Conclusion
1. Summary of Results
Climate is changing and there is increasing evidence that this is due to the excessive release of anthropogenic greenhouse gas emissions into the atmosphere.
As a consequence of this unnatural change, severe adverse impacts on natural and human systems are expected. The first forerunners are already experienced today.
As a consequence, the international community took action and agreed on the United Nations Framework Convention on Climate Change and adopted the Kyoto-Protocol to this Convention. Although the latter has not entered into force until today due to the lacking ratification of at least Russia or the US, it still is the most advanced international agreement on climate change.
Though the Kyoto Protocol is quite advanced in terms of specification of rules, a number of issues are still unresolved or undecided. These issues are mostly related to the allocation of GHG emission entitlements among Parties to the Convention and across time. Against this background the present study tried to answer the following five questions:
1. How must the rules for the determination of emission reductions by renewable energy projects in developing countries be set in order to avoid the crediting of non-additional emissions reductions and to avoid adverse incentives regarding cost efficiency of the international climate policy regime?
2. How can the burden of limiting GHG emissions be shared among states in such a way that the two justice principles responsibility (for climate change) and equity of rights are combined while at the same time offering flexibility regarding the time of fulfilling the resulting obligation for each Party?
3. How can the European Union, the leader in international climate policy, continue its burden sharing after 2012 and what are the consequences of different approaches regarding the costs and the negotiation process among member states?
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4. How can the emissions from international maritime transport, which are currently not part of any Parties’ GHG emission inventory, be addressed by and integrated into the international reduction efforts?
5. What are the implications of different approaches to allocate GHG emission entitlements to the participants of multi-period emissions trading schemes?
During the analysis of the first question in Chapter 2, the following general dilemma emerged. On the one hand, strict rules for issuance of certified emission reductions (CERs) generated through CDM-projects are necessary in order to avoid the crediting of non-additional emission reductions.90 Fake credits may be beneficial to investors, but would worsen the environmental integrity of the clean development mechanism. On the other hand a stiff investment additionality threshold91 would make these projects become more attractive than other projects which are economically viable without supplement income from the sale of CERs.
This may provide incentives for investors to decide in favour of projects which are not cost-efficient from the macro-economical point of view.
For renewable energies (RE) two other aspects must be considered in this context.
Firstly, the yield of RE-projects generally depends on the site where the device is installed. Secondly, electricity is often traded across borders while emission reductions are calculated in a national context only. Together, these two aspects may create an incentive to invest at unfavourable sites. To give an example, there may be an incentive to install wind turbines at sites with low wind speed but high computed emission reductions. This point was studied in more detail by simulating two concrete options: an investment in a wind turbine and in a photovoltaic module. The theoretical findings are found to be relevant for realistic projects.
90 This is why the corresponding discussion is referring to the “additionality” requirement.
91 I. e. a threshold which only allows the issuance of CERs to additional and thus non-economical projects.
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To overcome this adverse incentive, two suggestions were made. Firstly, the quantification of reductions should be based on the electrical grid the RE device is connected to and not on the basis of national statistics. Secondly, a fuzzy investment additionality approach was introduced according to which CERs are issued as a function of the IRR of the project in question. By so doing the undesired incentive can clearly be weakened.
The investigation of the second question starts with a review of different justice principles. When trying to apply these principles in the context of the allocation of GHG emissions entitlements, as in other contexts, the problem arises that there is no one and only principle which is supported by all Parties involved in the international climate negotiations. Views are particularly opposed between industrialised and developing countries.
Regarding the high number of possible allocation schemes, two approaches which are worthwhile to be mentioned, are the so-called Contraction and Convergence approach and the Brazilian Proposal. The first one is supported by a number of stakeholders and is mainly based on the principle of equity of rights. The second approach is based on the principle of responsibility and has formally entered the international climate negotiations. In the course of the analysis in Chapter 3, these two principle have been combined in such a way that the average emissions per capita are the same for all people on earth from a certain year in the past to the future. The outcome is an allocation which may be perceived as fair though it may lack political support from industrialised countries. Most of them would receive a few, even negative, emission entitlements due to their accumulated historical contribution to climate change.
Another interesting feature of the combination proposed is the great flexibility the approach offers. Parties would be allowed to start contributing to limiting global GHG emissions whenever they like. However, the later they start, the more negative the “emission entitlement account” will be in subsequent periods.
Sharing the burden of limiting GHG emissions is, however, not only an issue between industrialised and developing countries; it is also a potential source of
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conflict within the former group. This is why different burden sharing options, among which the one proposed in Chapter 3, are studied for a long-term European emission target in Chapter 4. As the EU will have new members after 2012, the year the current burden sharing agreement ends, the states joining the EU on May 1 2004, as well as Romania and Bulgaria, have been included.
The analysis of the cost implications of the different approaches for the member states reveals that costs may differ strongly at least for some member states.
Others, however, may be almost indifferent regarding the different options as cost differences are small, especially when put into relation to GDP. Given these distributional implications, an indicator was developed which describes each member state‘s expected interest in the negotiations on the burden sharing in Brussels. By choosing a “relevance threshold”, conclusions on the complexity to be expected during these negotiations may be drawn.
Like GHG emissions from developing countries, emissions from international aviation and international maritime transportation are also uncapped, i.e. there is no quantitative limit for them. This is quite unsatisfactory as all these sources show rapidly increasing GHG emissions. Against this background, GHG emissions from international shipping are discussed in Chapter 5.
The discussion of options to allocate these emissions to Parties of the Convention shows that different alternatives exist in theory which are, however, inadequate in practice. This is either for political, environmental or technical/economic reasons.
Annex-B Parties, for example, have already been and are likely to continue to be reluctant to have these emissions included into their emission inventory on the basis of bunker fuel sold in their ports. This would put an additional burden on them. In contrast to that, non-Annex-B countries do not mind using bunker fuels sold in their ports or other rules92 as a basis as they currently do not have an emission target. If emissions were allocated that way, environmental integrity would not be secured. Other options as for example the application of the
92 As for example the tonnage registered in their shipping registers.
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pays-principle seem tempting, however, transaction costs for assigning specific emissions to a specific, responsible person are prohibitive.
An analysis of the possible instruments which could be introduced to address this problem shows once again the trade-off among different criteria as for example environmental effectiveness, cost efficiency, dynamic efficiency, institutional complexity or conformity with existing regulation. It is concluded that the most promising strategic option for the International Maritime Organisation, the body through which this sector shall be addressed according to the Kyoto-Protocol, is to accept an overall cap for emissions from international maritime transportation and to subsequently allocate the resulting budget of emission entitlements to the individual shipping companies or ships. For a prompt start of emission reductions in this uncapped sector, a CDM-type mechanism is proposed. However, the same aspects regarding undesirable incentives and environmental integrity as discussed in Chapter 2 would have to be kept in mind.
When talking about the allocation of allowances in GHG emissions trading schemes, one has to keep in mind that real trading schemes are multi-period games. This is to say that emission entitlements are allocated to the participants at the beginning of a period and that they have to surrender entitlements equal to their emissions at the end or the beginning of the next period. If the entitlements are distributed free of charge as it is the case for most existing and planned trading schemes, the question arises of how to allocate emissions in the subsequent periods.
As existing and planned schemes mostly propose either an emission based or benchmark based allocation, these two options are studied in detail. The options are specified in such a way that entitlements are either allocated on the basis of initial, i.e. constant reference figures over all periods or on the basis of rolling reference figures, that is to say figures that are updated each period. As governments generally do not behave in a cost-minimising manner, the electricity sector, a major source of GHGs, has been used as an example instead. A realistic power market with more than 100 power plants is simulated over two periods.
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It turns out that there is no impact of different allocation rules on the electricity market. This is due to the fact that producing and thus emitting greenhouse gases always involves the same costs for the company which is the price on the carbon market. From the company’s point of view, it is unimportant whether the emission allowance was purchased or received free of charge. In the latter case, the opportunity costs of using the allowances must be considered.
What differs are the compliance costs for the different installations. Compliance costs are defined as the sum of the costs for reducing emissions in-house and for purchasing or selling allowances on the market. It was found that the installations’
preference regarding the different allocation options depends on the emission intensity of the fuel used and the price on the carbon market. These findings may be helpful when determining national energy policies and the national allocation plans for allowances as for example in the context of the upcoming EU emissions trading scheme.