E C O N O M I C R E P O R T O F T H E P R E S I D E N T

Like international emissions trading, Joint Implementation may occuramong countries with binding targets. Unlike international trading,however, JI is focused on projects. A firm in one industrial country mayinvest in a project to reduce greenhouse gas emissions in another. If bothcountries’ governments approve the project, emissions allowances from thecountry where the reductions occurred are transferred to the other country inexchange for the investment.The Clean Development Mechanism allows industrial and developingcountries to work together to design and implement projects in developingcountries that abate greenhouse gas emissions; however, developing countriesdo not need binding emissions targets to participate in the CDM. CDMprojects must be certified on the basis of several criteria. In addition, a portionof the emissions credits generated by the project would support an adaptationfund for low-income countries especially vulnerable to climate change(adaptation charges) and for administrative costs of the CDM. Industrialcountries can use CDM reductions to meet their emissions targets. The rulesfor international emissions trading, JI, and CDM are expected to be finalizedat the next round of climate change negotiations at The Hague later in 2000.Finally, the protocol allows for emissions allowances to be banked from onecommitment period to the next. A 5-year average commitment period providesadditional flexibility by effectively allowing for the banking and borrowing ofemissions allowances within this period. This opportunity to bank and borrowcan smooth out permit prices, which might otherwise experience large priceswings due to normal annual fluctuations in the weather or the economy.Cost-Effectiveness of Kyoto ProtocolFlexibility MechanismsAlthough international emissions trading, Joint Implementation, and theClean Development Mechanism can all help lower the cost of compliance withthe Kyoto Protocol targets, their cost-effectiveness may vary. Anefficient international emissions trading system would not require case-by-casereviews of trades; however, JI and CDM might require such review, and CDMprojects would also require independent certification. Further, the adaptationcharges and administrative costs would increase the costs of participating in aCDM project. The reviews and charges associated with project-based approachescould be similar to those in the early emissions trading programs under theClean Air Act—netting, bubbling, and offsets—which experienced less activitythan would have been expected with less bureaucratic oversight. In addition, theproject orientation of JI and CDM would effectively exclude some cost-savingefforts. For example, a country pursuing a policy of cutting energy subsidiesmight find it impossible to classify this policy as a project under JI or CDM.Chapter 7 | 267