Use of flexible mechanisms by parties without commitment for KP CP2

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Date produced: 03/10/2011

Are there rules under the KP, the UNFCCC process or under international law in general that would prevent developed country Parties that will not engage in a second KP commitment period to use the KP’s flexible mechanisms (if they are not part of the 2nd commitment period of KP)?

Summary

In order to participate in the Kyoto Protocol’s flexible mechanisms, a Party must continue to meet the eligibility criteria for the mechanism, including submitting relevant inventory reports, meeting its targets for the relevant commitment period prior to the end of the true-up period for that commitment period and paying fees to the ITL.
In the absence of amendments to the Kyoto Protocol and the Marrakesh Accords (which provide the modalities and procedures for the flexible mechanisms, reporting and compliance with obligations under the Kyoto Protocol), then provided an Annex I/Annex B Party has not been suspended from participation by the Compliance Committee or the COP/MOP, it will be able to participate in, at least, the CDM. Participation in JI and IET may not be possible if a Party has not been inscribed with a new assigned amount as both mechanisms are contingent upon AAUs being transferred between national registries (although note that some AAUs from the first commitment period may be carried over).
If a second commitment period is agreed to by some parties, then amendments to the Kyoto Protocol will be required, along with more detailed rules to implement the amendments. In addition to amendments to inscribe new targets for a second commitment period and to establish the duration of that commitment period, additional amendments regarding carry over, the use of the flexible mechanisms to meet targets, accounting rules, compliance etc. are under consideration. If only some Annex I Parties intend to participate in a second commitment period, further amendments or decisions may be taken that restrict access to participation in the flexible mechanisms.
It remains open to Annex I Parties to enter bilateral agreements which bypass the ITL to link national registries. This type of agreement could enable a Party that has decided not to participate in a second commitment period to still access CERs from a participating Party and hold CERs in accounts in its national registry.

Eligibility to Participate in Flexible Mechanisms

Decision 2/CMP.1 para 5 sets out the criteria for eligibility to participate in the Kyoto Protocol’s flexible mechanisms as follow:
Decides that the eligibility to participate in the mechanisms by a Party included in Annex I shall be dependent on its compliance with methodological and reporting requirements under Article 5, paragraphs 1 and 2, and Article 7, paragraphs 1 and 4, of the Kyoto Protocol. Oversight of this provision will be provided by the enforcement branch of the Compliance Committee, in accordance with the procedures and mechanisms relating to compliance as contained in decision 24/CP.7, assuming approval of such procedures and mechanisms by the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol in decision form in addition to any amendment entailing legally binding consequences, noting that it is the prerogative of the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol to decide on the legal form of the procedures and mechanisms relating to compliance;
The eligibility requirements for participation in the Clean Development Mechanism (CDM) are elaborated upon in Decision 3/CMP.1, Annex, section F, which states:
F. Participation requirements
28. Participation in a CDM project activity is voluntary.

29. Parties participating in the CDM shall designate a national authority for the CDM.

30. A Party not included in Annex I may participate in a CDM project activity if it is a Party to the Kyoto Protocol.

31. Subject to the provisions of paragraph 32 below, a Party included in Annex I with a commitment inscribed in Annex B is eligible to use CERs, issued in accordance with the relevant provisions, to contribute to compliance with part of its commitment under Article 3, paragraph 1, if it is in compliance with the following eligibility requirements:
(a) It is a Party to the Kyoto Protocol;
(b) Its assigned amount pursuant to Article 3, paragraphs 7 and 8, has been calculated and recorded in accordance with decision 13/CMP.1;
(c) It has in place a national system for the estimation of anthropogenic emissions by sources and anthropogenic removals by sinks of all greenhouse gases not controlled by the Montreal Protocol, in accordance with Article 5, paragraph 1, and the requirements in the guidelines decided thereunder;
(d) It has in place a national registry in accordance with Article 7, paragraph 4, and the requirements in the guidelines decided thereunder;
(e) It has submitted annually the most recent required inventory, in accordance with Article 5, paragraph 2, and Article 7, paragraph 1, and the requirements in the guidelines decided thereunder, including the national inventory report and the common reporting format. For the first commitment period, the quality assessment needed for the purpose of determining eligibility to use the mechanisms shall be limited to the parts of the inventory pertaining to emissions of greenhouse gases from sources/sector categories from Annex A to the Kyoto Protocol and the submission of the annual inventory on sinks;
(f) It submits the supplementary information on assigned amount in accordance with Article 7, paragraph 1, and the requirements in the guidelines decided thereunder and makes any additions to, and subtractions from, assigned amount pursuant to Article 3, paragraphs 7 and 8, including for the activities under Article 3, paragraphs 3 and 4, in accordance with Article 7, paragraph 4, and the requirements in the guidelines decided thereunder.

32. A Party included in Annex I with a commitment inscribed in Annex B shall be considered:
(a) To meet the eligibility requirements referred to in paragraph 31 above after 16 months have elapsed since the submission of its report to facilitate the calculation of its assigned amount pursuant to Article 3, paragraphs 7 and 8, and to demonstrate its capacity to account for its emissions and assigned amount, in accordance with the modalities adopted for the accounting of assigned amount under Article 7, paragraph 4, unless the enforcement branch of the compliance committee finds in accordance with decision 24/CP.7 that the Party does not meet these requirements, or, at an earlier date, if the enforcement branch of the Compliance Committee has decided that it is not proceeding with any questions of implementation relating to these requirements indicated in reports of the expert review teams under Article 8 of the Kyoto Protocol, and has transmitted this information to the secretariat;
(b) To continue to meet the eligibility requirements referred to in paragraph 31 above unless and until the enforcement branch of the Compliance Committee decides that the Party does not meet one or more of the eligibility requirements, has suspended the Party’s eligibility, and has transmitted this information to the secretariat.

34. The secretariat shall maintain publicly accessible lists of:
(a) Parties not included in Annex I which are Parties to the Kyoto Protocol;
(b) Parties included in Annex I that do not meet the requirements in paragraph 31 above or have been suspended.
Similar criteria are set out for participation in Joint Implementation (JI) in Decision 9/CMP.1 Annex, Section D, and Decision 11/CMP.1, Annex, para 2-4, for International Emissions Trading (IET).

Each year during the commitment period, the secretariat publishes an annual compilation and accounting report for each Party included in Annex I and forwards it to the COP/MOP, the Compliance Committee and the Party concerned. At the end of the commitment period and the additional period for fulfilling commitments, the secretariat will publish a final compilation and accounting report to determine whether the Party has met its quantified emission reduction and limitation target (QUELRO) inscribed in Annex B.

A Party’s ability to participate in the CDM (and other flexible mechanisms) may be suspended during a commitment period in circumstances where the Compliance Committee, in exercising its powers and functions under Decision 26/CMP.1, makes a finding that a Party is not in compliance with its commitments under the Protocol and declares the Party no longer meets the eligibility requirements for participation in the relevant flexible mechanism or has exceeded its QUELRO for the commitment period (see Section XV of the Annex to Decision 26/CMP.1). Questions of implementation regarding non-compliance with the reporting and accounting requirements of the Kyoto Protocol have been raised against Croatia, Greece, Canada, Bulgaria, Romania and the Ukraine. Consideration of these questions by the Enforcement Branch of the Compliance Committee has led to the suspension of international transactions with their national registries.

In addition, if a Party fails to pay its fees to the administrator of the International Transaction Log (ITL) the link between its national registry and the ITL will be suspended, which has the effect of preventing flexible mechanism transactions by holders of accounts in that national registry.

Conclusions on eligibility

In the absence of amendments to the Kyoto Protocol and the Marrakesh Accords (which provide the modalities and procedures for the flexible mechanisms, reporting and compliance with obligations under the Kyoto Protocol), then provided an Annex I/Annex B Party has not been suspended from participation by the Compliance Committee or the COP/MOP, it will be able to participate in, at least, the CDM.

There does not appear to be any requirement in the Kyoto Protocol or COP decisions that restricts the CDM eligibility criteria set forth therein to apply only to the first commitment period or state that new eligibility criteria must be adopted for any subsequent commitment periods. Thus, the eligibility criteria set forth in the Kyoto Protocol and COP decisions (which does not clearly restrict CDM to only Parties participating in a second commitment period) would continue in force. As a practical matter, LDCs could decline to host CDM projects if Annex I Host Countries did not participate in a second commitment period.

Participation in JI and IET may not be possible if a Party has not been inscribed with a new assigned amount as both mechanisms are contingent upon AAUs being transferred between national registries (although note that some AAUs from the first commitment period may be carried over).

By way of example, if Japan meets its target for the first commitment period, it will continue to be eligible to participate in a second commitment period (absent amendments to the Kyoto Protocol and Marrakesh Accord rules regarding eligibility). However, as it may not be allocated new AAUs for use in IET, its participation may be limited only to acting as an Annex I Host Country Party for the CDM. If Canada fails to meet its target for the first commitment period and does not agree to any directions made by the Compliance Committee, it will be suspended from participation in all the flexible mechanisms in the second commitment period.

Amendments to Eligibility Requirements

So long as a Party meets the eligibility criteria to participate in the CDM, there are no provisions explicitly prohibiting their participation in the CDM even if they are not participating in a second commitment period.
If a second commitment period is agreed to by some parties, then amendments to the Kyoto Protocol will be required, along with more detailed rules to implement the amendments. In addition to amendments to inscribe new targets for a second commitment period and to establish the duration of that commitment period, additional amendments regarding carry over, the use of the flexible mechanisms to meet targets, accounting rules, compliance etc. are under consideration. If only some Annex I Parties intend to participate in a second commitment period, further amendments or decisions may be taken that restrict access to participation in the flexible mechanisms. An amendment to the Kyoto Protocol to provide for a second commitment period could set forth eligibility criteria for participation in the CDM that requires Parties that wish to participate in the CDM to also agree to a second commitment period.
New eligibility criteria could also be set forth in a CMP decision that amends the CDM eligibility criteria set forth in the Marrakesh Accords (although this would not function to establish a second commitment period).

Bilateral Linking

It is important to note that the international market is linked through a series of national registries and the ITL. By way of example, in the CDM, CERs are issued into accounts in the national registries of the Annex I Host Country, and can then be transferred to other accounts in other national registries. If an Annex I Party’s registry is suspended (Party A), it is possible for project participants to seek a letter of approval from another Annex I Host Country (Party B) and nominate a registry account in that Party’s registry. The ability for Party A to then receive CERs in its national registry will depend whether there is a separate agreement to link its registry with Party B (as distinct from linking through the ITL). This bilateral linkage could effectively enable CERs to flow into the registry of a Party that has not endorsed a second commitment period.

There does not appear to be any prohibitions regarding the ability for Parties to bilaterally link their registries accounts in order to receive credits under the CDM. If new CDM eligibility criteria were set forth in a Kyoto Protocol amendment or COP decision, the bilateral linkage issue could also be addressed.