Legal implications of using Certified Emission Reductions (CERs)units post 2020

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer- client relationship. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 25/11/2019

Please clarify what are the legal implications for the use of KP units (CERs) post-2020, assuming the Doha amendment never enters into force.

Advice:

Summary

The CDM can continue to function in the absence of a new commitment period under the KP and it can be transitioned under the following scenarios: 1) the market-based mechanisms of Art.6 PA; 2) the NDC accounting and implementation framework, as well as the Enhanced Transparency Framework of the PA. 3) under the Enhanced Transparency Framework but outside the sectoral or GHGs coverage of the host country’s NDC.

The broad language of relevant PA/CMA provisions and SBSTA’s draft decisions seems to leave open spaces for arguments and individual country’s practices to host CDM projects or make use of CERs for accounting and implementation. Overall, this is due to a current lack of an explicit prohibition or clear requirements for incorporating the CDM under the PA.

Background

As the Doha Amendment to the Kyoto Protocol (KP) is unlikely to enter into force, there are calls for transitioning the KP’s Clean Development Mechanism (CDM) under the NDC accounting and implementation framework, as well as the market-based mechanisms of Article 6. This would imply that Certified Emission Reductions (CERs), the offset credits generated under the CDM, could be used for accounting under the PA, but also for a revamped PA-based carbon market, possibly linked to national carbon pricing mechanisms.

This advice will determine what legal pathways for a transition of the CDM are available by focussing on the three prospects: a) the incorporation of the CDM under Art 6.2 and 6.4; b) the use of CERs under the NDC accounting and implementation framework; c) continuation of the CDM outside the above frameworks, and outside the sectoral coverage of NDCs.

There are several policy implications in transitioning the CDM, or part of its eligible projects, under the PA. While generally these include issues of environmental integrity/additionality of projects, their regional distribution, and an overall contribution to mitigation within or alongside the NDC framework,[1] this advice is limited to outline the main legal and institutional aspects.

The current CDM framework and rationale for transition

The CDM is a baseline-and-credit market-based mechanism under the Kyoto Protocol. It rewards private or public entities investing in carbon mitigation projects in non-Annex I countries by generating CERs. These are marketable offset credits which can be used for compliance under the KP, under some national carbon pricing mechanisms,[2] and other voluntary schemes. Non-Annex I host countries are involved in the CDM project cycle by agreeing to their implementation within national sustainable development policies. Since its inception in August 2012, the CDM has issued an amount of CERs amounting to more than 2GtCO2eq across 111 countries.[3]

The CDM is managed by an Executive Board (EB) under the authority of the KP CMP. The Board regulates and oversees the cycle for registration and implementation of projects, as well as the issuance of CERs for project developers (operating entities). As a regulatory body, the EB has built through the years a complex set processes and standards aimed at securing the environmental integrity of projects, but also the reduction of administrative and other transaction costs. A claimed success has been, for instance, the creation of Programmes of Activities (PoAs), mostly implemented in less developed countries, which consist of registered umbrella programmes clustering more sub-projects having common objectives, baselines and regional scope.

As the operation of the KP is virtually stalled, due to the failed entrance into force of the Doha Amendment, the CDM has lost its rationale as a flexible mechanism to prove compliance with emissions targets under that treaty.[4] This does not mean, however, that the CDM cannot function in the absence of a new commitment period under the KP. Indeed, as the KP has no expiry date, its regulatory and institutional framework can still function to support the operation of the CDM, until all parties agree on the termination of such treaty,[5] the CMP decides to suspend or terminate the operation of the CDM, or the CMP and CMA decide to transfer the CDM under the authority and guidance of the CMA.[6]

Given the current framework, the following are the main pathways for continuing the operation of the CDM under the Paris Agreement: a) those currently under negotiations for transitioning the CDM and part of its existing registered projects under the two market-based mechanisms of Article 6 of the PA: namely, the Internationally Transferred Mitigation Outcomes (ITMOs, Art. 6.2); and the Sustainable Development Mechanism of Art.6.4 (SDM); b) by allowing the use of CERs for accounting and implementation of individual NDCs; and c) by having developing countries hosting CDM projects and generating CERs outside the above frameworks, and outside the sectoral coverage of their NDCs.

Transition under Internationally Transferred Mitigation Outcomes Art 6.2

ITMOs are voluntary cooperation activities between states which will operate “towards nationally determined contributions”.[7] In essence, ITMOs will allow a state to transfer emission reductions achieved within its NDC for the achievement of the NDC target of another state. Being ITMOs market approaches, in exchange of such transfer the receiving state would purchase or offer finance in return for reduced or avoided emissions.[8] Activities eligible under this mechanism should promote sustainable development, ensure environmental integrity and transparency, and rely on accounting and avoidance of double counting.

In the context of these basic elements, the latest draft text for guidance on ITMOs circulated at SBSTA 50 does not refer explicitly to any inclusion of CDM activities or to eligibility of CERs transfers among countries.[9] Despite that, in absence of an explicit prohibition, states could still voluntarily include in their ITMOs framework the possibility of supporting CDM projects and transferring CERs. This is supported by the margin of discretion given to states on how to account emissions in their NDCs, as well as for prove their implementation under the Enhanced Transparency Framework of Art 13.[10]

There are, however, two legal issues which might work against such possibility. First, a state, transferring CERs generated by CDM projects in its territory, will have to make a ‘corresponding adjustment’ to its NDC target reflecting such transfer.[11] Therefore, and differently from the accounting mechanisms of the KP, host countries will lose the possibility of using transferred CERs to account for the implementation of their own NDC. Therefore, they might be discouraged to allow that CERs generated from project in their territories will work to prove the implementation of another country’s NDC.

A second legal issue, which might work against the possibility of incorporating the CDM under ITMOs, is the additionality requirement for registering CDM projects. This situation would emerge in the case where a CDM project could not be accepted as additional to baseline scenarios, given that it would enter anyway within the NDC strategy of the host country. Currently the additionality baselines under the CDM do not include NDC strategies. Therefore, this impediment might emerge only for future projects and other further regulatory activity of the CDM EB.

Transition under the Sustainable Development Mechanism of Art 6.4

The Sustainable Development Mechanism (SDM) of Article 6.4 will work as a baseline-and-credit mechanism, replicating several features of the CDM. It will generate offset credits for emissions reductions from project activities which will inter alia promote mitigation; foster sustainable development; and contribute to emissions reductions of the host state. Credits generated from projects will be used by other states to fulfil their own NDCs.[12] In institutional terms, the SDM will be likely centrally managed and regulated by a Supervisory Body under the CMA.

One key difference from the CDM is that the SDM should also aim to ‘deliver an overall mitigation in global emissions’.[13] The SDM framework, in fact, requires from participants that their projects will generate an overall mitigation in global emissions, in addition to the avoided or reduced emissions from the project baseline. The eligibility of CDM projects, instead, is based on the avoidance and reduction of emissions within the project boundaries, according to requirements of additionality.

The latest draft text for guidance on Art.6.4 circulated at SBSTA contains elements for the transition and recognition of CERs and Joint Implementation’s ERUs under the SDM. These range from full recognition, to partial transition of CERs originated from only certain types of activities or after a cut-off date.[14] Given the similar nature of the SDM and the CDM as baseline-and-credit mechanisms open to private sector participants, their centralised governance, and their rationale to stimulate and prove global mitigation action, the question and options for transitioning the CDM under the SDM are mainly of political/policy nature, rather than legal.[15]

Transition under the Enhanced Transparency Framework of Art.13 and the NDC accounting and implementation framework of Art. 4

Given that ITMOs and SDM-based credits can be used by states towards the accounting and implementation framework of NDCs. Transitioning eligible CDM projects and CERs under the mechanisms of Art.6 will enable states to use CERs for accounting and implementation. However, PA’s provisions and CMA decisions do not explicitly exclude the possibility for states to use CERs within the same frameworks but outside the mechanisms of Art.6. Such lack of prohibition might lead to arguments for and practices by parties of including the accounting of CERs regardless of their eligibility under Art.6 mechanisms.

Under the CMA’s Decision on NDC guidance, parties will account for their emissions according to the IPCC guidelines[16] and in line with the rules on the Enhanced Transparency Framework contained in Decision 18/CMA.1.[17]

With reference to the use of CERs as accounting units in the NDC guidance, regardless of Art.6 mechanisms, the following provisions are determinant:

In terms of common structures for NDC reporting,[18] the guidance is open to the inclusion of ‘other assumptions and methodological approaches used for understanding NDCs, and, if applicable, estimating corresponding emissions and removals’.[19] This could be interpreted as allowing the inclusion of CERs transferred in national accounts as a methodological approach for estimating emissions under the NDC.

In terms of accounting methodologies, the following provisions are relevant:

“(b) Parties whose nationally determined contribution cannot be accounted for using methodologies covered by IPCC guidelines provide information on their own methodology used, including for nationally determined contributions pursuant to Article 4, paragraph 6, of the Paris Agreement, if applicable;

(c) Parties that draw on existing methods and guidance established under the Convention and its related legal instruments, as appropriate, provide information on how they have done so.”[20]

These provisions could allow the inclusion of CERs in accounting for NDCs. The referral to ‘related legal instruments’ might be an opening for states to justify the use of elements of the Kyoto Protocol’s accounting framework,[21] which makes use of CERs, for accounting and proving compliance of Annex-I Parties.

Under the Guidelines on the Enhanced Transparency Framework similar provisions can be found for national inventory reports and on the information to track progress on implementation of NDCs.[22]

Eligibility of CERs from CDM projects falling outside host countries’ NDCs

As Brescia et al note,[23] there is a contentious prospect for continuing the operation of the CDM: to allow project eligibility under the PA’s accounting and transparency framework in relation to sectors or GHGs which are outside the coverage of the host country’s NDC. Because the PA allows developing countries not to adopt economy-wide emission reductions in the medium term,[24] the same countries could allow the realisation of CDM projects in their territory, with the resulting issuance of CERs. The same CERs could then be accounted by another purchasing country to prove its NDC’s implementation according to the above findings.

Such a prospect, which raises issues of political/policy nature, also appears feasible in the absence of an explicit prohibition.


[1] For a detailed account of these implications and policy pathways, see Brescia et al. (2019), ‘Transition pathways for the Clean Development Mechanism under Article 6 of the Paris Agreement’, Perspectives Climate Group,.https://www.perspectives.cc/fileadmin/user_upload/Transition_pathways_for_the_CDM_2019.pdf  

[2] For instance, the EU Emissions Trading Scheme and the South Korean Emission Trading Schemes.  See Brescia et al, ibid.

[3] Annual Report of the Executive Board of the clean development mechanism to the CMP,  FCCC/KP/CMP/2019/3, 7 October 2019, para 10.

[4] Apart from EU Member States and Iceland which are provisionally implementing their commitments under the Doha Agreement. https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-c&chapter=27&clang=_en#EndDec

[5] See Vienna Convention on the Law of Treaties, Art.54(b), http://legal.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf

[6] An example of such ‘institutional transfer’ is the shifting of the Adaptation Fund under the authority and guidance of the CMP.

[7] PA, Art. 6.2.

[8] The PA does not clearly state that a purchase transaction should underpin ITMOs.

[9] SBSTA50.DT.i11a, https://unfccc.int/sites/default/files/resource/SBSTA50.DT_.i11a%20clean.pdf

[10] Decision 4/CMA.1, FCCC/PA/CMA/2018/3/Add.1, Annex II, para 1(a-d); and Decision 18/CMA.1, FCCC/PA/CMA/2018/3/Add.1 paras 65-79. See section below.

[11] The modalities are still under negotiation, see Ibid. See also Benito Müller and Axel Michaelowa, ‘How to Operationalize Accounting under Article 6 Market Mechanisms of the Paris Agreement’ (2019) Climate Policy 1.

[12] PA, Art. 6(4-5).

[13] Ibid., Art 6(4)(d).

[14] SBSTA50.DT.i11b. Annex, Chapter XIII.

[15] For an detailed outline of the policy options for such transition see Brescia et al. (2019), above at 1.

[16] https://www.ipcc-nggip.iges.or.jp/public/2006gl/vol1.html

[17] Decision 4/CMA.1, Annex II, para 1(a).

[18] According to Decision 1/CP.21, para 8.

[19] Decision 4/CMA.1, Annex I, 5(f).

[20] Ibid.

[21] https://unfccc.int/resource/docs/publications/08_unfccc_kp_ref_manual.pdf

[22] Decision 18/CMA.1, paras 22, 75(h).

[23] Above n(1), p.40.

[24] PA, Art.4(4).