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

Copyright (C) 1999 by Slavic Research Center, Hokkaido University.
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How to Design and Operate the Kyoto Mechanisms

Takamitsu Sawa


Introduction

The Kyoto Protocol and the Three Mechanisms

[1] On December 11, 1997 in Kyoto, the 3rd Conference of the Parties to the United Nations Framework Convention on Climate Change (COP3 of UNCCCF) adopted the Kyoto Protocol. The Protocol imposes legally binding and quantified targets for reduction of greenhouse gases (GHGs) emissions on the 38 Annex I countries. This was really a significant first step towards possible prevention of global warming.
[2] One of the significant features of the Kyoto Protocol was that it has established three international mechanisms to enable Annex I countries to achieve their reduction targets with the minimum possible costs. They include emissions trading (Article 17 of the Protocol), projects aiming at reducing GHGs emissions by human activities (Article 6 of the Protocol, hereinafter, we call those projects as joint implementation), and the clean development mechanism (Article 12 of the Protocol): namely, projects aiming to assist non-Annex I countries to achieve sustainable development. These international mechanisms were first named generically as flexible mechanisms, but after the Buenos Aires conference (COP4) renamed as Kyoto mechanisms.
[3] As for design and operation of Kyoto mechanisms, it may be safely said that any definite and concrete design of mechanisms has not yet been systematically proposed. The Buenos Aires conference finally agreed upon the Plan of Action that requires the Subsidiary Body for Implementation (SBI) and of the Subsidiary Body for Scientific and Technological Advice (SBSTA) to design details of mechanisms concretely enough at latest before the COP6 being held in the year 2000. At the sessions of the SBI and SBSTA held in Bonn in June 1999, considerable amount of discussion took place on mechanisms as well as on non-compliance measures. Most of them, however, were left unsolved and postponed to the Bonn conference being held from late October to early November 1999.
[4] In this paper we will examine how Kyoto mechanisms should be designed and operated. As for domestic measures to prevent global warming, they should be entirely left to each country's
government instead of international settlements. To put it differently, each country's government should explore its optimal system of domestic measures, taking into account its domestic constraints and feasibility as well as cost-effectiveness of various measures. International standardization on domestic measures should be kept to minimum to avoid unnecessary interference in the domestic affairs by international organizations. Careful attention should be, however, paid to how the existing diversity in each country's domestic measures influences the effectiveness and the feasibility of international mechanisms.

Flexibility of Kyoto Mechanisms

[5] The three international mechanisms examined here are all cost-effective in the sense that they enable each Annex I country to achieve its reduction target at the minimum possible cost. To put it differently, each Annex I country can attain a given reduction target as flexible as possible by adequately combining the three international mechanisms with its domestic measures.
[6] In his speech at the high-level segment of the COP3 on December 8, 1997, Vice President Gore of the United States stated that he would instruct the U.S. delegation to show increased negotiating flexibility, if a comprehensive plan with market mechanisms, among others, were put into place. What he meant was that the U.S. Government was to commit itself to higher reduction target of some degree, so long as the three international mechanisms would be introduced by the Protocol. It turned out that the final conclusion of the Kyoto conference had been quite finely summarized by Gore's
statement cited above.

[7] The Kyoto Protocol requires the 38 Annex I countries to reduce the total GHGs emissions at least 5% below the 1990 level. The reduction target for each country was differentiated as follows: 8% for European countries, 7% for the United States, 6% for Japan, 0%for Russia and Ukraine, and so on. These relatively higher reduction rates were agreed upon, because the Kyoto mechanisms were introduced. Otherwise, each Annex I country is obliged to attain her reduction target all by herself, and hence reduction targets must be necessarily far lowered.
[8] Kyoto mechanisms were strongly recommended and supported by the U.S., but they are also beneficial for Japan, because Japanese firms own various advanced energy-saving technologies that are certainly useful for successful operation of joint implementation (JI) and the clean development mechanism (CDM). By transferring advanced energy-conservation technologies to other developed and developing countries, Japan will be able not only to contribute to prevention of global warming through reduction of CO2 emissions, but also to lower the cost required to achieve its own reduction target.

Desirability of the Mechanisms

[9] As was mentioned earlier, Kyoto mechanisms still remain to be elaborated. Let us consider about the conditions that have to be satisfied by desirable mechanisms. We propose the following four principles. First, they should be really effective: that is to say, they should contribute to achievement of GHGs emission reduction commitments by Annex I countries, and sustainable development of non-Annex I countries. Second, they should be impartial: that is to say, they must be equitable and fair to all member countries. Third, they should be transparent: that is to say, information concerning emissions trading, JI and CDM should be in principle disclosed. Fourth, the mechanisms should be cost-effective. In order to attain cost-effectiveness, the market mechanism should be properly utilized: namely, excessive regulation must be avoided.
[10] The purpose of this paper is to identify desirable mechanisms that meet the above four principles. There may be, however, no desirable mechanisms that perfectly meet all of the four principles, and desirability often depends on assumptions. Moreover, there is no guarantee that such desirable mechanisms are in fact feasible.
[11] In order to minimize the total cost of achieving the reduction target 5% on the whole for 38 Annex I countries, the reduction target for each country should be differentiated rationally so that marginal reduction costs be equalized among Annex I countries. If the differentiation is rational in the above sense, introduction of emissions trading is unnecessary, because each country's cost-minimizing behavior results in attaining her target solely by domestic reduction. In reality, however, it is almost infeasible to estimate the marginal cost curves respectively for the 38 Annex I countries, and hence the reduction targets have been differentiated on ad hoc bases. Therefore, the reduction targets assigned to Annex I countries might be far from rational. This is the reason why Kyoto mechanisms play an essential role in minimizing the total abatement cost as much as possible.

Trading Emission Rights

[12] The Kyoto Protocol obliged Japan to reduce the average amount of GHGs emissions for the period from 2008 to 2012 at least by 6% less than that in the year 1990. To put it differently Japan was assigned emission rights equaling five times as much as 94% of total GHGs emissions in 1990, which will be effective during the five-year commitment period. The total amount of emission rights assigned to the 38 Annex I countries amounts to 94.8% of the total emissions in 1990 by the 38 countries. Commitments by the Annex I countries may be relaxed, i.e., fulfilled with lower costs, through purchase of emission rights from other countries.
[13] It should be borne in mind, however, that the Kyoto Protocol clearly states that emissions trading and JI should be supplemental to domestic measures. One of the most controversial points with regards to Kyoto mechanisms is what is really meant by "supplemental" The European Union claims that in order for mechanisms to be really supplemental the amount of emissions trading should be limited numerically somehow or other, while the US and Japan oppose that such limitation would harm precious cost-effectiveness of emissions trading and JI.
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