The prevailing legal conception of offset mechanisms under the Kyoto Protocol was an arguably exclusive bilateral instrument. Both Denmark and Finland explored the use of Joint Implementation (JI) as an instrument to incentivise domestic emission reductions.
For both the Danish and Finnish government we explored whether JI can be used as a domestic policy instrument. The assessment covered:
- a discussion of the opportunities that come with domestic JI,
- case studies (EU, Japan and the US) which address the issue of domestic offsetting as part of their climate change strategies, and
- the establishment of a legal and procedural roadmap for both national and international regulatory action to make domestic JI an effective tool of emission reduction policies in Annex I countries around the globe.
The Kyoto Protocol (KP) describes Joint Implementation (JI) as a bilateral mechanism that allows a Party included in Annex I to transfer to, or acquire from, any other Annex I Party emission reduction units (ERUs) resulting from projects.
The common understanding of the bilateral character of JI is that JI projects require a priori two national project approvals, one from the host Party and the other one from the State Party that acquires the ERUs. The scope of the approval requirement is essential to evaluate the role JI can play as domestic offset standard. Domestic JI means the unilateral implementation of an emission reduction project and issuance of ERUs on the basis of verified reductions to a domestic public or private entity. According to our analysis, Article 6 of the Kyoto Protocol only requires bi-country involvement for the cross-border transfer of ERUs. Its current form would support the unilateral development of JI projects, verification, issuance of ERUs and domestic ERU transaction.
To some extent, unilateral JI is practiced today. Under guidance from the Joint Implementation Supervisory Committee (JISC), the JI Track 2 governance body, JI projects can be developed, registered and operated on the basis of host country approval alone. This is a deviation from the Marrakesh Accords which had considerably reduced the scope for domestic JI by submitting all Track 2 determination (and thus registration) to a priori bilateral project approval. This being subsequently remedied by the JISC, bilateral approvalremains necessary at the stage of verification. Issuance of ERUs and domestic transactions, thus, are out of the picture under current rules and the current practice. Equally for Track 1 JI, although legally being unaffected from this restriction, countries have followed suit by excluding domestic ERU transactions from the outset.
JI does however require a second Annex I project approval for the transfer of ERUs to another Annex I registry. While such requirement is evident where another Annex I country or an entity from such country has invested in the JI project, it is less convincing (and harder to implement) where it applies to ERUs that have been already traded internally and where the link to the initial project developer is not any longer evident. In these cases ERU trading resembles more International Emissions Trading (IET), which requires the authorization of the trade and participating entity, but not of any underlying project.
Clients: Danish Energy Agency; Finnish Institute of International Affairs (FIIA)
Partners: During this assignment I was a staff member and shareholder of Climate Focus. The advise to the FIIA was formulated together with Greenstream.