stavins argues, “[t]he effects of low-cost abatement projects are particularly difficult to estimate because such projects may be nearly profitable in the absence of the [joint implementation] arrangement and hence may be ca

chanisms of the climate regime, especially if there are no sustainable development benefits.250

248. SCHNEIDER, supra note 247, at 26-27. “Discount rate” in this case refers to the rate with which CERs are discounted: for instance, a discount rate of fifty percent would mea

en made previously by David Drie

irable from the CDM’s cost-effectiveness perspective. GRUBB ET AL.,

n that for an emission reduction of two tons, only one CER would be issued. Id. at 22. 249. Stavins, supra note 83, at 311-12. This point has besen. Driesen, Free Lunch or Cheap Fix, supra note 9, at 82. 250. This relates to what Grubb et al. have termed the additionality paradox: the

most cost-effective projects are those that are most likely to go ahead without the CDM, yet they are also the most des

supra note 43, at 228.

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2. Incentives for equitable geographical distribution.

The risk of an inequitable geographical distribution of CDM projects has been recognized by the Parties to the Kyoto Protocol, leading to an exemption of the least-developed countries from the adaptation levy.251 However, this recognition in itself will not provide a substantial shift of investments from one country or region to another.252 A number of other options are conceivable.

First, country quotas could be established, which limit the number of projects per country on an equitable basis (e.g. by focusing on each country’s level of economic development), although there are some drawbacks to this approach.253 The main argument against setting a quota would be the unknown total number of projects, which would make it difficult to allocate a share for a specific region.254 Furthermore, quotas may lead to low quality CDM projects.255 Second, Parties could also award projects executed in specific countries, such as in small island developing states and least-developed countries, with a higher number of CERs. This proposal, however, is at odds with the leadership principle, as it provides additional credits that allow developed countries to increase their emissions. Third, preferential treatment could be granted to those countries that have a small share in the CDM market, including least-developed countries and small island developing states.256 For example, the additionality requirement could be removed for certain types of CDM project activities in these countries.257 The adaptation levy could also be differentiated between “richer” and “poorer” developing countries.258 However, one could wonder to what extent a differentiation of the adaptation levy would redirect investments, given other factors

251. Decision 17/CP.7, supra note 89, ¶ 15(b). 252. Jung, supra note 185, at 2181. 253. Id. 254. See SILAYAN, supra note 179, at 53; see also Banuri & Gupta, supra note 241, at 90

(stating that “[t]he basis (that is, in terms of resources or in terms of future CERs to be generated) in allocating quotas for CDM projects is not clear and may be difficult to implement”).

255. Banuri & Gupta, supra note 241, at 89. 256. See UNFCCC, supra note 246, paras. 57-58. 257. Id. para. 57. 258. See Banuri & Gupta, supra note 241, at 90.

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s, it may be pos

n-constrained future. Nevertheless, options to gently steer CDM inve ries that have so far missed out are available in the

agreement concerns the use of sectoral CDM. One form of sectoral CDM, the bundling of projects, was already allowed by the CO

influencing investment decisions. Fourth, by making further distinctions between types of developing countrie

sible for some countries to graduate out of the CDM, and for others to obtain a greater share of the CDM market. Fifth and finally, developing countries could cooperate on a regional level by working through a CER clearinghouse, which could enhance their bargaining position and could possibly result in fairer pricing, as well as a more equitable geographical distribution.259

Several options are thus available to direct CDM financing towards those countries and communities that have missed out so far, most of them providing for some form of differentiation between various types of developing countries. It should be kept in mind, however, that pursuing an equitable geographic distribution at all costs does not always make sense, given the potential cost of setting up the domestic institutional framework, as well as the potential to reduce emissions in certain countries.260 Instead, it might be warranted to think about other mechanisms to support these countries and communities in their efforts to develop sustainably, taking into account the prospects of a carbo

stments to count short term. In particular, the differentiation of developing

countries allows for preferential treatment in order to increase CDM investments in underrepresented countries, even though this will not necessarily entail a great increase of their market share.

3. Sectoral CDM.

A widely discussed option for a future climate change 261

P/MOP in 2005.262 Furthermore, as mentioned earlier, the

259. See Silayan, supra note 179, at 55-56 (noting that there are some potential drawbacks to this approach, including possibly increased transaction costs, as well as a lack of technology transfer).

260. Cosbey et al., supra note 148, at 26, 28. 261. See generally José Luis Samaniego & Christiana Figueres, Evolving to a Sector-based

Clean Development Mechanism 89 (2002), in BUILDING ON THE KYOTO PROTOCOL, supra note 5; Sterk & Wittneben, supra note 167.

262. Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol, March 30, 2006, Report of the Conference of the Parties Serving as the Meeting

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Executive Board has endorsed programs of activities to qualify as single CDM projects. A more enhanced version of sectoral CDM is based on sectoral policy initiatives by a host country.263 At the COP/MOP in Montreal in 2005, Kyoto Parties decided not to allow policy standards as a CDM project activity for the time being.264 Through sectoral CDM, Parties would be able to receive credits for mitigation activities that “transcend the single-site approach that has so far characterized most CDM project activities.”265 A “sector” could be defined narrowly—e.g. all coal-fired power plants in a specific region of a country—or broadly—e.g. the transport policy of a country. Although the lack of a common understanding of what is meant with sectoral CDM may obscure a proper discussion of the concept, some potential advantages and drawbacks are highlighted.

There are a number of potential benefits of sectoral CDM, which are relevant in the context of the concerns expressed in Part II.C. First, sectoral CDM may stimulate CDM projects in the renewable energy and energy efficiency sector by reducing transaction costs through the use of economies of scale, and thus potentially increase the share of projects with a stronger sustainability component.266 Second, sectoral CDM may provide an incentive to invest in CDM projects with sustainable development benefits that on their own would not be very cost effective.267 Third, sectoral CDM would address the “perverse incentives” issue by rewarding climate-friendly policies in developing countries rather than stimulating countries to refrain from adopting and implementing new policies.268 Fourth, given the po et ntial large scope of sectoral mitigation activities, sectoral CDM could ensure

of the Parties to the Kyoto Protocol on Its First Session, Further Guidance Relating to the

7/CMP.1, U.N. Doc. FCC after Decision 7/CMP.1].

noting that the difference between prog licy CDM is not always straightforward).

ion 7/CMP.1, supra note 262, ¶¶ 20-21. & Wittneben, supra note 167, at 273.

Clean Development Mechanism, ¶¶ 20-22, DecisionC/KP/CMP/2005/8/Add.1, (Mar. 30, 2006) [herein263. See also Cosbey et al., supra note 5, at 16 (rammatic and po264. Decis265. Sterk266. Id. at 279. 267. Id. 268. Id.

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es fewer credits if it is less likely to be add

sufficient supply of credits, thereby providing an incentive for developed countries to adopt more ambitious targets.269

Notwithstanding these potential benefits, a few caveats should be made explicit here. First of all, sectoral CDM has the potential to exacerbate the geographical inequity amongst developing countries as not all developing countries have the technical capacity to implement the mechanism at the sectoral level (which requires setting baselines and monitoring emissions).270 To address this concern, the approach could be combined with institutional capacity building in those countries with an inadequate infrastructure to implement CDM projects based on policy initiatives. The second point is related to additionality. As Sterk and Wittneben put it, “[w]ould a government have to prove that it is adopting [the sectoral] policy solely because of climate change considerations?”271 Verifying whether this is the case would entail a cumbersome process. In response, it has been suggested that a list of policies could be developed, which would be automatically considered additional.272 In other words, the problematic additionality requirement would be sidelined for these kinds of projects. However, as additionality is essential from an environmental integrity perspective, a strict selection of policies and monitoring would be needed. A less extensive, although perhaps more complicated solution could be to relate the issuing of credits to the probability of additionality.273 This would imply that a project receiv

itional. A further option would be to discount credits from sectoral CDM by a certain percentage, differentiating them from “regular” CDM projects. The third caveat is that sectoral CDM credits could flood the market, thereby lowering the CER price

269. Cosbey et al., supra note 5, at 20 (“One clear implication for a regime that includes an expanded CDM is the need for ambitious reduction targets that will fuel demand fo on line.”).

tneben, supra note 167, at 281. 282.

, supra note 237, at 714 (discussing a similar proposal for Joint Implementation projects).

r the additional CERs that may be brought 270. Sterk & Wit271. Id. at272. Id. 273. See, e.g., STEPHEN MEYERS, ADDITIONALITY OF EMISSIONS REDUCTIONS FROM

CLEAN DEVELOPMENT MECHANISM PROJECTS: ISSUES AND OPTIONS FOR PROJECT-LEVEL ASSESSMENT (1999), available at http://ies.lbl.gov/iespubs/43704.pdf; see also Michaelowa & O’Brien

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e.274 es an opportunity to address

developing the contribution to sustainable dev

o the per capita emissions and

ntry in which they invest. Finally, such a levy a small incentive for domestic emission reductions

wit

extending the levy to the other flexibility mechanisms.276 A year

and crowding out other projects in the same way as industrial gas projects have don

In sum, sectoral CDM providcountry concerns about

elopment of CDM projects, as well as the perverse incentive argument. However, the use of sectoral CDM could further exacerbate geographical inequity and thus needs to be accompanied by measures aimed at ensuring a balanced distribution of projects across countries, as suggested in the previous section.

4. Tax on flexibility mechanisms.

Another suggestion is specifically aimed at eliminating the unfair burden on cooperation between Annex B and non-Annex B countries resulting from the adaptation levy of two percent that is being charged on CDM projects.275 The appropriateness of an adaptation levy is not questioned here, since such a levy taxes the reduction of emissions outside the domestic context and can be seen as a partial acceptance of liability for climate change impacts. Nevertheless, we suggest extending this levy to all flexibility mechanisms used in a post-2012 climate regime, including international emissions trading and JI. This would remove a small burden for investing in CDM projects, which is not justified under the UNFCCC or the Pr tocol. The levy could possibly be differentiated for investors based onincome of the host couwould provide

hin Annex I countries. Interestingly, at COP/MOP-3 in Bali, a decision was adopted regarding investigating the feasibility of

274. Cosbey et al., supra note 5, at 13. 275. Gupta, supra note 192, at 204-05. 276. Conference of the Parties Serving as the Meeting of the Parties to the Kyoto

Protocol, Third Session, Bali, Indonesia, Dec. 3-15, 2007, Scope and Content of the Second Review of the Kyoto Protocol Pursuant to its Article 9, ¶ 6(a), U.N. Doc. FCCC/KP/CMP/2007/9/Add.1, Decision 4/CMP.3, (Mar. 14, 2008). The possibility of extending the levy to JI was opposed by Ukraine and Russia on the last night of the Conference of the Parties in Bali. See Int’l Inst. for Sustainable Dev., Summary of the Thirteenth Conference of Parties to the UN Framework Convention on Climate Change and Third Meet TH NEGOTIATIONS BULL. 1, ing of Parties to the Kyoto Protocol: 3-15 December 2007, 12 EAR

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later, in Poznań, South Africa unsuccessfully suggested adopting the extension to JI credits.277 It thus remains unclear whether the Parties will agree on any extension.

D. Discussion

The previous sections outlined a range of options to address the concerns raised earlier in this Article. The question now is: do all recommendations address all concerns, and what are the possible remaining challenges? This Section will first discuss some of the challenges in improving the CDM, followed by a discussion of challenges related to extending international emissions trading to developing countries.

The CDM is regarded as an instrument to achieve a variety of goals. Not only is the CDM supposed to generate emission reductions and contribute to a host country’s sustainable development,278 it is also expected to lead to equitable investments across the developing world, and to “the transfer of environmentally safe and sound technology.”279 Although “the beauty of any market mechanism is precisely that it will find the lowest-cost way to achieve its objectives,”280 this holds true only with respect to the objective of reducing greenhouse gas emissions. It can be ques oti ned whether the CDM is also the appropriate mechanism to achieve all kinds of other objectives. Other mechanisms to support developing countries in reducing emissions are conceivable. For example, the CDM emerged from the Brazilian idea of a Clean Development Fund, and the use of such a multilateral fund for climate change mitigation projects that fulfill several goals simultaneously does not have to be out of the question.281

17 (2007), available at http://www.iisd.ca/download/pdf/enb12354e.pdf. 277. Int’l Inst. for Sustainable Dev., supra note 82, at 10. 278. Kyoto Protocol, supra note 1, art. 12. 279. Decision 17/CP.7, supra note 89, pmbl. 280. Cosbey et al., supra note 169, at 46. 281. Cosbey et al., supra note 5, at 22-23. Note that this is not the same suggestion

made by Wara, supra note 244, at 1801-02. Whereas Wara raises the option of establishing a fund for projects with low or no contributions to sustainable development, it may also be possible to establish a fund for projects with high contributions to sustainable development. Both suggestions, however, imply using different means for different ends.

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If policymakers still want the CDM to contribute to several objectives simultaneously, there is a range of possible options to do so. However, the CDM’s different goals will lead to inevitable tradeoffs. First, although incentives for sustainability could strengthen the sustainable development component of the CDM in theory, they will most likely lead to higher administrative burdens for both developed and developing country participants in practice. Ensuring that a project contributes to sustainable development presents a great challenge, from a careful design to appropriate monitoring, reporting and verification procedures.282 Second, there is a tradeoff between addressing the additionality concern, preserving the environmental integrity of the CDM on the one hand, and addressing various other concerns, including the contribution to sustainable development and achieving geographical equity on the other. Measures to promote a better balance between regions that involve awarding more CERs to certain projects result in a situation in which the credits issued do not reflect the real emission reductions. Furthermore, the types of projects that seem to have the greatest sustainable development potential—renewable energy and energy efficiency—already face difficulties in proving their additionality. And achieving a more balanced distribution of CDM projects at all cost could lead to tensions with the sustainable development objective. A project’s contribution to sustainable development is not necessarily contingent on the region in which it takes place. One could argue that those countries with a track record in developing CDM projects will also have the greatest institutional capacity to ensure that projects contribute to sustainable development, although this depends on the mitigation potential for various project types in these countries. Finally, although sectoral CDM could address a range of developing country concerns, it could also harm developing country interests. For example, sectoral CDM could aggravate the regional distribution of CDM projects, and reduce the contribution to (local) sustainable development by drawing away funding from small-scale projects. But the main tradeoff for

282. See generally Gupta et al., Flexibility Mechanisms and Sustainable Development: Lessons from Five AIJ Projects, 8 CLIMATE POL’Y 261 (2008) (discussing the contributions to sustainable development of five AIJ projects).

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o the fundamental criticism tha

expansion of inte

ot worthwhile to set up a complex glo

sectoral CDM will be to find a balance between maintaining environmental integrity, by ensuring that sectoral CDM is “additional,” and stimulating climate-friendly policies in developing countries.

The continuation of the use of flexibility mechanisms involving developing countries is still prone t

t this leads to the diffusion of a concept based in Western neo-liberal market ideology. This is perhaps not so surprising, as most of the suggestions outlined in the previous sections do not question the use of flexibility mechanisms, but rather provide guidance on how to take developing country considerations into account in the design of such mechanisms in future climate policy. Addressing this concern seems to require a more fundamental change in thinking about whether emissions trading—project-based or not—constitutes the most appropriate climate policy instrument for developing countries.

If greater developing country involvement in the use of flexibility mechanisms can be achieved by broadening the geographical coverage of international emissions trading, it will be necessary to make some fundamental changes to the legal architecture of the future climate regime. First, the

rnational emissions trading would need to be combined with tougher targets for developed countries. Only more stringent targets for developed countries could create room for emissions growth in developing countries in line with the equity principles of responsibility and capacity, without increasing global emissions. Furthermore, only tougher targets can address the climate change problem rapidly enough to keep the rise in global temperatures below dangerous levels. It is n

bal system of international emissions trading if there are no clear long-term objectives for the global community.

Second, defining and elaborating the concept of supplementarity is a critical element of the process of expanding international emissions trading. If all domestic emission reductions in developed countries can be achieved in the short term through market-based mechanisms, there will be no incentive to change production and consumption patterns in the developed world in the long term, and the incentive to invest in low-carbon technologies will be reduced.

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ed either with a system that allows developing countries to increase or the basic right to increase their standards of livin with a new system that allo

scientific and political uncertainties surrounding the

Third, the key structural differences between developed and developing countries—and among the developing countries themselves—need to be addressed. While there are some small, well-organized countries with well-functioning social institutions that may be able to participate effectively in such schemes, other states fall into many different levels of economic development, scientific skills and political stability. Extending emissions trading requires consideration of a country’s capacity to act (measured by GDP per capita), its greenhouse gas emissions per capita, and its institutional infrastructure for implementing emissions trading.

Fourth and finally, the present system of grandfathering in combination with some form of bargaining is inadequate to determine different countries’ emission allocations. It is vital that such a system be combin

emissions to allow fg, or

cates responsibilities to all on the basis of fair and predictable principles. In other words, the allocations should reflect the need to reduce to emissions from some countries and the temporary need to allow other countries to increase emissions. In addition, it should also acknowledge the importance of universal participation. These changes are necessary to give developing countries a clear incentive to participate in an international climate change agreement.

IV. CONCLUSION

This Article aims to serve as a reminder of the potential and real impacts of flexibility mechanisms on developing countries. These concerns tend to be sidelined by developed countries, which are preoccupied with achieving their Kyoto Protocol targets in a cost-effective fashion. Flexibility is an important virtue of any future legal framework for climate change, given the many

phenomenon. Furthermore, flexibility mechanisms could provide a substantial source of income and technology for developing countries and create the necessary capacity and awareness to set these countries on a more climate-friendly development path.283

283. See supra Part III.A.

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cluding projects that do not contribute to the

However, it is possible that the international community is stretching too far by overemphasizing the importance of cost effectiveness to climate policy. Maximizing cost effectiveness through flexibility is a means to achieve emission reductions, but not the ultimate goal.

The logic of flexibility mechanisms is that they achieve any given emission reduction target at least cost. However, it may be difficult for these mechanisms to simultaneously achieve auxiliary goals. The tradeoffs between multiple objectives are perhaps most pertinent in the case of the CDM. The mechanism is designed to function like a market mechanism should, finding least-cost options to achieve emission reductions. At the same time, it is less successful in achieving its other objectives of contributing to sustainable development, equitable geographic distribution, and technology transfer to developing countries.

There are different ways of dealing with this dilemma. First, Parties to the UNFCCC and the Kyoto Protocol could decide that the CDM should primarily be used to achieve greenhouse gas emission reductions cost-effectively, and leave the achievement of other objectives to other instruments, such as multilateral funding mechanisms. Second, Parties could instead decide to focus the CDM much more towards other objectives, including its contributions to sustainable development, the transfer of clean technologies, and an equitable geographical distribution. This could be done by prioritizing projects that are likely to contribute to these goals, or by ex

m. Third, Parties could continue to fine tune the CDM in order to achieve the various objectives simultaneously. In this Article, we have discussed several options to achieve this outcome, including differentiation between project types or between countries and sectoral CDM. However, if the CDM is not able to deliver on its various objectives after this fine tuning, it may be necessary to seek recourse to one of the other options—making it either a full-fledged market mechanism that focuses solely on delivering emission reductions at lowest cost, or targeting the mechanism at non-market objectives.

Given the political necessity of maintaining flexibility mechanisms in a post-2012 agreement, it is quite likely that market-based mechanisms in some form will continue to exist—if not at the international, then at the national level. Greater involvement

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qua

ties in both developed and developing countries, politicians may be more inclined to

of developing countries in international emissions trading, however, will require more fundamental changes to the design of the legal architecture. As long as a version of the grandfathering principle combined with some modicum of bargaining is the fundamental basis for the allocation of emission entitlements to individual Parties, an international emissions trading scheme is unlikely to be attractive to developing countries. If governments are serious about extending this scheme to developing countries, then the following ideas will need to be considered. First,

ntified emission reduction targets must embody an equity principle that ensures domestic action in developed countries. Second, only countries that can accurately measure greenhouse gas emissions and removals by sinks at both the project and the national level should be invited to participate, since the success of emissions trading is dependent on an accurate monitoring system. This calls for gradual inclusion of countries into emissions trading.284 Third, the rules for allocations and participation should be clear, predictable and fair, and should treat like countries alike. This may encourage developing countries to come on board.

Even with these suggestions, challenges remain. As long as emissions trading does not cover all countries, and as long as emission targets for the expanding group of developed countries remain low, the environmental effectiveness and economic efficiency of emissions trading will be impeded. We may then find that we have set up a complex institutional mechanism that has considerable transaction costs, but that is ineffective simply because it does not include all countries, and cannot, in the short term, include the many countries that are unable to implement such a complex system. If there are no major changes to the stringency of emission reduction targets, there is also no point in further elaborating the international emissions trading system. However, the fact that targets were low in the past does not imply that they will be low in the future. Given the increasing evidence of climate change as a serious and urgent problem, as extreme weather events wreak havoc on communi

284. See Greenspan Bell, supra note 134, at 22.

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embrace more stringent targets necessary for an effective international emissions trading system.

We do not expect that all the issues raised in this Article will be addressed by the time the Parties reach agreement on a follow-up to the Kyoto Protocol, probably by the end of 2009 in Copenhagen. Nevertheless, we hope this Article will provide some guidance to the various actors involved in the post-2012 discussions on how to address the various concerns of developing countries, and the important policy choices involved.

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CDM BEYOND KYOTO.pdf