JI - Joint Implementation

This page contains information on two working papers I wrote during 1996 and January 1997. The first one (Joint implementation in climate policy) is in Finnish and the second one (Joint implementation and climate change) in English. I gratefully acknowledge the financial support from the Maj and Tor Nessling foundation which made the study possible. I also want to thank Yrjo Jahnsson foundation for making it possible to finish the second report.

KUOPPAMAKI, Pasi, Joint implementation in climate policy: Greenhouse gas abatement co-operation between Finland and neighbouring areas. (Joint implementation ilmastopolitiikan valineena: Suomi ja lahialueiden kasvihuonekaasujen paastojen rajoittaminen.) Helsinki: ETLA, Elinkeinoelaman Tutkimuslaitos, The Research Institute of the Finnish Economy, 1996. 35 s. (Keskusteluaiheita, Discussion Papers, ISSN 0781-6847; no. 558)

Summary

The risk of climate change causing significant economic and non-economic damages has led to rapid expansion of search for tools to deal with the phenomenon. Finland has agreed by signing the Rio (1992) agreement to limit its greenhouse gas emissions to the 1990 level by 2000. The general purpose of the agreement is to achieve "... stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner". This goal seems, however, currently very difficult to meet. The Finnish economy suffers from severe unemployment and needs more energy which has to be supplied mainly by new coal fired power plants. Rio (1992) agreement gave in principle the right to reduce carbon emissions jointly with other nations. ("Efforts to address climate change may be carried out co-operatively by interested Parties.") The agreement did not, however, specify the mechanism for joint implementation (JI) and COP I meeting in Berlin discussed the topic in depth. Yet, the result was that no credits are given for co-operation but countries can engage in activities implemented jointly (AIJ) co-operation when reducing greenhouse gas emissions as a possible preliminary step for JI. Some countries like USA have developed their own AIJ-programme hoping for the possible provision to be able to use a share of the fruits of co-operation in their own greenhouse gas balance in future.

The basic argument for JI is that emissions would be reduced where the cost of abatement is cheapest, i.e. resources would not be wasted in expensive projects when one can find cheap abatement options in other countries willing to co-operate. Typically JI is projected to happen so that rich industrialised countries make emission reducing investments into transitional economies and developing countries. However, the evidence on the practical workability of JI is mixed. In principle joint implementation adds to the toolkit of policymakers but there are many drawbacks mainly related to transaction costs and incentive mechanisms.

Joint implementation can be divided into open and closed form JI. Closed form JI would be organised as a market for tradable emission rights. Some areas like the EU might adopt a system where the total emissions of the area would be fixed at the 1990 level and the rights to pollute distributed on some fair and efficient basis. Currently there is no definite timetable for this kind of approach and many questions remain to be solved. Open form JI refers mainly to smaller scale technological co-operation between two or more countries, e.g. Finland could help some other country to improve its energy efficiency by technology transfer. The open form JI is more likely between Finland and neighbouring areas and the closed form JI within the EU.

Joint implementation or AIJ has currently no official or explicit role in the Finnish climate change policy. Finland has, however, helped some economies in transition to build more efficient energy facilities and has some energy development co-operation with the neighbouring countries.

The Russian energy system has been inefficient and pollutive due to cheap energy and disregard for environmental problems during the Soviet era. Energy prices were subsidised and the environmental technology backward. There is limited information on the current situation which seems to be improving. The possibilities for much further energy efficiency improvements and emission abatement is evident and Finland has many opportunities to engage in co-operation with Russia. Market based pricing of the fossil fuels without subsidies could also be seen as a precondition for JI as there is no reason to improve technology before significant market distortions have been removed. Elimination of subsidies and other market distortions would also improve local resource allocation.

As the mere volume of the Russian energy production including fossil fuels is tens of times the size of the Finnish energy production and consumption there should be large possibilities for JI if it is done solely between Finland and Russia. This is unlikely, however, and Finland will have to compete with other countries for the best projects if the JI is fully accepted. This implies convergence of the greenhouse gas abatement costs between countries where is has previously been different. The gains that may appear large if we consider only Finland and Russia could be largely reduced due to this factor. Some engineering type of studies show that there exists some potential for gains from JI between Nordic countries and Baltic countries.

Joint implementation may also reduce the so-called carbon leakage which results from polluting industry moving from countries with strict environmental policy to countries with loose environmental policy. There exists, however, also many drawbacks which are difficult to measure. JI may reduce the incentive to develop more environmentally friendly technology in both the investing and receiving country. Transaction and administrative costs may be significant and the receiving partner may lose a share of their decision making power to the investing partner. On the other hand, the investing country has always a risk of political changes in the JI system and the receiving country's policy.

In conclusion we could say that joint implementation is a prerequisite for the globally efficient environmental policy but that it includes many hazards that reduce the benefits. A subglobal JI may not be much better than completely disjoint implementation. Finland should keep keen eye on the Russian and Baltic JI possibilities as the competition for best projects may be intense if greenhouse gas credits will be allowed.

KUOPPAMAKI, Pasi (1997): Joint implementation and climate change: Rationality of joint implementation when energy markets are not well-functioning. Etla DP No. 581

Short Introduction

Climate change is a multidimensional problem which calls for holistic solutions. The Framework Convention for Climate Change has proven to be difficult to implement in most of the Annex I countries. It is likely that the goal of stabilising the greenhouse gas emissions at the year 1990 level by the year 2000 will not be achieved. Reduction of the greenhouse gas emissions is too costly for many countries to be politically feasible. Joint implementation (JI) of the Climate Convention has been proposed as an innovative and efficient solution to the abatement of greenhouse gases. We study the emerging market for joint implementation and concentrate on the Finnish-Russian case.

The purpose of this paper is to study the potential for JI between Finland and neighbouring areas and try to understand how energy market imperfections affect the outcome of JI. We approach the problems firstly by a brief survey to the existing economic and related literature. Secondly, we study JI under conditions of malfunctional markets and thirdly research the conditions in Russia and Estonia from the perspective of the previous chapters. Thus, the weight of the paper is on the Finnish-Russian case.

In the introduction we present some basic arguments behind joint implementation and briefly survey the literature around climate change policy. Some material on climate change policy is also annexed. Second chapter discusses the issues related to climate change policy and JI in more depth and presents a framework for understanding the environmental co-operation between Finland and Russia. Third chapter surveys briefly the current conditions in the neighbouring energy markets and discusses the real potential for JI. Lastly we summarise some of the main findings.

We show that joint implementation is a good addition to an effective climate policy under certain conditions. The JI-policy should be well-formulated and lead to a global Pareto improvement. To minimise free-riding and maximise local and especially global benefits from JI one should require the participating countries to have clear base-line targets for environmental policy and to abolish existing subsidies on greenhouse gas emitting industries.

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