1. How will the compliance mechanism – in particular its system of enforcement through penalties relating to emissions trading – be affected by the gap between commitment periods of the Kyoto Protocol (or indeed absence of a second commitment period altogether)?

2. Does the true-up period create a de facto extension of the first commitment period?

Summary: Although the compliance mechanism will continue to exist during a gap between commitment periods or in the absences of a second commitment period, the effectiveness of the penalties that the Compliance Committee can impose will be limited until a second commitment period enters into force because the design of the compliance procedures is such that the conseqeunces of non-compliance (particularly in relation to Art 3(1) commitments) are not intended to have effect until the second commitment period. The true-up period does not create a de facto extension of the first commitment period since only AAUs or emission reduction units related to the first commitment period can be bought or sold during the true-up period (units generated after 2012 which relate to emission reductions after 2012 cannot be bought or sold for the purposes of ‘truing-up’ differences between Parties’ total emissions during the first commitment period and units retired for compliance).

1. The compliance mechanism’s role during a gap between commitment periods

Institutionally, the compliance mechanism will continue to exist after the expiry of the first commitment period (CP1). Its existence is not tied specifically to any commitment period and thus it would continue to exist during any gap between the first and second commitment period or in the absence of a second commitment period (CP2).
As the secretariat has noted, the compliance mechanism (and the Compliance Committee which operates it) is not limited in its concern to compliance with Art 3(1) obligations of Parties; it also is concerned with compliance of other provisions of the Kyoto Protocol, chiefly Art 5(1) and (2) and Art 7(1) and (4).

However, the effectiveness of the compliance mechanism in relation to its functions re Articles 3, 5 and 7 after the expiry of CP1 depends on the existence of CP2.

Article 3(1) of the Kyoto Protocol:
Art 3(1) of the Kyoto Protocol is the provision which requires Annex I Parties to reduce emissions by the amount listed in Annex B. These commitments are limited to CP1 (2008-2012). Future emissions reductions targets require an amendment to Art 3(1), Annex B and a few other provisions of the Kyoto Protocol.
Pursuant to the compliance procedures established by Decision 27/CMP.1, a Party which is in breach of its CP1 Art 3(1) obligations (such breach to be determined only after the submission and review of a Party’s final commitment period accounting report – likely to be sometime in 2015/6) is faced with certain consequences.

The consequences are set out in Decision 27/CMP.1, Annex, Section XV at para 5 and are as follows:
A) Deduction from the Party’s assigned amount for the second commitment period of a number of tonnes equal to 1.3 times the amount in tonnes of excess emissions;
(B) Development of a compliance action plan; and
(C) Suspension of the eligibility to make transfers under Article 17 of the Protocol until the Party is reinstated in accordance with the relevant provisions.

Given the fact that there is no compulsory dispute settlement mechanism in the Kyoto Protocol, the consequences listed above will only affect ‘breaching’ Parties when CP2 actually begins. Therefore, during any gap between CP1 and CP2 or after the expiry of CP1 (if CP2 is not agreed), the consequences of breaching Art 3(1) commitments may not have any practical legal effect since the consequences are linked to the existence of CP2.

Articles 5 and 7 of the Kyoto Protocol:
The consequences which would normally flow from breach of Art 5(1), (2) and 7(1) and (4) of the Kyoto Protocol are:
1) Declaration of non-compliance by the Compliance Committee; and
2) Development of a plan that includes an analysis of the causes of non-compliance, measures the Party will take to remedy the non-compliance and a timetable for implementing such measures.

In addition, breaches of these provisions by a Party entitles the Compliance Committee to suspend that Party’s participation in the flexible mechanisms established by the Kyoto Protocol.

There are two opposing views on the effectiveness of the compliance mechanism’s functions in relation to Art 5(1), (2) and 7(1) and (4) of the Kyoto Protocol during a gap between CP1 and CP2 or after the expiry of CP1 (if CP2 is not agreed). The differing views turn on whether these provisions would continue to bind the Parties in the absence of a second commitment period.

Even assuming that these provisions bind the Parties in the absence of CP2, the practical effect of the consequences for breach is limited since the consequences are primarily procedural rather than substantive (e.g. developing a compliance plan). In relation to the eligibility of that Party to participate in the flexible mechanisms post-2012 (in the absence of CP2), breach of the relevant provisions could limit that Party’s participation in the CDM. In relation to joint implementation and international emissions trading, we believe that no Parties (whether they have breached Art 5 or 7 or not) will be able to use them until CP2 begins as they require CP2 to operate.

2. The true-up period – an extension of the first commitment period?

The true-up period does not amount to a de facto extension of the first commitment period. The first commitment period will end on 31 December 2012.

Annex I Parties will be required to submit their last annual emissions report (pursuant to Art 7(1)) sometime in 2014. This will then be reviewed by expert review teams. Following this, the commitment period accounting will begin. This phase provides a final tally of the Party’s total emissions and associated flexible mechanism transactions (the assigned amount) for the commitment period and enables determination of whether a Party is in compliance with its Art 3(1) commitments.

The Kyoto Protocol provides for a specific period of 100 days that is to occur after the completion of the review of the final annual report for the commitment period in order for Parties to continue to buy or sell Kyoto units (which are related to emission reductions in CP1) for the purpose of ‘truing up’ any remaining differences between Parties’ total emissions during the commitment period and units retired for compliance. The formal name for this period is the ‘additional period for fulfilling commitments’, but it is commonly known as the ’true-up period’.

Since the transactions allowed in the true-up period relate to CP1 emissions reductions only, this cannot be seen as a de facto extension of CP1.