Learning by doing in CEE

Authors: James Perkaus, Elena Petkova

The objective of this summary, case studies developed by Central and Eastern European (CEE) non-government organizations (NGOs) , and recommendations from an international Advisory Committee to the WRI-REC Capacity for Climate Protection Project-- is to draw lessons from CEE experience with Activities Implemented Jointly (AIJ) projects and inform rule-setting by governments and the Conference of the Parties (COP). Delegates, potential project investors, and other stake holders interested in the flexibility mechanisms created under the Kyoto Protocol, especially joint implementation (JI) and the Clean Development Mechanism (CDM), may profit from these reviews of AIJ projects in the region.

The Kyoto mechanisms offer a challenge and opportunity to channel investment to more sustainable energy and industrial projects while lowering the overall cost of compliance with the ambitious emissions reduction targets, set in the Protocol. But making the mechanisms work is not simple. A well-structured project-based crediting program under the Kyoto Protocol will have to simultaneously perform three difficult tasks. First, the project must demonstrate real reductions in greenhouse gas (GHG) emissions. Second, host firms must receive an adequate supply of capital and technology to make the project worthwhile to them. And finally, investing firms must receive enough "emission reduction units" (ERUs) from the JI or Certified Emissions Reductions (CER) from CDM projects to make the project interesting from their perspective.

The case studies on AIJ experience in the region illustrate the importance of good governance to successful market programs. The CEE countries, wishing to engage in JI, will need to increase the attention and resources they give to implementing the Kyoto Protocol. Specifically, countries must pay more attention to making themselves attractive targets for investors seeking cost-effective CO2 reduction opportunities. They must make more concerted efforts to integrate JI into their overall development goals. At the same time, many of the problems highlighted in the case studies can only be remedied by decisions taken by the international process, specifically at the Conference of the Parties to the Climate Convention.

Good Governance in National Programs: A meaningful and effective project-based program under the flexibility mechanisms of the Kyoto Protocol requires decisions and actions by national governments to:

• Align and integrate JI into national priorities and a long-term national development vision. The five case studies indicate that AIJ projects are being implemented on a piece-meal basis rather than by using a long-term strategy to link economic development, technological innovation, and climate objectives. Currently, Annex I EIT's reform strategies in key sectors (e.g., energy) fail to incorporate climate objectives, while AIJ projects fail to reflect changes in the larger socioeconomic framework;

• Specify clear legal authority and competencies for project selection and approval. It is already clear that AIJ projects involve uncertainty concerning how and by whom projects are selected and approved. This leads to substantial transaction costs, including those related to search, negotiation, and approval. Questions that need to be addressed by recipient governments include: Which department(s) have the legal authority to "select and approve" AIJ projects? How easy is it to follow and monitor the procedures? How difficult is it for potential investor and host firms as well as NGOs and public interest groups to find reliable, easy-to-understand information about project selection and approval?;

• Establish actionable project selection criteria. Some of the case-study countries (e.g., Bulgaria, the Czech Republic, and Poland) have developed selection criteria. However, case studies indicate that criteria are substantively quite general and usually function as suggested guidelines rather than mandatory obligations. Countries need to develop and implement clear, transparent and actionable project selection and approval criteria; and

• Set up systems to ensure transparency of decisions, public oversight of project performance and information dissemination to business. Most Annex I EITs in CEE have already committed to transparency and public participation in environmental matters by signing and planning to ratify the Aarhus Convention on Access to Information, Public Participation in Decision-Making, and Access to Justice in Environmental Matters. This framework is applicable to both country JI programs and specific AIJ/JI projects, as the latter are in sectors specified by Annex I of the Aarhus Convention. The application of the Aarhus principles to JI projects will require that governments create channels so that NGOs and other constituencies can participate in country JI program design, and AIJ/JI project selection and approval processes. They must be able to monitor and make public information about AIJ/JI project performance.

These four key components of a national system for project-based flexibility mechanisms will streamline decision-making and reduce transaction costs and motivate participation by private sector. They will help to make sure that individual projects become an instrument for capital inflows and technological innovation in support of long-term national development objectives; and they will involve civil society and create checks and balances to make certain that GHG reductions are achieved by each project under the Kyoto flexibility mechanisms.

International Governance Decisions and Guidance from the COP: A national system in a recipient country, however, may stumble over three issues at the core of project-based flexibility mechanisms: baselines, additionality and credit-sharing. These issues are currently being discussed by governments, expert groups, and the subsidiary bodies to the Convention. The CEE case studies and discussions by the Advisory Committee suggest specific problems that require decisions and/or guidance by the COP.

Baselines: Experience with AIJ in CEE underscores the need for a set of common rules, or at least guidelines, on baseline assessment. Case studies illustrate that for many AIJ projects, selecting and evaluating baselines consumed considerable time and effort and thus generated high transaction costs. In addition, discrepancies in baseline assumptions were frequent and led in turn to high levels of uncertainty (the Czech Republic, Poland, Bulgaria). The lack of local expertise in baseline assessment not only added to the uncertainty but also made the AIJ/JI benefits controversial. Therefore a common set of baseline rules or guidance should aim to reduce uncertainty and transaction costs. The COP should create and adopt an independent mechanism for baseline review and validation. Such a mechanism should identify and train experts in recipient countries.

Additionality: The case studies raise specific issues, which should be considered in developing the rules for the assessment of project additionality: whether commercially viable projects or projects implementing existing legislation (e.g., previously enacted air pollution standards) should be considered additional under the flexibility mechanisms rules. The COP needs to specify what criteria are useful in defining additionality, especially whether to prohibit projects in the "commercially viable" and "existing legislation" classes. If a "commercially viable" or "existing legislation" ban is not adopted by the international community, there remains a need to clearly define a framework to reduce uncertainty in determining the "additional" component of a project that makes economic and financial sense or achieves the objectives of existing national legislation.

Credit-sharing: Although the AIJ pilot does not allow emissions reduction credits to be applied to the Kyoto Protocol targets, the subject did arise in the region. The case studies suggest concerns over two credit-sharing principles: how to share credits between the investor and the host, and how long a project should be able produce credits. The second question - duration of credit-sharing agreements - has to reconcile two conflicting interests: those of the investors who are interested in generating credits throughout the life of a project; and the host country whose future commitments are unclear (Annex I CEEs' first commitment period expires in 2012). A detailed assessment of experience in the pilot AIJ phase and guidance from OECD Annex I Expert Group can help governments in weighing the benefits and liabilities in the credit sharing agreements they are likely to form.

An overall conclusion from the AIJ experience in CEE is that the level of uncertainty is so high that governments, investors, and NGOs are cautious in their assessment and/or involvement in AIJ. Stakeholder caution is likely to increase in a crediting regime, and therefore uncertainties and bottlenecks need to be addressed to support healthy JI programs. The COP should consider and set clear rules for assessing project baselines and additionality before entering into crediting regimes.

National governments who wish to engage in flexibility mechanisms also need to make considerable investment in building the national institutional and policy infrastructure to support project-based flexibility mechanisms. Without an institutional infrastructure in place, JI and CDM projects are unlikely to become cost-effective mechanisms for emissions reduction, technological innovation, and economic growth. This infrastructure would need to have clear and operational selection and approval criteria integrated into local and national development objectives; streamlined institutional procedures; transparency and public oversight and participation; stable and favorable investment climate for both domestic and foreign investors; and finally, local capacity for baseline and additionality assessment and project validation.