Use of AAUs post-2020

Legal assistance paper

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Date produced: 14/02/2019

Is there any legal basis for using Kyoto Protocol Assigned Amount Units (“AAUs”) toward post-2020 Paris Agreement nationally determined contributions (“NDCs”)?

Summary:

There is currently no legal basis for using AAUs toward Paris Agreement’ NDCs. After 2020, AAUs will become meaningless other than as a record of previous compliance with Kyoto Protocol emissions allowances. A similar mechanism for unitising emissions may be created under the Paris Agreement framework, but this is unlikely to include Kyoto Protocol AAUs. To allow the use of AAUs towards NDC targets could create unfair advantages for developed countries over developing countries, and may create systemic incentives not to reduce emissions beyond NDC targets.

Advice:

1.1          Basis of AAUs under the Kyoto Protocol

AAUs are a creation of the Kyoto Protocol. Under Article 3(7) of the Protocol, a number of developed countries agreed to limit their greenhouse gas emissions in the period from 2008 to 2012. Annex B to the Protocol contains an “assigned amount” for each party, expressed as a percentage of that Party’s aggregate emissions in 1990 multiplied by five. The Protocol thereby created a binding obligation on each Party to limit its emissions to its “assigned amount”.

In a later Decision (13/CMP.1) of the Conference of the Parties serving as the meeting of the Parties to the Protocol (the “CMP”), the “assigned amounts” were unitised by dividing them into “assigned amount units”, or AAUs. An AAU is equal to one metric tonne of carbon dioxide equivalent greenhouse gas, calculated using global warming potentials. Each Party therefore had a certain allowance of AAUs, the total of which was its overall emissions limit under the Protocol.

Further mechanisms were developed to permit the trading of AAUs between parties, thereby creating a market for AAUs and leading to so-called “emissions trading”. AAUs are, as a result, seen as a commodity or type of ‘currency’ through which the Parties manage their emissions allowances.

In 2012, the Parties adopted an amendment to the Kyoto Protocol, which would create further binding emissions targets for the Parties from 2013 to 2020 (the “Doha Amendment”). If the Doha Amendment comes into force, AAUs will apply to those emissions targets as well. However, the Doha Amendment needs acceptance of at least 144 Parties to the Protocol to enter into force, and as at 18 January 2018 only 124 Parties had indicated their acceptance. The Doha Amendment therefore currently has no binding force in international law.

AAUs are, therefore, simply an expression of the Parties’ emissions allowances between 2008 and 2012 under Article 3 and Annex B of the Kyoto Protocol. The Protocol does not contemplate that AAUs could be used for any other purpose, including towards NDCs under the Paris Agreement. AAUs have no current legal basis for compliance, other than to the extent that Parties are provisionally applying them on the assumption that the Doha Amendment will enter into force. There is currently no legal basis under the Kyoto Protocol for the use of AAUs after 2020.

It is worth noting that some Parties holding surplus AAUs conceptualise them as a form of property (often as an intangible chose in action or similar), rather than simply currency exclusively for meeting the emission reduction commitments under the Kyoto Protocol. Whilst this might imply that they have some meaning for the relevant Parties outside the framework of the Kyoto Protocol, this view is not held by the majority of Parties. Even to the extent that this view is legally correct, it is questionable what value such property would hold outside the context of the Protocol, given also that the market in AAUs, especially post 2012, has been limited.

1.2          Legal applicability of AAUs to the Paris Agreement framework

The Paris Agreement also seeks to limit Parties’ greenhouse gas emissions, with the overall aim of limiting global temperature rise to less than 2 degrees Celsius. Unlike the Kyoto Protocol, it does not set specific emissions allowances for each Party. Article 4 of the Paris Agreement requires all Parties (not just certain developed countries) to put forward “nationally determined contributions” (NDCs) stating their post-2020 emissions targets. The Parties are required to report regularly on their compliance with their NDCs and update their NDCs every five years, to be more ambitious each time.

There is little guidance in the text of the Paris Agreement as to what exactly NDCs should constitute. There is nothing explicitly stating that AAUs under the Kyoto Protocol could or could not be used towards NDCs. Therefore, a Party could theoretically incorporate Kyoto Protocol AAUs into its NDC.

However, it would make little legal sense to do so. As stated above, there is currently no legal basis for the use of AAUs towards NDCs post-2020, as they will become legally baseless once there are no longer any applicable emissions limitations under the Kyoto Protocol. The only relevance of AAUs post-2020 will be as a record of past emissions compliance. There is, therefore, no legal basis for them to serve as a forward-looking target, which is the purpose of NDCs.

1.3          Possibility of adoption under the Paris Agreement

The Conference of Parties to the UNFCCC serving as the Meeting of the Parties to the Paris Agreement (the “CMA”) may decide to adopt a Kyoto-style approach to accounting for emissions, whereby emissions can be traded. It is possible that tradable units similar to AAUs could be adopted, whereby Parties can trade emissions within the framework of their NDCs. Indeed, the Ad Hoc Working Group on the Paris Agreement, which is currently developing guidance on NDCs, has received many suggestions that similar style accounting mechanisms are used for NDCs.

However, even if AAUs (in the same or similar form) are adopted as an accounting mechanism for NDCs, it would conceptually be difficult to allow the use of Kyoto Protocol AAUs post-2020 as they will not represent forward-looking emissions levels, as they are only a measurement of emissions allowances up to 2020 (and even that would be on the assumption that the Doha Amendment enters into force).

Instead, a new tradable unit would need to be created for use towards NDCs. This may well resemble AAUs, but it does not make sense for Kyoto Protocol AAUs to continue to be used towards post-2020 targets.

1.4          Economic arguments against continuing use of Kyoto Protocol AAUs

As AAUs are measurements of emissions allowances up to 2020, they would lose their economic value after 2020 once the Kyoto Protocol commitments no longer apply.

If a new type of unit were adopted under the Paris Agreement framework, it is possible that whilst the Kyoto Protocol commitments still subsist (i.e. until the end of 2020) there would be economic incentives for some parties to trade their AAUs for such new units (or vice versa). This may take place in the context of the Paris Agreement “internationally transferred mitigation outcomes” mechanism (“ITMOs”). ITMOs allow Parties to agree between themselves to adopt mitigation measures in each other’s territories to contribute to their own NDC (without double-counting). However, if such trades do occur, the Kyoto Protocol AAUs themselves would not contribute to compliance with NDCs in any way. They would simply be a bargaining tool for the party transferring the AAU.

Furthermore, the continued use of Kyoto Protocol AAUs post 2020 may create an unfair advantage for developed countries over developing countries. Only those States which adopted Kyoto Protocol commitments (developed countries) received AAUs, whereas the Paris Agreement applies to all UNFCCC Parties. The non-Parties to the Kyoto Protocol have not had the opportunity to accumulate surplus AAUs for use under the Paris Agreement.

To allow such an advantage to developed countries would go against the spirit of both the Kyoto Protocol and the Paris Agreement, since both recognise that developed countries are in a better position to reduce their emissions (indeed, this was one of the reasons why only developed countries made emissions commitments under the Kyoto Protocol).

1.5          Economic and environmental arguments against AAU concept

There are a number of perceived benefits to the emissions trading framework created by AAUs (and other carbon securities) under the Kyoto Protocol. However, it may be that AAUs as a concept are not the best way to reduce emissions in every jurisdiction.

The principle behind Paris Agreement’ NDCs is that each Party sets itself a target and then reports on its achievement of that target. The overall goal is to reduce emissions as much as possible.

However, the tradability of AAUs (or similar units) allows States to sell off any “surplus” allowance units. It could be the case that, if States were not able to sell off their surplus units, overall emissions would decrease. States which would otherwise buy the surplus units to meet their NDCs would instead have to reduce their emissions to meet them. As AAUs are structured as an allowance, or a ceiling of permitted emissions, their trade creates a systemic economic incentive not to reduce emissions beyond a certain aggregate level. This goes against the purpose of the Paris Agreement, which is to reduce emissions as much as possible, not just to a certain level. A different type of carbon security might avoid this incentive and encourage reduction in emissions beyond parties NDC targets.

Conclusion

There is currently no legal basis for the continued use of Kyoto Protocol AAUs, other than on the assumption that the Doha Amendment enters into force (or is nevertheless complied with voluntarily). After 2020, when the Kyoto Protocol obligations fall away, AAUs will have no forward-looking meaning and will not serve any purpose towards contributing to Paris Agreement’ NDCs. It is possible that similar tradable emissions units will be created under the Paris Agreement framework, but Kyoto Protocol AAUs would not be fungible with these and should not be able to contribute to achievement of NDCs.

Parties wishing to oppose the use of Kyoto Protocol AAUs towards NDCs may also argue that their continued use would create an unfair advantage for developed countries over developing countries, as only developed countries were granted AAUs under the Kyoto Protocol framework. Furthermore, it is arguable that the structure of AAUs creates a systemic incentive not to reduce emissions beyond set targets.