Legal status of CDM if gap in CPs

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 However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments.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: 04/12/2012

1. What are the legal implications for the CDM if there are no commitments (QUELROs) from Annex I Parties in the context of a second commitment period?

i) Would only one party’s pledge be enough to keep the CDM going?

2. What is the legal status of the CDM (or market mechanisms in general):

i) if a second commitment period is not agreed?

ii) if a second commitment period is agreed and there is a gap between commitment periods, and in particular during the gap?

iii) Does it make any difference to the legal status of the CDM if a second commitment period is provisionally applied during the gap?

3. What happens to AAUs vis-a-vis the CDM in the above scenarios?

Please consider the above in light of the fact that Article 12 says the mechanisms exist for fulfilling commitments in Article 3 and those commitments may not have legal force if there is a gap or there is no second commitment period at all. 

Summary:

From a legal perspective, there is no basis for the CDM to cease in circumstances where there is no second commitment period. To the extent that amendments to the Kyoto Protocol are agreed to that affect the operation of the CDM, those amendments will only take effect upon acceptance by sufficient parties or provisional application by parties and in the interim the existing rules will apply.

Advice:

1. What are the legal implications for the CDM if there are no commitments (QUELROs) from Annex I Parties in the context of a second commitment period?ß

Unless the COP/MOP agrees to the modalities for a second commitment period before the end of the first commitment period at the end of 2012 there may be a period when none of the Annex B Parties has a QELRO in respect of the second commitment period. This would represent a “gap” in commitment periods unless some interim arrangement is put in place.

No precedents or explicit literature exists with respect to the legal consequences of a gap between two commitment periods. For this reason, our analysis in this section is primarily based on the text of the Kyoto Protocol and the UNFCCC, the COP and CMP decisions and general legal principles.

The conclusion of the first commitment period without agreement on a second commitment period would not render the CDM obsolete or ‘impossible to perform’.

Certain provisions of the Kyoto Protocol are linked to the transfer of Assigned Amount Units and the question therefore arises as to whether those provisions of the Kyoto Protocol can apply in respect of CER transfers under those mechanisms where there are no QELROs and therefore no Assigned Amount Units. However, many of the provisions of the Kyoto Protocol are not related to, or dependant upon, Assigned Amounts or subsequent commitment periods being agreed.

The Kyoto Protocol provisions relating to the CDM reference the first commitment period but not in a way which would preclude the continuation of the CDM in a second commitment period. The purpose of the CDM is expressed in the Kyoto Protocol as being to:

(a) “assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention”; and

(b) “to assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3.”

With this dual objective, the operation of the CDM is not contingent upon Assigned Amounts being allocated, except to the extent that QELROs and Assigned Amounts establish market demand for CERs.

From a legal perspective, there is, in our opinion, no basis for the CDM to cease in circumstances where there is no second commitment period.

A practical issue may arise as to whether those sections of the UNFCCC Secretariat which support the operation of the CDM and the Executive Board could continue to function in the absence of a second commitment period or QELROs. As these bodies are funded by the Share of Proceeds and the contributions of Parties, provided that CDM project activities were still being registered and CERs issued they could in effect be self-funding and could continue to operate. This could in practice depend, however, on their being continued political support for their operation.

A further practical issue which would need to be addressed is ensuring that the Executive Board is able to issue CERs following the end of the first commitment period. The unique serial number attaching to each CER includes a reference to the commitment period that that CER is issued in respect of. CER referencing would need to reflect the period following the first commitment period. It is likely that interim arrangements could be put in place to address this.

A further question is whether Designated National Authorities (DNAs) would continue to approve new CDM projects and grant LOAs for involvement in new and existing CDM projects without a second commitment period or QELROs. This will be a matter for each host country and will only affect new projects developed during the gap.

i) Would only one party’s pledge be enough to keep the CDM going?

The continuation of the CDM is not of itself dependent upon pledges of one or more Party. As noted above, the CDM can continue in the absence of amendments to the Kyoto Protocol which establish Assigned Amounts for Annex B Parties. In terms of giving effect to amendments to the Kyoto Protocol, refer to the provisions of Article 20 of the Kyoto Protocol which requires acceptance of the amendments to the Kyoto Protocol, and deposit of instruments of acceptance, by three quarters of Parties.

2. What is the legal status of the CDM (or market mechanisms in general):

i) if a second commitment period is not agreed?

See above answer – the CDM may legally continue.

ii) if a second commitment period is agreed and there is a gap between commitment periods, and in particular during the gap?

See above answer – the CDM may legally continue.

iii) Does it make any difference to the legal status of the CDM if a second commitment period is provisionally applied during the gap?

No – not with respect to the legal status of the mechanism. However, if amendments to the Kyoto Protocol are agreed to vary or supplement the rules for the CDM then provisional application will be relevant to the application of those rules. For example, if amendments are agreed at CMP.8 with respect to access to the CDM for non-second commitment period Annex I Parties and certain Parties agree to apply those amendments provisionally, those Parties will be bound by the revised rules.

3. What happens to AAUs vis-a-vis the CDM in the above scenarios?

It is important to understand that the CDM, and CERs in particular, are not backed by AAUs (unlike JI and ERUs). Therefore, there is no direct connection between AAUs and the CDM. The real issues relate to how the carry-over of AAUs affects the market and demand for CERs in a second commitment period. There is a risk that excess AAUs may limit demand for CERs. However, the bulk of demand for CERs from the CDM in the second commitment period will come from national and regional trading schemes, such as the EU ETS.