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Overvi ew

Joint Implementation Projects – Legal Background Foresta Tropicana Hotel, Zelinograd Oblast August 22, 2006 Dr. Bernd Beckmann Rechtsanwalt /Attorney Hogan & Hartson Raue L.L.P. Overvi ew. What is Joint Implementation (JI)? Background: Climate Change and Global Governance

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Overvi ew

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  1. Joint Implementation Projects –Legal BackgroundForesta Tropicana Hotel, Zelinograd OblastAugust 22, 2006Dr. Bernd Beckmann Rechtsanwalt /AttorneyHogan & Hartson Raue L.L.P.

  2. 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

  3. 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)

  4. 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

  5. Global Warming – A Result of GHG Emissions

  6. Global Warming Predictions • Global Warming is essentially consensus among scientists • Depending on forecasting methodologies, predicted temperature rise varies:

  7. 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!

  8. 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)

  9. Kyoto Member States and Approval Status

  10. Kyoto Protocol Regime • Legal Elements • United Nations Framework Convention on Climate Change (UNFCCC) 1992 • Kyoto Protocol1997 • Decisions/Resolutions based on the Protocol (“COP/MOP”), especially “Marrakesh Accords” (COP 7) • Institutions • COP/MOP (Member State Conventions) • UNFCCC Secretariat (Bonn, Germany)

  11. 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

  12. 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!

  13. 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

  14. 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)

  15. 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

  16. 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)

  17. JI Project Procedures – Country Eligibility Project procedures depend on eligibility status pursuant to Guidelines (9 CMP.1): • „Track 1“ (Full eligibility) Criteria: • Party to Kyoto protocol • Assigned amount calculated • National system for estimating emissions/removals in place • National registry for tracking assigned amount in place • Submission of most recent required emissions inventory • Accurate accounting of assigned amount and submission of information • „Track 2“ eligibility (minimum requirements) • Party to Kyoto Protocol • Assigned amount calculated • - • National registry in place for tracking assigned amount • - • - 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.

  18. JI Projects – Project Cycle/ Procedure Project Steps Project Cycle Steps Documents Responsible Entity Ex-ante-Data: Project Development Project Design Project Participant Project Design Document (Monitoring Plan) Independent Entity Validation Project Participant Monitoring Project Execution Ex-post-Data:Monitoring Report Verification and Certification Independent Entity Host Country (Registry) Transfer of ERUs

  19. JI Projects – ERU issuance and transfer (Track 2) International Transaction Log at UNFCCC Secretariat Report of ERU Transfer Country 2(Host Country) Country 1 (Investor Country) Approval Project Entity ERU Purchase(Country/Investor) Investment Agreement ERPA National Registry National Registry Conversion of AAUs into ERUs Reduction 3 + 3 Purchased ERUs Assigned Amount 997AAUs 5.000AAUs Assigned Amount

  20. 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

  21. 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)

  22. Excursus: EU Emission Trading SchemeOverview • 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!

  23. 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)

  24. 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)

  25. Installation 1 Installation 2 Excursus: EU ETS – Trading of CertificatesEffective Re-Allocation of Certificate through Market Mechanisms Situation prior to ETS CO2-Emissions: 5.000 t CO2Emissions: 5.000 t Allocated Allowances 4.500 t Factual CO2 Emissions 5.000 t Alloctated Allowances 4.500 t Factual CO2 Emissions 4.000 t CO2-Reduction Sale 500 t Purchase 500 t Trade Result: In total, CO2 reduction targets are met. Installation 1 profits from sale of allowances. Installation 2 saves substantial investments in new technology.

  26. 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.

  27. Thank you for your attention!Spasiba!

  28. For further information ::please contact . . . 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 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

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