The form and magnitude of the eventual markets for ERUs under Article 6 (i.e., Annex I JI) and CERs under Article 12 (the CDM) are difficult to estimate. Key policy decisions have not been made by the Parties. This discussion of the potential for LULUCF activity in the CDM makes no judgment about the policy issue of whether the CDM includes specific LULUCF activities.
No credible, detailed estimates of the magnitude of the potential for LULUCF activities in Annex I and in non-Annex I countries are available for the first commitment period, 2008-2012 (see Chapter 4). To date, macroeconomic model assessments of supply and demand for emissions reductions by Annex I countries using the Kyoto Protocol flexible mechanisms (e.g., emissions trading, JI, or the CDM) have not separated LULUCF activities or projects. These analyses generally do not reflect policy or technical tests and guidance likely to be included in the operationalization of Articles 6 and 12. Analyses are needed of the potential supply, cost, and demand for LULUCF project-based activities, especially at the national level, under realistic scenarios for operating conditions under Articles 6 and 12.
The best approximations of Annex I project-level activity would be some small fraction-as yet unknown-of estimated country-level Article 3.3 and possibly Article 3.4 activities (depending on additional activities the Parties decide to include under Article 3.4, if any). Prospective activity levels under these two articles are reviewed in Chapter 3 and 4 (see also Nabuurs et al., 2000). Project-level activities under Article 6 likely would be a small subset of these activities, which otherwise have been widely assumed to be reported nationally under the two articles, not as projects. No estimates of the demand for LULUCF project ERUs under Article 6 have been widely reviewed and reported for individual countries or for Annex I as a whole.
Global economic general equilibrium models have been used to project GHG target levels for 2010 for Annex I countries, to estimate the percentage of emissions reductions and total financial flows that might occur under Annex I JI or the CDM. Austin and Faeth (2000) summarized the results of four independent modeling teams. These models have been used to estimate where emissions reductions could occur at the lowest cost, largely on the basis of fossil fuel CO2 emissions. Modeling results project that estimated emissions reductions by Annex I countries in the year 2010 (for that year) would come predominately from domestic reductions (15-45 percent), Annex I trading (6-10 percent), and "hot air" (8-41 percent). (Hot air is a term that describes ERUs predicted to be generated by country emissions during the first commitment period below countries' assigned amounts, as an artifact of macroeconomic and political changes in economies in transition, such as the Russian Federation, Ukraine, and Poland.) Some limited set of JI projects under Article 6 might be developed, although such projects would compete directly with these emissions reduction alternatives. Reductions in developing countries were estimated at 33-55 percent (another estimate is 19-57 percent; Vrolijk, 1999) of the demand for reductions by Annex I countries.
These models are neither designed to assess LULUCF activities, nor JI or the CDM. Project-oriented mechanisms are not likely to deliver the same stream of least-cost GHG abatement activities as an efficient emissions trading system, carbon tax, or other economic instrument (Austin and Faeth, 2000). Projects under Articles 6 and 12 may require certification and reporting costs, and costs for projects under Article 12 may also include charges for an adaptation fund and administration expenses of the CDM, as well as sustainable development considerations. These constraints may reduce the economic efficiency of JI and the CDM relative to emissions trading, according to reviews by some economists (e.g., Manne and Richels, 1999).
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