EXECUTIVE SUMMARY For over a decade, the Environmental Defense Fund (EDF) has been engaged in the design, development, and implementation of markets for environmental protection. These activities have ranged from the creation of markets for water savings from conservation investments to reduce irrigation to the acid rain allowance trading system of the Clean Air Act Amendments of 1990. Since 1985, EDF has been concerned about the problem of global climate change and has been working to develop both a scientific understanding of the problem as well as practical solutions. This paper represents our current thinking concerning a framework for an international protocol that could deliver both the environmental and economic benefits desired. The concept of emissions budgets were first introduced by EDF at the meeting of the Ad Hoc Group on the Berlin Mandate (AGBM) in February of 1996 in Geneva at the request of the Netherlands. The fundamental strategy of emissions budgets is to establish a dynamic framework of review and leaming over time by harnessing in tandem a continual process of scientific and technical review to a process of emissions control within a legally binding framework which allows parties to trade extra emissions reductions. Of course, such a system must ultimately be guaged against the goals it aims to achieve. EDF believes that credible environmental goals would include: ♦ a first period of emissions reductions that begins by 2005 and ends not later than 2014 an ultimate concentration objective of 450 ppmv (CO2 equivalent), inclusive of all greenhouse gases (GHG) a transient constraint to limit the warming rate not to exceed 1o C per century. The foundation of emissions budgets are legally binding obligations for OECD nations and economies in transition established on the basis of historic emissions baselines and set as a cumulative emissions budget for 10 years. For other nations, comprehensive GHG inventories and reporting would be required. Also critical to the foundation are the transparent and verifiable annual national reports covering all gases, sources and sinks by sector and including all transacted international GHG reductions by country and vintage. The plan for this construction is given by the continuing review and evaluation process to set new budget levels which on a 10 year cycle would: assess the science review the progress of the Parties review the development and adoption of technologies. The bricks resting upon this foundation are the emissions reductions produced by Parties and their transaction through international greenhouse gas emissions reduction trading. Parties' performance in meeting their emissions obligations would be durable with savings for early reductions and automatic debt carryover for any shortfalls. Performance would be evaluated for all GHG emissions by sources, uptake by sinks, and transactions in terms of 100-year global warming potentials (GWPs). Joint Implementation, for credit, is an essential element for addressing both graduation and economic competitiveness concerns. For nations that have not taken a budget, project-by-project crediting of reduction investments with the possibility of international review would be the primary trading path. For nations with a budget, full international trading of reductions is available. In addition, for those non-Annex I Parties that opt to take an emissions budget, an explicit growth allowance should be provided. Such growth allowances would be made available under a formula by which they would decline over time so as to reward early participation. The mortar holding the system together is the incentives for sovereigns to meet their underlying emissions commitments. These include: All GHG reduction obligations remain until discharged For Parties with cumulative net emissions greater than the budget but less than all emissions greater than budget automatically deducted from next ❖ dispremium charged on emissions over budget (e.g., 1.2 to 1.0) * Above Plus automatic discounting of the non-complier's sold GHG reductions that have not yet been used by other countries for compliance beginning in the year of first occurrence (discounting to be in proportion to amount of non-compliance) For Parties with cumulative net emissions greater than 120%: → Above Plus mandatory COP review of Party's noncompliance ❖ Prohibition on further sales of reductions as of the date of noncompliance Under the emissions budget approach, each nation would be free to meet its budget and earn savings in any way, consistent with its own sovereign priorities, that it chooses. Each Party would determine whether it would participate in international emissions trading and who would be empowered to do so. The approach is designed to capitalize on our greatest asset in addressing the global threat of climate change -- human ingenuity. Emissions budgets reward early adopters, innovators, savers, and cost reducers. EDF believes that emissions budgets provide a straightforward, uncomplicated policy framework with clear environmental goals and easy to measure perfomance that is sufficiently flexible to consistently capture these assets over time. INTRODUCTION ́1 Under the "Berlin Mandate" adopted at the first Conference of the Parties (COP), signatories to the United Nations Framework Convention on Climate Change (FCCC) have committed to develop a protocol to control greenhouse gas (GHG) emissions by their third Conference, to be held in Kyoto, Japan in late 1997. In the atmosphere, these pollutants, the byproducts of fundamental economic activities like energy production, transportation and agriculture, can lead to accelerated warming resulting in dangerous changes to the earth's climate system. Analyses produced by the Intergovernmental Panel on Climate Change (IPCC) indicate that failure to limit the emissions of these gases are expected to be damaging to natural ecosystems and costly to the many human societies that have developed during the 10,000-year period of relative climate stability leading up to the present.-2 At the same time, because of the link between GHGs and activities fundamental to both industrialized and developing economies, many anticipate, or at least fear, that the costs of limiting their emissions will be high. For the same reason, others question the capacity of any international agreement to establish a truly durable and efficacious regime for limiting these emissions. This doubt is intensified by the fact that an international GHG regime could exist only as the artifact of a voluntary agreement between and among sovereigns, often in competition with each other, and representing the widest possible diversity of economic needs and resources and political and cultural aspirations. As a result, the tools that can be used to induce or enforce compliance by sovereigns with their GHG emissions obligations may be limited - and downright meager when contrasted with those that domestic authorities can bring to bear to ensure that private firms comply with domestic emissions limitation requirements. In view of these circumstances, an international program must meet a set of exacting tests of equity, economic efficiency and responsiveness, durability in terms of legally binding commitments, flexibility and, above all, environmental efficacy - if it is to be credible. In addition, the international regime should function as a framework that can encompass the inevitable variety of domestic policies and measures - ranging from emissions taxes and technology standards to emissions cap-and-trade systems – that This paper was written by Dr. Daniel J. Dudek, senior economist, and Joseph Goffman, senior attorney, of the Environmental Defense Fund's New York and Washington offices respectively. EDF is a not-for-profit, non-governmental organization that combines science, law and economics to solve environmental problems. The authors can be reached at 257 Park Avenue South, New York 10010, telephone (212) 505-2100 or 1875 Connecticut Avenue, NW, Washington, D.C. 20009, telephone (202) 387-3500. In addition, EDF's international counsel, Annie Petsonk, can be contacted at the Washington office. 2 See Intergovernmental Panel on Climate Change, Science of Climate Change; Impacts. Adaptation and Mitigation of Climate Change: Scientific-Technical Analyses, Cambridge University Press, 1996. each nation will adopt in the exercise of its sovereign decision-making for the purpose of meeting its international obligations. Equally important, the protocol must be designed to create a reliable mechanism of accountability for nations' performance of their GHG emissions obligations. Finally, the FCCC itself introduced and codified a distinction between nations characterized by advanced industrial economies (denominated as "Annex I Countries" in the parlance of the FCCC) and those at all other stages of economic development. It is all but certain that this distinction, or some form of it, will inform at least the initial structure of the commitments and obligations propounded in Kyoto, with few, if any, emissions limitations imposed on the developing countries. Nevertheless, because of rapid economic growth and other conditions, the latter category of countries are expected to contribute an ever increasing proportion of global anthropogenic emissions of GHGs. Consequently, the international regime must be sufficiently dynamic to induce those nations ultimately to participate in a worldwide effort to limit GHG emissions. This inducement is key both to an environmentally effective agreement and to limiting economic advantage from non-participation. In response to these challenges, EDF first introduced the concept of emissions budgets at the February 1996, meeting of the Advisory Group on the Berlin Mandate (AGBM) in Geneva at the invitation of the Netherlands. Emissions budgets are the building blocks both of a verifiable and legally binding protocol and an effective international emissions trading regime. This paper builds on that earlier work to elaborate particularly on the critical reporting and compliance elements of this policy approach. In July, 1996, at a meeting of the second COP in Geneva, U.S. Undersecretary of State Tim Wirth announced U.S. support for negotiations that would lead to legally binding GHG emissions limitation and reduction obligations. Because it marked a watershed shift in U.S. position, Undersecretary Wirth's statement transformed the international debate on climate change by making the prospect of success for the Berlin Mandate plausible, perhaps for the first time. At the same time, Undersecretary Wirth's statement linked acceptance of such obligations to the availability of flexible, cost-reducing mechanisms of international emissions trading and joint implementation for credit. During the December, 1996 meeting of the AGBM the U.S. government offered a document containing a preliminary description of a system of national emissions limits and international GHG emissions trading including the option of emission budgets. The U.S. followed its December submission with proposed draft protocol language on January 17, 1997 embodying the concepts included in the earlier document, but now focusing on emissions budgets. The proposed draft language provided further detail, but contains, as 1 See Dudek, Daniel J., “Emission Budgets: Creating Rewards, Lowering Costs and Ensuring Results", Proceedings Climate Change Analysis Workshop, Springfield, Virginia, June 6-7, 1996, 18 pp. |