Project-Based Emissions Trading: The Impact of Institutional Arrangements on Cost-Effectiveness

In this paper we demonstrate that the institutionalarrangement (or: design) of Joint Implementation (JI) and the CleanDevelopment Mechanism (CDM) has a decisive impact on theircost-effectiveness. We illustrate our arguments by statistically analyzing thecosts from 94 Activities Implemented Jointly (AIJ) pilot phase projects aswell as by adjusting these data on the basis of simple mathematicalformulas. These calculations explicitly take into account the institutionaldifferences between JI (sinks, no banking) and the CDM (banking, no sinks)under the Kyoto Protocol and also show the possible effects on credit costsof alternative design options. However, our numerical illustrations shouldbe viewed with caution, because AIJ is only to a limited extentrepresentative of potential future JI and CDM projects and because creditcosts are not credit prices. Some of the main figures found in this study are:an average cost figure per unit of emission reduction for AIJ projects of 46dollar per ton of carbon dioxide equivalent ($/Mg CO₂-eq), anaverage potential JI credit cost figure which is lowered to 37$/Mg CO₂-eq by introducing banking and an average of 6$/Mg CO₂-eq per credit for potential low-cost CDM projects whichincludes sinks. However, at CoP6 in November 2000 in The Hague (TheNetherlands), the Parties to the Framework Convention on Climate Change(FCCC) did not (yet) reach consensus on the institutional details of theproject-based mechanisms, such as the possible arrangement of early JIaction or the inclusion of sinks under the CDM.