Project-based mechanisms allow actions that reduce GHG emissions from, or enhance sinks beyond, what would otherwise occur to receive “credits” for the emissions mitigated; these credits can be used by Annex I Parties to help meet their emissions limitation commitments. These mechanisms include technology transfer and provide opportunities for mutual co-operation. JI involves emissions reduction or sink enhancement projects in Annex I countries. CDM involves emissions mitigation projects in non-Annex I countries.⁶⁴ Central to these mechanisms is the operational definition of what emissions would have been in the absence of the project; the baseline from which emission reductions (or sink enhancements) are measured. This section focuses on setting the baselines for crediting.

6.3.2.1 Joint Implementation (Article 6)

Article 6 of the Kyoto Protocol allows an Annex I country to contribute to the implementation of a project to reduce emissions (or enhance a sink) in another Annex I country and to receive emission reduction units (ERUs) equal to part or all of the emission reduction (sink enhancement) achieved. The ERUs received by the investor country can be used to help meet its national emissions limitation commitment.

In the case of JI, some analysts have suggested that an independent authority responsible for approving the project baseline is needed in addition to the Parties’ approval of the project. Others argue that the host government has an incentive to ensure that ERUs are issued for real emission reductions only if the government is bound to strong and credible penalties for non-compliance (see also Section 6.3.5).

Numerous issues related to JI remain to be agreed, including:

• host and project eligibility;
  
• the possibility of awarding ERUs for emission reductions from JI projects prior to the start of the first commitment period (see Parkinson et al., 1999);
  
• monitoring, verification, and reporting requirements;
  
• baseline updating frequency;
  
• ERU approval, registry, and trading conditions;
  
• supplementarity provisions; and
  
• incentives for compliance.

6.3.2.2 The Clean Development Mechanism (Article 12)

The purposes of the CDM are to assist non-Annex I Parties to achieve sustainable development and to contribute to the ultimate objective of the Convention while assisting compliance by Annex I Parties (UNFCCC, 1997, Article 12.2). The CDM allows a project to reduce emissions, or possibly to enhance sinks, in a country without a national commitment to generate certified emission reductions (CERs) equal to the reduction achieved.⁶⁵ Annex I Parties can use CERs to meet national emissions limitation commitments. In contrast to JI, for which there is little peer-reviewed literature, the literature is rapidly growing on the CDM (Goldemberg, 1998; Michaelowa and Dutschke, 1998; TERI, 1998; Hassing and Mendis, 1999; Jepma and van der Gaast, 1999; Haites and Yamin, 2000).

A process for independent review of the certification of the emission reductions achieved is necessary for the credibility of the CDM. Article 12.4 establishes an executive board for the CDM and Article 12.5 specifies that emission reductions must represent real, measurable, and long-term benefits related to the mitigation of climate change and be certified by designated operational entities. The certification process and the respective roles of the operational entities and the executive board remain to be defined, but they will be critical.

The host government must approve proposed CDM projects. As part of its approval process it will need to assess whether the proposed project contributes to sustainable development (Matsuo, 1998; Begg, et al., 2000). Some Parties have proposed criteria or procedures that the host government be required to follow when determining whether a project contributes to sustainable development of the country (see also Thorne and La Rovere, 1999; Chadwick, et al., 2000; Begg, et al., 2000).

Investments in CDM projects by Annex I governments could lead to a reduction in their official development assistance (ODA).⁶⁶ The effect of government investment in CDM projects on the level of ODA will be difficult to determine since the level of ODA in the absence of CDM projects is unobservable. However, historical figures compiled by the OECD Development Assistance Committee could be used to try to deal with this.

Article 12.8 specifies that a share of the proceeds from CDM projects will be used to cover administrative expenses and to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation. Articles 6 and 17 do not impose a comparable levy on JI projects or international transfers of AAUs, although a number of developing countries have proposed that the levy be applied to all three mechanisms.

CDM projects can begin to create CERs upon ratification of the Kyoto Protocol. The advantage is that it supports developing countries obtaining access to cleaner technologies earlier. It means that a supply of CERs should be available prior to the start of the 2008 to 2012 commitment period when they can be used by Annex I Parties.⁶⁷ Parkinson et al. (1999) argue that creation of CERs during 2000 to 2007, which are credited towards 2008 to 2012 compliance, increases the emissions trajectories of Annex I countries for 2000 to 2012. They estimate that increased Annex I emissions offset 30–60% of the CERs created during 2000 to 2012.

Some analysts argue that the CDM facilitates the transfer of CERs from low-cost emission reduction actions to Annex I investors when they might subsequently be needed by the host government to meet a future emissions limitation commitment. However, this assumes a fixed stock of emission reduction actions. In practice, the stock of possible emission reduction (or possibly sink enhancement) actions changes over time in response to turnover of the capital stock, technological change, and other developments. Rose et al. (1999) analyzes the optimal strategy for a host government given a dynamic stock of potential projects.⁶⁸

Numerous issues related to implementation of the CDM remain to be negotiated, including:

• host and project eligibility;
  
• eligibility of sequestration actions;
  
• demonstrating contribution to sustainable development;
  
• project financing arrangements;
  
• monitoring, verification, and reporting requirements;
  
• baseline establishment;
  
• CER certification, registry, and trading conditions;
  
• the share of proceeds for administrative expenses and adaptation assistance;
  
• adaptation assistance fund administration;
  
• supplementarity provisions;
  
• executive board composition and responsibilities;
  
• process for designation of operational entities; and
  
• penalties for non-compliance.

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