Joint Implementation Projects –Legal Background

Foresta Tropicana Hotel, Zelinograd Oblast August 22, 2006

Dr. Bernd Beckmann Rechtsanwalt /Attorney

Hogan & Hartson Raue L.L.P.

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Overview

What is Joint Implementation (JI)?

Background: Climate Change and Global Governance

The Kyoto Protocol Climate Change Regime

JI as a Flexible Mechanism

• Structure• Procedure• Legal Issues

Excursus: EU Emission Trading Scheme

Outlook

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What is Joint Implementation (JI)?

The basic idea of Joint Implementation in a nutshell:

Joint Implementation is a programme under the Kyoto Protocol that allows industrialized countries to meet part of their required cuts in greenhouse-gas emissions by paying for projects that reduce emissions in other industrialized countries.

“Mutual Help for countries with emission targets”.

In practice, this will likely mean facilities built in the countries of Eastern Europe and the former Soviet Union - the "transition economies" - paid for by Western European and North American countries.

(Definition from the official UNFCCC web site, http://unfccc.int)

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Background: Climate Change and Global Governance

Climate Change Symptoms

• Term “Climate Change“ refers to various phenomena• Rising temperatures: “Global Warming“ and “Green House Effect“• Desertification• Melt-off of glaciers and pole caps• Rising water levels

Growing Global Awareness

Nations decide to take Action

• United Nations Framework Convention on Climate Change (UNFCCC) in 1992

• Kyoto Protocol in 1997

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Global Warming – A Result of GHG Emissions

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Global Warming Predictions

Global Warming is essentially consensus among scientists

Depending on forecasting methodologies, predicted temperature rise varies:

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Framework Convention (UNFCCC) of 1992

The United Nations Framework Convention on Climate Change (UNFCCC) ”sets framework for intergovernmental efforts to tackle climate change“. 

Under the Convention, governments:

• Gather and share information on greenhouse gas (GHG) emissions, national policies and best practices,

• Launch national strategies for addressing greenhouse gas emissions and adapting to expected impacts, including the provision of financial and technological support to developing countries,

• Cooperate in preparing for adaptation to the impacts of climate change.

Main Problem: No binding GHG reduction targets!

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Kyoto Protocol of 1997

Strengthens UNFCCC by introducing legally binding targets to limit or reduce greenhouse gas emissions

Of 164 countries ratified until today, of which 35 countries and the EC (EU) have accepted binding GHG reduction targets

• Countries with reduction targets are referred to as Annex I countries

• Annex I countries are all industrialized countries or economies in transition like Russia

Important detail questions left open and later specified at member state meetings (e.g. “Marrakech Accords”)

Protocol came into force in February 2005 (after Russia ratified)

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Kyoto Member States and Approval Status

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Kyoto Protocol Regime

Legal Elements

• United Nations Framework Convention on Climate Change (UNFCCC) 1992

• Kyoto Protocol 1997

• Decisions/Resolutions based on the Protocol (“COP/MOP”), especially “Marrakesh Accords” (COP 7)

Institutions

• COP/MOP (Member State Conventions)

• UNFCCC Secretariat (Bonn, Germany)

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Kyoto Protocol Regime Subject of Regulation

• Binding Climate Protection Obligations for States (not Private Entities)

• Green House Gas (GHG) Reduction Targets for States (average 5,2 % with respect to base level year 1990), to be met within “Kyoto Period“ (2008-2012)

• 3 Flexible Mechanisms

Inter-State Emission Trading (Trading of AAUs) CDM – Clean Development Mechanism (Generation of CERs) JI – Joint Implementation (Generation of ERUs)

• Countries operate National Registries, connected by International Transaction Log (ITL), to execute flexible mechanism transactions

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Flexible Mechanisms under the Kyoto Protocol Annex I States have limited “Assigned Amount Units” (AAUs),

according to their reduction targets

Flexible Project Mechanisms represent way to generate needed additional units

• Joint Implementation (JI) Project resulting in specific Emission Reductions in Annex I State (e.g. Russia) “Generation” of Emission Reduction Units (ERUs) through conversion of AAUs

• Clean Development (CDM) Project resulting in specific Emission Reductions in Non-Annex I State (e.g.

India, Brazil) Generation of Certified Emission Reductions (CERs)

Complex Involvement of National Authorities and UNFCCC Secretariat

Direct Private Sector Participation!

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JI Projects – Basic Facts

JI mechanism is stipulated in Article 6 of the Kyoto Protocol

Details specified in Decision 9/CMP.1 (2005)

Participating parties: Annex I countries

Private sector involvement (e.g. companies in need of extra credits)

Responsible UNFCCC institution: JI Supervisory Committee (JISC)

Projects can operate before 2008, but only “generate” ERUs from then on

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JI Projects – Basic Structure (I)

Project is carried out between two Annex I countries

• Investor country: Needs extra credits• Host country: Has eligible project opportunity • Both countries need to meet eligibility criteria • Private companies (usually) carry out projects (“sponsorship”)

Project in host country that reduces emissions and meets JI eligibility criteria:

• Approval by parties involved• Additionality („reduction … is additional to any that would otherwise occur“ -

Art. 6 Sec. 1 (b) Kyoto Protocol), not “business as usual”• Supplementarity (countries only rely on such projects to limited extent)

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JI Projects – Basic Structure (II) Project goes through approval and verification procedures

• “Track 1” procedure:

Approval only by countries’ authorities (“Designated Focal Points”) Easier when bilateral Memorandum of Understanding (“MoU”) between involved countries

exists Procedure (also) determined by national law

• “Track 2” procedure: Strong involvement of JISC

Project Initiator receives ERUs

• Host country registry converts AAUs to ERUs• ERUs are transferred to investor account in investor country registry

Host Country Registry:

Converts AAUs to ERUs

Investor Country Registry

Transfer of ERUs ”through“ ITL

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JI Project Types

Projects need to be “aimed at reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the economy” (Article 6 Sec. 1 Kyoto Protocol)

Eligible project types include

• Methane Gas Capture (from landfills etc.)• Biomass and Biogas Energy Projects• Fuel Switch (e.g. Coal – Biomass)• Hydropower • Wind Power• Energy Efficiency (e.g. in industry, heating, and energy production)

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JI Project Procedures – Country Eligibility

Project procedures depend on eligibility status pursuant to Guidelines (9 CMP.1):

„Track 1“ (Full eligibility) Criteria:

a. Party to Kyoto protocol

b. Assigned amount calculated

c. National system for estimating emissions/removals in place

d. National registry for tracking assigned amount in place

e. Submission of most recent required emissions inventory

f. Accurate accounting of assigned amount and submission of information

„Track 2“ eligibility (minimum requirements)

a. Party to Kyoto Protocol

b. Assigned amount calculated

c. -

d. National registry in place for tracking assigned amount

e. -

f. -

Russia is not yet qualified as a Track 1 country, aims for compliance by 2008.

For prior projects, Track 2 procedure will have to be used.

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JI Projects – Project Cycle / Procedure

Project Steps Documents Project Cycle Steps Responsible Entity

Project Development

Project Design

Validation

Monitoring

Verification and Certification

Transfer of ERUs

Project Participant

Independent Entity

Project Participant

Independent Entity

Host Country (Registry)

Project Execution

Ex-ante-Data:

Project Design Document (Monitoring Plan)

Ex-post-Data:Monitoring Report

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JI Projects – ERU issuance and transfer (Track 2)

International Transaction Log

at UNFCCC Secretariat

Country 1 (Investor Country)

Country 2(Host Country)

ERU Purchase(Country/Investor)

Project Entity

Report of ERU Transfer

Approval

Investment Agreement

ERPA

National Registry National Registry

+ 3

5.000AAUs

Purchased ERUs

Assigned Amount

3

997AAUs

Reduction

Assigned Amount

Conversion of AAUs into ERUs

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JI Projects – Contracts (ERPA)

The contract used to purchase ERUs is referred to as ERPA – Emission Reductions Purchase Agreement.

Such agreements, inter alia, stipulate:

• Obligation to deliver (including interval)• Price • Distribution of (regulatory) costs• Monitoring and Verification• Force Majeure

Use of standard documents or reference to such documents

• Sample ERPA by Danish Environmental Protection Agency (DEPA)• IETA CDM Sample ERPA

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Excursus: EU Emission Trading SchemeOverview

Participants: Installation Operators from specific Sectors

• Energy• Production (Metal Industry)• Mineral Industry (Glass, Cement)• Certain Others (Paper etc.)

Allocation of Certificates (EUAs) to Installations

Participants can generate additional credits through JI and CDM

EU-wide market place (leads to high liquidity)

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Excursus: EU Emission Trading Scheme Overview

Regulatory Background

• EU Emissions Trading Directive 2003/87/EC:

Establishment of Cap-and-Trade System on Emissions (EU Emission Trading Scheme - EU ETS) for Private Entities

Green House Gas (GHG) Emissions Subject to Permission and Monitoring

• Linking Directive (2004/101/EC):

Links EU ETS to Kyoto Level Certificates generated from CDM and JI Projects

Creates incentive for companies to get involved in Kyoto project mechanisms like JI!

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Excursus: EU Emission Trading Scheme - Layers of Climate Change Regulation

“Kyoto Level” Provisions: United Nations Framework Convention on Climate Change (UNFCCC) and Kyoto Protocol

EU Legislation: Implementation of Kyoto Goals (EU as Party – “Bubble” Implementation)

National Legislation (National Registry, Project Mechanisms, National or EU Emission Trade Schemes)

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EU ETS – Trading of Certificates Transaction Types

• Bilateral Trades by Installation Operators (No Financial Services Act – KWG - License required for EUA Trades, but for Trades with Derivatives)

• OTC Trades (Broker)• Exchanges (e.g. EEX)

Registries

• National Registry (registers both Kyoto and EU ETS units)• CITL (Community Independent Transaction Log)

Transaction Contracts: Use of Framework Agreements developed by

• IETA (International Emissions Trading Association)• EFET (European Federation of Energy Traders) • ISDA (International Swaps and Derivatives Association)

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Excursus: EU ETS – Trading of CertificatesEffective Re-Allocation of Certificate through Market Mechanisms

Installation 1

Installation 2

CO2-Emissions: 5.000 t

CO2 Emissions: 5.000 t

Situation prior to ETS

Alloctated Allowances

4.500 t

Factual CO2 Emissions

4.000 t

Allocated Allowances

4.500 t

Factual CO2 Emissions

5.000 t

CO2-Reduction

Sale 500 t

Purchase 500 t

Result: In total, CO2 reduction targets are met. Installation 1 profits from sale of allowances. Installation 2 saves substantial investments in new technology.

Trade

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Outlook

A (Global) Climate Change Governance System is here to stay: ET and Project Mechanisms will most likely remain a Key Instrument in European and Global Climate Policies

Project Mechanisms complement GHG Emissions Trading and provide an effective Opportunity to enlarge Certificate Base, and therefore provide a Business Opportunity for Companies

The Russian Municipal Heating Sector can profit from JI Investments, and should actively pursue such Opportunities.

Thank you for your attention!

Spasiba!

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For further information :: please contact . . .

Dr. Bernd Beckmann

Hogan & Hartson Raue L.L.P.

Potsdamer Platz 1

10785 Berlin

Germany

Tel: (+49) 30 726 115 330 Fax: (+49) 30 726 115 107Email: bbeckmann@hhlaw.com

. . . or visit :: www.hhlaw.com

Dr. Carl-Stephan Schweer

Hogan & Hartson Raue L.L.P.

Potsdamer Platz 1

10785 Berlin

Germany

Tel: (+49) 30 726 115 330 Fax: (+49) 30 726 115 107Email: csschweer@hhlaw.com