Joint Implementation and its Alternatives: Choosing Systems to Distribute Global Emissions Abatement and Finance

Controlling global growth of greenhouse gas emissions, thereby attaining the central goal of the Framework Convention on Climate Change (FCCC),The FCCC''s central goal is to "stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system" (Article 2). is widely believed to require some system for shifting emission-abatement effort among nations with accompanying exchanges of money and technology. There are three reasons for this: large reductions in global emission trends will be expensive; distributing the abatement effort efficiently among nations, cutting more where cutting is cheaper, is projected to reduce cost drastically, perhaps by half or more; For example, the Intergovernmental Panel on Climate Change (IPCC [1996], WG 3, Ch. 10) estimated that for each country to hold its emissions at 1990 levels would cost 0.2 - 0.7 per cent of world product by 2010, rising to to 3 - 7 per cent by late next century. Global costs of this target are projected to be 20 to 50 per lower if abatement is distributed among nations in the lowest-cost way. Such redistribution of abatement effort would not weaken the environmental goal, because where a ton of emissions occurs has no affect on its contribution to global climate change. and the cheapest abatement opportunities appear to reside at present in developing countries and transitional economies which can ill afford to undertake them.The claim that the cheapest abatement opportunities are in developing countries has been disputed (e.g., Shukla, 1996), and need not remain true even if it presently is true. Some projections show that after 30 to 50 years of continued rapid growth in developing countries, the cheapest emission abatement opportunities may then reside in the present OECD. [Edmonds et al, 1995]

Developing countries accepted no abatement obligation under the FCCC and have strong arguments against being expected to bear any such burden soon. While their projected development is likely to make the largest contribution to global emissions growth, they have highly constrained resources and many more urgent priorities than climate change. Moreover, the present industrialized nations, through their past fossil-fuel use and greenhouse emissions, are most responsible for the present excess atmospheric burden of greenhouse gases. If developing countries grow rapidly enough, however, even the most extreme cuts in industrialized countries may be insufficient to attain a stringent global target. Developing-country participation in abatement is thus essential in two ways: to make stringent global abatement goals feasible and to minimize the cost of attaining any global goal.

To attain such substantial participation of developing countries and transitional economies in global abatement goals, a cooperative system should create incentives to abate where it is cheapest to invest in technologies that advance abatement possibilities, while transferring finance and/or technology as necessary to ensure that all parties to the exchange benefit.

While many such systems are possible, varying in dimensions of institutional and policy detail, three broad classes of systems have been proposed which dominate current debate. These three systems, Joint Implementation (JI), international tradable emissions permits (TPs), and administrative financial mechanisms (AFMs), differ from each other in basic respects and have all accumulated at least modest relevant experience. Joint implementation and tradable permits are both familiar terms, while "administrative financial mechanisms" is a term we propose to denote politically negotiated, centrally administered systems that transfer public funds internationally, according to agreed criteria, in support of environmental projects. Prominent current examples of AFMs are the Global Environment Facility (GEF) and the Multilateral Fund of the Montreal Protocol on the Ozone Layer. Though AFMs are not market-based systems like JI and TPs, they pursue the same goals, shifting abatement effort among nations with accompanying financial and technological support.

This paper seeks to clarify the basic differences among the three systems, to identify the major actors involved in the functioning of each system and their key interests, and to identify each system''s most and least promising areas of application. In particular, because the job these systems must do may be large while current international experience with each is very modest, we consider how each system would function, and what potential pitfalls or obstacles might arise, if its scale were greatly increased.

The paper devotes most attention to the potential contribution and limits of JI. For AFMs and TPs, the discussion is much more limited. We outline their basic defining characteristics and identify key issues in their potential for expansion. A concluding section summarizes relative advantages and disadvantages of the three systems and briefly explores the implications of more than one system co-existing, how they might interact, and how a practicable and effective combination of systems can be designed. Since experience with all three systems is limited, and since all three admit of many detailed design possibilities, our discussion of their potential and limits must be informed by general theoretical argument and analogy as well as empirical evidence and is inevitably speculative.

Section 2 summarizes relevant provisions from the FCCC, arguing that it admits the possibility of any one or more of these systems, though full implementation of any would require substantial further negotiation of institutional detail. Section 3 estimates the size of the job such a system must do, through order-of-magnitude estimates of how much emissions, and how much money, must shift between regions to move from a plausible simple negotiated allocation of emissions to a cost-minimizing distribution. Section 4 summarizes the basic characteristics, present experience, and potential for expansion of a JI system. Sections 5 and 6 present parallel, more limited discussions for administrative financial mechanisms (AFMs) and tradable permit systems (TPs) respectively, while Section 7 provides conclusions.