What should happen to JI after Kyoto?
The future of JI after the Kyoto Protocol expires in 2012 is currently unresolved. An estimated 300 million carbon credits (Emission Reduction Units, or ERUs) will be in circulation by the time the treaty expires.
However, the JI scheme is expected to be operational for a few more years, as ERUs are valid for a crediting period running from 2008-2015. What happens next is anybody's guess.
"The market is currently in a general state of uncertainty," Natalia Yakymenko, an analyst for Point Carbon told EURACTIV. "Investors are reluctant to come to the market now for emissions reductions after 2012. They're not sure if they'll receive anything back for their investments and if so, what."
Russia's opposition to a second round of emissions reduction commitments after 2012 has added to the uncertainty abut the scheme's future. Alexey Korkorin, head of the World Wildlife Fund (WWF) in Russia, suggested that it be transformed into a voluntary emissions market. "Prices would of course be significantly lower," he told EURACTIV "but if it's profitable, why not? There could be a direct agreement with the EU and others to continue JI, but with a very limited amount of projects."
He hoped that the EU could support such an approach.
In theory, ERUs could be accepted into the EU's Emissions Trading Scheme (ETS) as the emissions reduction obligations guarantee demand for such credits up until 2020. But whether the demand would be sufficiently great to make the investments attractive is an unknown.
Should JI be brought into the EU ETS?
JI is a form of domestic carbon offset and the EU still has unfinished business concerning the appropriateness and potential design of its domestic offset scheme.
One possible solution on the demand side would be for ETS projects to accept ERUs for domestic EU projects, according to Benoit Leguet, an executive committee member of the Joint Implementation Supervisory Committee (JISC) and head of research at CDC Climat, a carbon finance group funded by the French government.
"JI can be carried out in Russia, Ukraine outside Europe or inside Europe," Leguet told EURACTIV, "and this is what some European countries have been doing so far - France, Germany, Poland, Bulgaria, Romania etc. As we are talking about European emissions reductions, somehow this should be counted towards the goal of reducing Europe's emissions by 20% by 2020."
Some argue that JI schemes would work best within a 'baseline credit system' that allows polluters not covered by an aggregate emissions cap (like the ETS) to create carbon offset credits by reducing their emissions below a baseline level. These credits could then be traded with polluters that do not have a regulatory limit. Leguet felt "strongly" that such schemes could complement the ETS - and to some extent already were.
What should happen to surplus credits of 'hot air'?
It is estimated that Russia alone has between 3.5 billion and 5 billion Assigned Amount Units (AAUs) stored, as a result of over-allocation of carbon credits. These had been allotted according to industrial output figures of the constituent republics of the then-Soviet Union, prior to the collapse of their economies after 1990.
If all of Russia's stored AAUs were released onto the market, their price would collapse to near zero. But, as this is not in Russia's interest, analysts believe it is unlikely. "The demand is quite low so who would buy them?" Yakymenko asked. But countries such as Japan continue to buy some of these 'hot air' credits to offset their carbon emissions when these exceed the Kyoto targets.
Alexey Korkorin recommended that governments use the AAUs "as a sort of a national heritage in their presidential speeches, that Russia reduced emissions from 1990-2030 by X billion dollars etc. It is a tool for future PR but for now, we should just ignore it." One day they could even be used for domestic emissions trading between Russia's regions in his view.
A post-2012 'carryover' of the credits into whatever post-Kyoto regime emerges has also been suggested by many analysts. However proposals to this end by the UN's Joint Implementation Supervisory Committee (JISC) have not yet been agreed.
Do Track 1 projects lack transparency?
JI projects proceed along one of two pathways: 'Track 1' or 'Track 2'. Track 2 procedures are uncontroversial. They are implemented when a host party only meets some eligibility requirements to transfer or acquire ERUs. A verifications procedure then takes place under the aegis of the UN's Joint Implementation Supervisory Committee (JISC), a respected independent body.
By contrast, Track 1 procedures apply when a host country is said to have met all eligibility requirements. The verification process then only occurs between the host and investor country to ensure that any emissions reductions are 'additional' to what would have happened anyway. But the process is not always made public, and so it has given rise to suspicions, complaints and protests.
The lack of certainty that the JI will continue after the Kyoto agreement has run its course is one factor affecting business confidence in the mechanism but there are others. According to Jan-Willem van de Ven, Senior Carbon Manager at the European Bank for Reconstruction and Development, many European investors rightly don't believe that it is working well.
"Unfortunately the [European] banking region for various reasons is falling behind more ambitious regions like China and India and Latin America," he said. The reason was only partly due to liquidity problems resulting from the recession.
JI also started later than the CDM and in many countries, license applications have been processed slowly, causing hold-ups in the approval of projects.
In the Ukraine, approvals of JI have been followed by demand from the industrial and power sectors for letters of approvals to provide JI projects, which were often delayed. However, in Russia, the state-owned Sbersbank recently announced that it would proceed with a third tender of 70 million carbon credits if there was sufficient market demand.
How secure is it?
JI has suffered several crime-related setbacks. The most infamous case occurred when Slovakia's sold millions of AAUs to Interblue, a US registered company run out of a garage at less than half the going rate. The country may have lost up to €40 million as a result. An environment minister was sacked, as the scandal struck the country in 2009.
The disappearance of 15 million tonnes of emission rights that Ukraine had agreed to sell Japan in the same year contributed to an impression of a scheme lacking elemental security protocols.
"If I'm honest, we have a hard time tracking the sales of AAUs," Elsworth said. "It's not a massively well-known or transparent process. There's no centralised registry for it or clear indication sometimes that sales are taking place. It's only when reporters or the speciality press get wind that we become aware of it." But tighter control of information flows can also be a useful precaution against criminal exploitation and are often country-specific.
Questions about conflicts of interest were recently raised after Russia's Sberbank handed out $175 million of carbon credits from a JI offset scheme to a company linked to a firm that owed it over $800 million. One JI insider told EURACTIV that this move "raised eyebrows." Korkorin said that WWF was "disappointed" by the move.
"It is understandable that they would like to have profits and be a decision maker but it is not good for JI as a whole," he said. "Voluntary emission reduction projects in Russia after the Kyoto Protocol should be absolutely independent from Sbersbank."
The overwhelming majority of JI projects in Russia led to real emissions reductions in his – and most observers – views, but Sberbank was "over-checking and over-controlling everything," he complained. "Its role is negative on the whole," he said. "Sbersbank follows the interests of the bank itself rather than the maximum effort to accelerate JI, unfortunately." Its objective was probably to obtain a supra-regulatory position, he suggested.
Has JI been flexible enough?
The carbon emissions allowed to the former Soviet countries were drawn up in 1990, shortly before state subsidies to failing industries were withdrawn, and whole industrial sectors disappeared from the map. This led to problematic baselines being drawn.
For example, Russia's emissions in 2007 were 37% lower than in 1990 and may have fallen further to as much as 50% lower in 2009 due to the global economic downturn.
But, critics say, an inflexibility in JI meant that the original estimates could not be revisited and as a result, Russia's hot air surplus has become a bargaining chip blocking a deal on a Kyoto successor pact.
How environmentally useful have JI projects been?
The environmental efficacy of JI has sometimes been questioned because its credits have so often been used, for instance, for shale gas and industrial projects rather than to support renewable energies. The"additionality" of the carbon emissions reductions involved is thus moot.
Critics also charge that some JI-funded emissions reductions would have happened anyway without the ERU mechanisms. Many involved the modernisation of outdated industrial plants: Russia and the Eastern European countries can be seen to have benefited from a subsidy that has given them a competitive advantage.
"These investments were necessary for these companies," Yakymenko said. "These post-Soviet countries have a lot of enterprises that are quite old and heavy and the JI projects need proof ofadditionality and energy efficiency improvements. One of the major locking stones is that they would not have happened without foreign investment."
Has JI been a success?
JI's perceived success (or otherwise) will to some extent determine its post-Kyoto fate and how far its example is emulated in other carbon schemes.
A consensus stretching from NGOs to market experts holds that it has had many noteworthy achievements, despite its limitations. Emissions reductions have been achieved, infrastructure has developed, investments have flowed and projects have been established. But environmentalists question whether such factors should be the sole criteria used for defining success.
In Ukraine, carbon credits issued by JI account for only about 10% of the entire CDM volume, and JI projects constitute a small percentage of the global carbon market. Direct emissions reductions from JI have also been small. Advocates of JI sometimes complain that the scheme was severely handicapped by a lack of informed involvement from host countries. But equally, they point to the auditors, procedures, infrastructure and accumulated experience from the scheme as being valuable in themselves.
The EBRD's Jan-Willem van de Ven paused before venturing an opinion on whether the scheme had been successful. "By putting a value to carbon, I think that we at least helped put climate on the agenda and if there hadn't been JI, my guess is that we'd be even further from involving these countries in the international climate market," he said.
"Has it been a success in terms of volumes? I don't think so. The region is good for about 13% of the global emissions, the amount of carbon credits coming from the region is so far about 3%, so they're not pulling their weight."