6.3.5.3 Liability
Liability provisions prescribe how quotas transferred by a party that subsequently
is not in compliance with its emissions limitation commitment are treated. Since
the developing country hosts of CDM projects do not have emissions limitation
commitments, this is not an issue for CERs once they have been certified and
issued by the operational entity or the Executive Board. However, this does
not deal with the question of what happens if the certification has not been
undertaken to acceptable standards or if there are other significant irregularities
in issuance procedures. Since both JI and IET involve only Parties with emissions
limitation commitments, treatment of quotas traded using these mechanisms must
be addressed if the issuer does not achieve compliance.
With regard to JI, Article 6.4 of the Kyoto Protocol specifies that if compliance
by an Annex I country is questioned under Article 8, any ERUs acquired from
that country cannot be used to meet the buyer’s commitments under Article
3, until the question of non-compliance by the originating country is satisfactorily
resolved (UNFCCC, 1997).
If the ERUs issued for JI projects are determined by an international review
process, they reflect corresponding reductions of the host country’s emissions
and hence do not contribute to its non-compliance. However, if the decision
on the quantity of ERUs issued is left to the host government and the penalties
for non-compliance are weak or not effectively enforced, JI projects could contribute
to non-compliance by the host country. Since any ERUs transferred must be deducted
from the party’s AA, they could be made subject to the liability provisions
for IET.
Article 17 does not include any provisions to deal with quotas that have been
transferred by a country that subsequently fails to meet its emissions limitation
commitment. A number of options and variants have been proposed in the literature
(Goldberg et al., 1998; Grubb et al., 1998; Haites, 1998; Baron, 1999; Zhang,
1999b). The proposals reflect various strategies, including seller and (its
opposite) buyer liability, eligibility requirements for buyer and sellers, limits
on the quantity of quota that can be sold, limiting sales to quantities surplus
to estimated or actual compliance needs, or restoration of default. These approaches
can be grouped into those that aim to prevent or limit the risk of non-compliance,
and those designed to provide sufficient deterrence (either requiring the defaulting
party to face the regimes’ non-compliance system or else harnessing the
market to discount quotas from those Parties considered to be most at risk).
These liability proposals differ in terms of their environmental effectiveness,
impact on compliance costs of Annex I Parties, and market liquidity. The proposals
can change the ratio of domestic reductions to purchased quotas used for compliance
and the mix of quotas purchased. In this way they can change the distribution
of costs across countries, including non-Annex I countries through the volume
of CDM activity. In policy terms, it is likely that the most effective strategy
would aim to combine one or more of them. Details of how this may be undertaken,
as well as on how many of the proposals would be implemented in practice, are
currently subject to international negotiations.79
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