Axel Michaelowa

Transaction costs of the Kyoto Mechanisms

Transaction costs will reduce the attractiveness of the Kyoto Mechanisms compared to domestic abatement options. Especially the project-based mechanisms Clean Development Mechanism (CDM) and Joint Implementation (JI) are likely to entail considerable costs of baseline development, verification and certification. The Activities Implemented Jointly (AIJ) pilot phase and the Prototype Carbon Fund (PCF) programme give indications about the level of these costs. Under current estimates of world market prices for greenhouse gas emission permits, projects with annual emission reductions of less than 50,000 t CO 2 equivalent are unlikely to be viable; for micro projects transaction costs can reach several hundred € per t CO 2 equivalent. Thus, the Marrakech Accord rule to have special rules for small scale CDM projects makes sense, even if the thresholds chosen advantage certain project types; projects below 1000 t CO 2 equivalent per year should get further exemptions. An alternative solution with no risk for the environmental credibility of the projects would be to subsidise baseline setting and charge lower, subsidised fees for small projects for the different steps of the CDM/second track JI project cycle.

Estimating the CDM market under the Marrakech Accords

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely. The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDMs share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.

Defining Investment Additionality for CDM projects--practical approaches

The environmental integrity of the CDM under the Kyoto Protocol depends on the possibility to avoid giving emission credits to projects that would have happened anyway. Whether and how ?Investment Additionality? of CDM projects has to be determined is currently part of climate negotiations. We discuss the rationale of companies to invest in projects and analyse possible criteria to determine Investment Additionality from a theoretical point of view. A number of case studies is used to show the implications of the different criteria. The use of a single criterion is not possible, especially due to the importance of non-monetary barriers. However, some criteria are better than others. Moreover, the institutional framework for the selection and application of criteria is very important. Concluding, we suggest a combination of a threshold Internal Rate of Return with a risk factor as primary criterion. To take nonmonetary barriers into account, additional criteria could be used such as the existence of similar privately financed projects in the host country. If no explicit criterion is politically feasible, stringent baseline methodologies could at least capture some aspects of Investment Additionality.

Synergy of adaptation and mitigation strategies in the context of sustainable development: the case of Vietnam

Abstract An emerging topic in current climate negotiations is the political momentum for recognising adaptation to climate change as a crucial part of a comprehensive climate policy. However, there are a number of arguments and doubts raised by politicians, negotiators and environmentalists alike with regard to the necessity of implementing adaptation in parallel with mitigation. The first aim of this article is to analyse possible contradictions and synergies between these two strategies and analyse the implications for developing countries and sustainable development targets. We then use Vietnam as a case study to demonstrate how to integrate mitigation and adaptation strategies that can provide additional benefits to the social welfare. This empirical analysis provides a basic understanding of how to address thorny questions in a nascent process of designing public climate policy in Vietnam. Lessons drawn from this research should be replicable in other developing countries having similar circumstances.

Coding Error or Statistical Embellishment? The Political Economy of Reporting Climate Aid

During the last few decades, general awareness has increased that along with problems of international development, environmental problems, notably with respect to climate change, represent yet another global challenge. In an attempt to win further public support for aid expenditures, aid administrations may have tried to make use of this trend in public perception by labeling some of their aid activities as conducive to the mitigation of, or the adaptation to, climate change. In this case, whether a donor reports a project with a climate-related “Rio marker�? should depend not only on the actual content of the project, but also on the national voters’ ecological preferences, meteorological extreme events, or the media coverage of international climate policy issues. In our paper we test these hypotheses using project-level aid data and country-level political data for 21 DAC donors from 1995 to 2007. Keyword search in the project descriptions of the PLAID database and complementary hand-coding allows us to assess all projects for their actual climate change-related content, and to thereby construct our most relevant control variables. We then econometrically analyze the impact of political factors on climate aid reporting, in a multilevel setting, controlling for a number of additional project-level and donor country characteristics. Our results reveal that indeed, coding is influenced systematically by political factors. Further factors are a misinterpretation of the Rio marker, and insufficient coding diligence.

Avoiding perverse effects of baseline and investment additionality determination in the case of renewable energy projects

As part of the international climate negotiations there is a lot of discussion about methodologies for quantifying emission reductions of greenhouse gas reduction projects (baseline discussion) and about granting emission reduction credits only to projects that are additional (Investment Additionality discussion). So far this discussion has been fairly general and has not systematically analysed the impacts on investor decisions. We analyse these impacts for the case of renewable energies and show that the approaches under discussion can all give perverse incentives to invest at unfavourable sites. Thus, higher CO2 abatement costs than without any crediting system might be realised resulting in inefficiencies in climate policy. To overcome this problem we introduce a new Investment Additionality concept and propose to have only one emission reduction factor for each electricity grid.

Joint Implementation – the baseline issue: Economic and political aspects

Abstract The efficiency of Joint Implementation (JI) can be seriously hampered as investors and hosts of JI projects want to achieve maximum emission reduction. To avoid overstatement of emission reduction, it becomes necessary to define the emission that would have occurred without the project – the ‘baseline’. The possibility of quantifying indirect effects and market distortions through aggregation in country-related baselines is weighed up by the uncertainty of the assumptions required in an aggregate baseline scenario. Thus, project-specific baseline scenarios are recommended as a basis for JI. The paper surveys some baselines of current JI pilot projects and finds serious flaws.

Impact of interest groups on EU climate policy

The EU has been a leader in the international climate negotiations from the beginning. Nevertheless, it has not been able to implement strong policies and measures to actually reduce emissions. The strong discrepancy between declared targets and implemented action can be explained through analysis of the activities of interest groups. The article discusses the goals of the different groups and their influence on EU institutions and the climate policy process. It concludes that the institutional allocation of responsibilities favours strong targets. Concerning implementation, interests hostile to climate policy have a higher influence and thus are able to prevent strong instruments that might lead to real emission reduction. Even if instruments are accepted, budget allocations for implementation will fall far short of the needs unless another policy field with strong interests is involved.

Climate policy and interest Groups—A Public choice analysis

Climate policy is particularly prone to the activities of interest groups. How have these shaped the development of policy targets and instruments?

Development assistance and the CDM - how to interpret "financial additionality"

International climate negotiations have specified that projects under the Clean Development Mechanism (CDM) should not lead to a ‘diversion’ of official development assistance (ODA). It is however unchallenged that ODA can be used in capacity building for the CDM. Diversion can be interpreted in purpose, sectoral, and regional terms. There are possibilities to use ODA benchmarks to define diversion such as the UN 0.7 per cent target but they are unlikely to be politically acceptable. On the project level, three main options exist but none of them is perfect. The Development Assistance Committee of OECD endorses deduction of the value of emissions credits (CERs) from ODA. This however leads to a long-term pressure on the ODA level. Differentiating an ODA-financed baseline project and a ‘piggyback’ CDM option is likely to be arbitrary in many circumstances. Even if CERs do not accrue for the ODA share of the investment, still private CDM projects are crowded out due to the subsidizing of CDM projects.