World Bank Carbon Funds

1. World Bank Carbon Funds Dr. Moritz von Unger, Senior Legal Counsel Joint Implementation After 2012 Barcelona, 31 May 2011 Host Country Committee Annual Meeting

2. Outline International Developments: Kyoto, Cancun Durban Mind the Gap: Bridging Climate Action After 2012 JI From The EU Perspective of Emissions Trading and Effort Sharing Unilateral Responses: Article 24a EU ETS and Bilateral Agreements

3. I. International Developments: Kyoto, Cancun Durban

4. International Developments: Kyoto and JI Article 6 Kyoto Protocol created the flexible mechanism for Annex I/Annex B Parties as host countries: Offsetting as Crediting The Marrakech Accords (2001) laid down the mechanics of JI (most importantly JI Guidelines and AAU accounting rules, Dec 9, 13 CMP 1) Track 1 and Track 2 (JISC: 2006) Other than the CDM, JI became operational only in 2008 (‘early JI’ was AAU trade)

5. Joint Implementation in May 2011 • 35 Annex B Parties have their Designated Focal Points in place • 29 Annex B Parties had their national approval procedures in place • First registered projects in the Russian Federation • Market volume (primary JI): 354 million USD (2009) (CDM: 2,7 billion USD; IET: 2 billion USD) • Track 1 / Track 2: 40% / 60% (new fee structure Track 1 as of 2011) • Almost 200 projects within the EU (roughly 50% of total projects and 25% of total emissions)

6. List of registered Track 1 and Track 2 Projects

7. Issuance of ERUs until May 2011

8. International Negotiations Post 2012 Kyoto’s first commitment period expires on 31 December 2012 The Fate of the Kyoto Protocol is unclear The Protocol caps only around 30% of global emissions Pledges for 2020 fail to achieve what would be needed to work towards the 2° C scenario Among the contentious issues: banking of AAUs, LULUCF accounting rules US not a Party

9. Message From Cancun: Breakthrough for Future Negotiations? Result from Copenhagen: Multilateral action in a crisis; many State Parties felt hijacked by a small number of states; others saw a two- or three-tiers society of states Cancun Agreements: First comprehensive rule-making after Bali Frenetic Applause despite Bolivarian Revolt Most importantly: New trust in the multilateral model and roadmap for 2011

10. The Cancun Substance • Global greenhouse gas targets: Affirms IPCC-recommended target to keep global warming to 2 °C over pre-industrial times; consider 1.5 °C limit. • Mitigation commitments of developed countries: Agreement scaled-up mitigation efforts to substantially reduce global emissions by 2050. • Voluntary mitigation commitments by developing countries: Nationally Appropriate Mitigation Actions (NAMAs) + Registries • Adaptation: Adaptation Committee and scaled-up finance, technology, and capacity-building. • Financing and Markets: Pledges USD30 billion (-2012) for fast-start and USD100 billion/yr (2020) confirmed; Green Climate Fund. Caveat: Kyoto Negotiations ended indecisive with a range of countries in fierce objection

11. Kyoto’s Future? • AWG KP Draft Decision contained options for a revised Annex B table, a collective emission reduction target, and provisions on the provisional application of the amendment • Final Outcome remained weak; even though: • Unilateral targets under the Copenhagen Accord are noted • Annex I Parties are urged to raise the level of ambition • Agreement that “emissions trading and the project-based mechanisms under the Kyoto Protocol shall continue”

12. II. Mind the Gap: Bridging Climate Action After 2012

13. Mind the Gap: JI After 2012 The Kyoto Protocol has no expiration date; however: A new commitment period, CP 2, requires an amendment to the Kyoto Protocol and this needs a CMP decision first and then ratification by at least ¾ of State Parties (currently 143 ratification acts) The discontinuation of emission reduction commitments (= “the gap”) may frustrate the purpose of various of its provisions… Article 6 KP (JI): “For the purpose of meeting its commitments under Article 3, any Party included in Annex I may transfer to, or acquire from, any other such Party [ERUs]…”

14. The Long Good-Bye: Emissions Trading 2013-2015 Marrakesh, Decision 27/CMP 1 (XIII): “For the purpose of fulfilling commitments under Article 3, paragraph 1, of the Protocol, a Party may [during the True-Up-Period] continue to acquire, and other Parties may transfer to such Party, emission reduction units, certified emission reductions, assigned amount units and removal units under Articles 6, 12 and 17 of the Protocol, from the preceding commitment period, provided the eligibility of any such Party has not been suspended in accordance with section XV, paragraph 4.”

15. True-Up Timeline

16. JI Activities During True Up JISC in its Cancun Report asked COP for clarification whether CP1 AAUs could be converted into CP1 ERUs for emission reductions after 2012 until CP2 comes into place After a long debate, State Parties only took note of the issue, postponing it to Durban Implication for Track 2 and Track 1?

17. III. JI From The EU Perspective of Emissions Trading and Effort Sharing

18. JI post 2012 and the European Union Article 11a of Directive 29/2009/EC explicitly refers to a post 2012 gap allowing ERUs generated after 2012 and allows them into the EU ETS: “… competent authorities shall allow operators to exchange CERs and ERUs from projects that were registered before 2013 issued in respect of emission reductions from 2013 onwards for allowances valid from 2013 onwards.” (emphasis added)  true-up ERUs would be admissible

19. JI Post 2012 in the European Union Are JI projects hosted by EU Member States excluded by the EU ETS? Art. 11a (7) and 28 (3) make reference to third-country credits alone The EU ETS rules on direct and indirect double-counting are set to expire, thereby excluding any and all projects that would reduce or limit directly or indirectly an EU ETS installation (Art. 11b)

20. JI Post 2012 in the European Union This leaves the non-EU ETS sectors for JI projects, which largely fall under the Effort Sharing Decision (ESD). The ESD recognizes JI projects and credits post 2012 (art. 5(1)b); however, as the EU ETS it makes continuous reference to third-country credits alone. Most importantly, the ESD does not foresee a deduction of the ESD quota (annual emission allocation) for ERUs issued from ESD-related activities • This is at odds with the established No-Double-Counting paradigm • Exclusion of intra-Member-State JI projects as of 2013?

21. IV. Unilateral Responses: Article 24a EU ETS and Bilateral Agreements

22. Domestic Action: Waiting for Article 24a? Article 24a EU ETS allows the establishment of a EU-proper crediting mechanism […] implementing measures for issuing allowances or credits in respect of projects administered by Member States that reduce greenhouse gas emissions not covered by the Community scheme may be adopted. Article 24a EU ETS may be the default mechanism for offsetting in the EU Art. 24a credits are recognized by the ESD and the problem of double-counting does not exist Article 24a EU ETS can stay intact independently from Kyoto

23. Bilateral Agreements Europe’s contingency plan: “…in the event that the international negotiations on an international agreement on climate change are not concluded by 31 December 2009, credits from projects or other emission reduction activities may be used in the Community scheme in accordance with agreements concluded with third countries, specifying levels of use.” (Article 11 a (5) EU ETS) See also Article 5 (2) Effort Sharing Decision (together with recital No 15) Caveat: EU has not yet acted on this plan.

24. Bilateral Agreements: Entry Venues • Ukraine • European Neighborhood Policy • Action Plan with Ukraine • Joint Ukraine-EU Working Group on Climate Change • Russia: • EU-Russia Strategic Partnership • EU-Russia Environmental Dialogue • Northern Dimension Environmental Partnership

25. Dr Moritz von Unger Senior Legal Counsel Climate Focus +31 20 262 10 37 E-mail: M.vonUnger@climatefocus.com