Carry-over of AAUs from the first KP commitment period

Legal assistance paper

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Date produced: 05/11/2009

1. If the KP is extended to a second commitment period, what are the legal requirements needed (or are there any available legal avenues) to prohibit or limit the carry over of AAUs from the first to the second commitment period, or limit trading of such AAUs under Article 17.

2. What legal text/language would be needed in an amendment to the Kyoto Protocol in order to prohibit or limit the carry over or use under article 17 of units from the first commitment period. (cf. paras 46-48 of FCCC/KP/AWG/2009/10/Add.3/Rev.2)

3. Assuming such an amendment were submitted, what would be the procedure and potential consequences for its adoption under article 21 of the KP, e.g. if a surplus holding country submitted a notification of non-acceptance under article 21.5 of the KP? Could such an approach formalize a “gentlemans’ agreement” to cancel or not recognize units from the first commitment period?

4. If the outcome of Copenhagen is a single legal instrument, including key elements of the Kyoto Protocol (for example compliance and emissions trading mechanisms) how can you prevent the carry-over or non-recognition of first commitment period AAUs from the KP?

5. In this regard, what provisions of the Marrakesh Accords would need to be amended before they could be adopted under a new legal instrument, assuming continuity between the compliance and trading regimes from the KP to the new instrument?

6. What would be the consequences of “leaving behind” such provisions?

1 .Article 3(13) of the Kyoto Protocol provides that, if the emissions of an Annex I Party in a commitment period are less than its assigned amount under Article 3, this difference shall, on the request of that Party, be added to the assigned amount for that Party for subsequent commitment periods. Paragraph 15 of the Annex to Decision 13/CMP.1 (modalities for the accounting of assigned amounts under Article 7, paragraph 4) elaborates that Annex I Parties may carry over all unused AAUs from one commitment period to the next, after the expiry of the additional period for fulfilling commitments at the end of the relevant commitment period. Unused ERUs and CERs can also be carried over, subject to a quantitative limit. Paragraph 36 of this Annex states that the units carried over shall be valid in the subsequent commitment period.

There are few legal avenues available under the current drafting of the Protocol and COP/MOP Decisions to limit or prohibit the carry-over of AAUs. The only existing limitations on carrying-over are:
• ERUs, CERs and AAUs may not be carried over if they have been retired or cancelled;
• RMUs and ERUs converted from RMUs may not be carried over; and
• CERs and ERUs may only be carried over to a maximum of 2.5% of the assigned amount each.

If no changes are made to the Kyoto Protocol and Decisions, the limitations that would apply to trading carried-over AAUs would be the same as those that would apply to “new” second commitment period AAUs:
• the use of the flexible mechanisms must be supplemental to domestic action (Article 17 and 2/CMP.1, paragraph 1)). There has been considerable discussion of what “supplemental” means, but it can be interpreted as allowing a Party to meet up to half of its commitment through trading;
• the transferring and acquiring Parties would have to be eligible to take part in trading under Article 17; and
• the transferring Party would only be able to sell its surplus AAUs if this would not result in a breach of its Commitment Period Reserve. Carried-over AAUs are valid in the subsequent commitment period and so can form part of a Party’s Commitment Period Reserve. In the case of a Party with a considerable surplus of AAUs, of course, this limitation is unlikely to be triggered.

Parties may choose whether or not to carry over AAUs, ERUs or CERs: the process is not mandatory. In theory, therefore, the objective of preventing any carrying-over of AAUs to the second commitment period could be attained if all Annex I parties with a surplus decided not to carry over any of that surplus. If the AAUs are not carried over, they must be cancelled pursuant to 13/CMP.1 paragraph 36, and will not be available for sale or compliance.

If Annex I parties with a surplus do not take this approach, changes to the provisions of the Kyoto Protocol and the COP/MOP Decisions would be necessary to prevent or limit the carrying over and/or trading of AAUs. Since both the Protocol and the Decisions provide for AAUs to be carried over, the most prudent approach would be to make changes to both. If only a new Decision is made, this could conflict with the wording of Article 3(13) and questions might then be raised about the validity of the Decision.

The restrictions could take the form of a complete prohibition on the carrying over and/or trading of AAUs, or a limit (either purely quantitative or on another basis). The baselines or targets set for Annex I countries may take account of over-achievement/surplus AAUs. The examination of the political and environmental merits of these approaches is not within the scope of this note.

2. The precise language to be used will, of course, depend on the nature of the prohibition or limitations which are agreed and will need to be integrated with any other changes that are made to the Protocol and/or Decisions. The suggestions here should, therefore, be treated only as a starting point.

In the Protocol, the current Article 3(13) would need to be amended. An amendment to Article 3(13) has been suggested in addendum 2 to the AWG-KP documentation to facilitate negotiations for Barcelona (FCCC/KP/AWG/2009/10/Add.2) but would not prevent or limit the carrying over of AAUs.
To completely prohibit all carrying over of AAUs, the article would need to be amended to state that, if the emissions of a Party included in Annex I in a commitment period are less than its assigned amount under this Article, for the purposes of subsequent commitment periods the difference shall be disregarded and shall not be added to the assigned amount for that Party for subsequent commitment periods. Alternatively, limits on carrying over could be set in this Article, perhaps with more detailed rules for their application to be set by a decision of the COP/MOP.

Article 7(4) of the Protocol required the COP/MOP to decide modalities for the accounting of assigned amounts prior to the first commitment period. This can be interpreted to mean that those modalities are fixed once the first commitment period has begun and cannot be amended. To avoid dispute, the most prudent approach would be to amend Article 7(4) to permit the COP/MOP to review and amend the modalities for accounting for assigned amounts, at least in respect of subsequent commitment periods and the transition from the first to the second commitment periods, if not in respect of the first commitment period itself. An amendment to Article 7(4) which would largely achieve this has been suggested in addendum 2 to the AWG-KP documentation to facilitate negotiations for Barcelona (FCCC/KP/AWG/2009/10/Add.2)

Amendments will also be required to the Decisions to implement limits or prohibitions on carrying over and/or trading AAUs. Some draft wording for new Decisions has been proposed in addendum 3 to the AWG-KP documentation to facilitate negotiations for Barcelona FCCC/KP/AWG/2009//10/Add.3/Rev.2). However, none of the proposed options in paragraphs 46 to 48 would change the position on the carrying over of AAUs from the first to the second commitment period.

In the Decisions, the key provision to be amended in respect of carrying over of AAUs is paragraph 15 of the Annex to Decision 13/CMP.1. In respect of trading carried-over AAUs, it is the Annex to Decision 11/CMP.1. Other references to carried-over AAUs will also need to be removed or amended. In practical terms, where extensive amendments need to be made, this could be achieved by the adoption of an annex of replacement modalities. Detailed rules on the limitations on carrying-over of AAUs could then be set out in the replacement Annex.

3. Very broadly, under the amendment process set out in Articles 20 and 21 of the Kyoto Protocol, amendments can be adopted by a three-fourths majority vote of the Parties. However, Parties have the right to not accept an amendment and, as a consequence, not to be bound by it.

This means that a situation could potentially arise in which certain countries with surplus AAUs do not accept (and are not bound by) an amendment prohibiting or limiting the carrying-over or trading of AAUs. Some further analysis is required to determine whether these non-accepting Parties would be bound by Decisions of the COP/MOP relating to carried-over AAUs made subsequently under the amended Protocol, but the logical initial assumption is that they would not. On this basis, those Parties would be entitled to carry over AAUs pursuant to the existing provisions of the Protocol and to sell those AAUs to other Parties who had not accepted limitations on trading of carried-over AAUs. The relevant amendments would, however, be binding on those who had accepted them and this might, in practice, limit the market for carried-over AAUs.

4. For the purposes of this question, we assume that the single legal instrument in question retains a system of national targets and is based on AAUs or similar units. Again, the question of how the choice of baseline year and the setting of targets could be used to neutralise or mitigate the effects of carrying over is beyond the scope of this note.

The details of how carrying over of AAUs from the first commitment period of the Kyoto Protocol (KP1 AAUs) can be limited will depend to a very large extent on the provisions of the new single agreement, which are at present still far from fixed.

In practical terms, the limitation can either be achieved by an explicit statement, or by designing the mechanics of the agreement so that it is not possible to use KP1 AAUs for compliance. For example, if the national registry system established under the Kyoto Protocol is to be retained, provisions may be needed to the effect that surplus KP1 AAUs must be cancelled. The types of units that can be used by Parties to demonstrate compliance with their commitments should exclude (either explicitly or through the clear definition of “new” AAUs), carried-over KP1 AAUs.

Care would need to be taken in the drafting of the new legal instrument so that the new commitment period could not be deemed to be a second commitment period under the Kyoto Protocol, which could allow countries with surplus AAUs to argue that they are entitled to carry over those AAUs.

5. The changes to the Decisions described under 1(b) above would be the starting point. Further amendments may also be needed. At the very least, it is likely that technical changes would be required to most of the Decisions, to adapt them to the terminology used in the new legal instrument. The extent to which substantive changes would be required would depend, of course, on the degree to which the relevant regimes are altered under the new agreement.

The answer to query 10 (also attached) gives more information on the question of how the content of COP/MOP Decisions under the Kyoto Protocol can be imported into a new, legal instrument. In summary, this could be done either by making an explicit reference in the new legal instrument to an existing COP/MOP Decision or by incorporating such a Decision as an annex to the new legal instrument. The latter may be more appropriate where extensive changes to an existing Decision are needed to adapt it to the new regimes established by the new legal instrument. It would also avoid legal issues arising from references to existing procedures developed under an agreement to which not all countries were party.

It may not be practicable to agree the precise text of the new modalities and procedures as part of the new legal instrument and it may, therefore, be necessary to leave their development and adoption to a later COP. In this case, it would be prudent to ensure that the wording of the new legal instrument itself clearly sets out the principle that carrying-over of KP1 AAUs is not permitted.

6. The AWG-LCA negotiating text contains numerous references to detailed rules, modalities and procedures for the implementation of the new legal instrument being developed and adopted by the COP.

Drafting and agreeing such modalities etc. has historically been a time-consuming process and so there is a clear practical benefit to drawing on the work that has already been done in this regard under the Kyoto Protocol. “Leaving behind” such provisions will almost certainly result in some delay before new modalities etc. are developed and adopted (although it would seem likely in practical terms that the Decisions made under the Kyoto Protocol would be used as a model).

The response to query 10 provides useful information on the question of whether the Decisions under the Kyoto Protocol (to the extent they would survive if no second commitment period was agreed) could be in legal conflict with Decisions under a new legal instrument.