Secretary of State Bernt Bull

Emission commitments and flexible implementation mechanisms under a strengthened international climate agreement

Opening Address at the Conference
"Controlling Carbon and Sulphur: International Investment and Trading Initiatives"
Chatham House/London, 5 & 6 December 1996

Mr. Chairman, Ladies and Gentlemen,

I am grateful for being invited to give this opening address at the eleventh conference in this well reputed series organised by the Royal Institute of International Affairs. The subject of this year's conference is of immediate importance since the issue of flexible implementation mechanisms, such as joint implementation and emission trading, with certainty will receive increased attention in the deliberations on a strengthened international climate agreement in the year to come.

Next week, the Ad hoc Group on the Berlin Mandate (AGBM) will meet in Geneva for its fifth session. It should then commence negotiations on the substantial content of a strengthened climate agreement to be adopted one year from now. I would therefore like to use this opportunity to make some remarks that connect the questions of joint implementation and emission permits trading to the present situation in the climate change negotiations.

The Berlin Mandate prescribes the process for advancing the international response to climate change. An identified priority in this process is the strengthening of the commitments of developed countries (Annex I Parties) after the year 2000, to be laid down in a protocol or another legal instrument. In this context, the Ministerial Declaration at the second Conference of the Parties this summer was most encouraging. It demonstrated overwhelming support from most governments for taking serious action against climate change: First of all, the Geneva Declaration gives unequivocal support for the findings of the IPCC as a scientific basis for future actions to limit and reduce emissions of greenhouse gases. Second, consistent with this recognition, the Declaration emphasises the need to accelerate the negotiations on strengthened commitments and advises "... quantified legally-binding objectives for emission limitations and significant overall reductions within specified time-frames..." to be set for developed countries (Annex I Parties) in the final agreement. The Geneva Declaration therefore represents an important step towards the adoption of an adequate agreement at the third Conference of the Parties to the Climate Convention in Kyoto 1997.

Flexible implementation mechanisms, as those discussed as this conference, should be a part of a strengthened climate agreement. However, a premise for most of these systems is that initial quantitative emission commitments, or entitlements, have been allocated to the parties to the agreement. Let me therefore initially say a few words about the present deliberations on emission commitments.

Structure of Emission Commitments

The question on how to structure and implement so-called "Quantified Emissions Limitation and Reduction Objectives" (QELROs) will demand increased attention in the forthcoming negotiations. The rather limited discussions on the allocation of emission commitments so far have indicated two general approaches: a flat rate approach - implying uniform percentage reductions across all countries - and a differentiated approach. It is my view that a differentiated approach is necessary according to the Berlin Mandate. The Mandate, in consistence with the Convention, emphasises that account shall be taken of important differences in national circumstances among the Parties. Clearly, a stringent flat rate approach will not respond to such substantial differences. It fails on grounds of equity but also on grounds of efficiency - it will reward those countries that are most inefficient and emit most, and will penalise those that have already successfully implemented measures to make their economies more efficient.

In a longer term perspective, the global challenge we are facing requires commitments and co-operative efforts by all Parties. The simplified division of countries applied in the Convention is not sufficient to embrace neither the current national differences existing among developed countries, nor the differences that will exist among developing countries when they are ready to take on emission commitments too. The importance of reflecting such differences in a strengthened climate agreement has also been underscored by the IPCC Working Group III in its contribution to the Second Assessment Report. It is therefore important that the agreement we design today establishes a model that sets us on the right track to the future. An agreement that is structured in an equitable way will enable us to take on and realise more ambitious long-term goals.

It is on this background that Norway has responded to the invitation from the AGBM to submit proposals regarding possible criteria and modalities for differentiation of emission commitments. The Norwegian submission substantiates the reasons why uniform targets across Annex I Parties would be inconsistent with the premises of the Berlin Mandate, and why a differentiated approach can lead to outcomes that are both more equitable and more cost-effective. It furthermore discusses a set of criteria and indicators to be included in a formula for differentiation. The submission also underlines the need for flexible mechanisms to support the implementation of the emission commitments.

In order to facilitate completion of the work of the AGBM by the third session of the Conference of the Parties, a thorough discussion of the elements and preconditions set by the Mandate remains indispensable. The operationalization of the premises for emission commitments in a protocol or another legal instrument has been and will continue to be a key issue for the AGBM. I hope that the Norwegian submission will be a useful contribution to these important discussions in the forthcoming sessions.

Flexible Implementation Mechanisms

While equity and cost efficiency are critical concerns to be taken into account when setting and allocating targets, cost efficiency must also be duly considered when formulating policies and measures to achieve these targets. Thus, an important aim is that a protocol or another legal instrument should be, as far as possible, cost-efficient across greenhouse gases, sectors and countries to achieve the environmental objectives at least overall costs to the Parties. Any system which distributes emission commitments among Parties has to open for flexible implementation to ensure cost-effectiveness. It is my opinion that, independent of how the emission commitments are initially distributed among Parties, both joint implementation and emission trading can, if designed in a proper way, contribute to significantly cheaper reductions and thus contribute to more ambitious environmental goals.

Joint Implementation/Activities Implemented Jointly

Norway has for a long time advocated the concept of Joint Implementation. We therefore welcomed the launching of a pilot phase for Activities Implemented Jointly (AIJ) in Berlin in 1995. The Government has renewed its support for the development of reporting criteria and crediting options on AIJ. Norway has so far co-funded two AIJ pilot projects - in Poland and in Mexico, in co-operation with the World Bank, UNEP and UNDP. The project in Poland involves the conversion of several coal-fired power plants to gas, while the project in Mexico promotes high efficiency lightning in two cities. New projects in Costa Rica and Burkina Faso have recently been decided on, and we are in a process of identifying possible AIJ projects in Eastern Europe and the Baltic countries as well. In addition to bilateral activities, we have signed a three-year agreement with the World Bank on co-operation on common AIJ activities to catalyse opportunities and maximise learning. This type of co-operation may be helpful in reducing transaction costs, such as those related to identification, implementation, monitoring and verification. I should finally add that the Nordic countries are involved in a joint effort to investigate the climate change effects of ongoing environmental projects in Eastern Europe and the Baltic countries together with the Nordic Environmental Financing Co-operation (NEFCO).

Norway will continue to participate in pilot projects on Activities Implemented Jointly . A main aim with our present engagement in AIJ projects is to demonstrate workable solutions, show the risk components of AIJ activities and provide examples of institutional frameworks. In general, projects on fuel switching and energy efficiency may seem preferable to projects on enhancement of sinks, i.a. due to measurements problems related to the latter. It is furthermore essential to develop the potential role of the private sector and mobilise private sector funds. The private sector must, in this respect, be willing to consider the pilot period as an opportunity for investments in knowledge and practical experience without achieving credits for emission reductions.

When more generally applied, and in a longer time perspective, I feel confident that Joint Implementation will be a necessary instrument in achieving the ultimate objective of the Convention. However, a main challenge will be to find ways of reducing the transaction costs related to identification, implementation, monitoring and verification. In our view, the agreement we are now negotiating should allow for Joint Implementation between Annex I Parties. The possibilities for such arrangements in the upcoming agreement should therefore be further investigated. The door should also be kept open for similar arrangements with non-Annex I Parties, provided such co-operation is in accordance with national aims and priorities in receiving countries and implemented in a transparent way, according to agreed criteria. This conference should contribute with valuable insight into how such systems might be designed and implemented.

Emission Trading

The second concept focused at this conference, tradable emission permits or quotas, is also highly interesting, although international experiences with such systems are still few. No doubt, emission trading systems have a potential to enhance the overall cost-effectiveness of international environmental agreements, provided that i.a. monitoring and enforcement are adequate. In this respect, the experience gained from the US tradable sulphur permit scheme might hold valuable lessons and insight for the design and implementation of corresponding systems at international level, also within the field of climate change. Still, with the variations in domestic regulatory policies existing among Parties, we are in need of additional practical experiences from more countries. I would like to mention that Norway is currently exploring new instruments to ensure that our SO ₂-emissions remain below the ceiling set in the second sulphur protocol. At present, our most important instruments are a tax on the sulphur content of mineral oils and a licensing system for industry emissions. There are basically two alternatives for our future approach:

Extending the sulphur tax, primarily to cover coal and coke in industrial processes, so that the content of sulphur in these products is taxed in line with sulphur in mineral oils.

Establishing a system of tradable sulphur quotas which will encompass all major sources of SO ₂-emissions.

We are developing the specific elements in a tradable permit system in close contact with the relevant industries. Which alternative we will go for will probably be decided in the autumn next year, but I hope that experiences gained from any trading scheme might be carried forward to systems for control of GHG emissions.

We also need further intellectual efforts on legal and institutional aspects and fundamental design parameters for international trading schemes. I find both the UNCTAD project on pilot emission trading programmes and the project conducted by the Annex I Experts Group on the FCCC (supported by the OECD and the IEA) valuable and important as a basis for further exploration and possible input to the present negotiations. It is vital that such trading systems are kept as simple as possible, that they are practicable, transparent and feasible. The system should also be able to function without the establishment of a large international bureaucracy to monitor and enforce the trading.

As with joint implementation, we need practical experience with systems of emission trading at the international level. As mentioned, it is in my view a necessity that the agreement reached in Kyoto next year includes flexible market mechanisms such as emission trading. I look forward to hearing the contributions of the speakers on these subjects here today, and hope that the discussions will contribute to valuable exchange of information and ideas on this promising concept.

While the content and distribution of emission commitments will probably attract much of the attention in the climate change negotiations in the nearest time, further effort on development of flexible implementation mechanisms to enhance the cost-effective implementation of the forthcoming commitments is meanwhile needed. I therefore welcome the initiative taken by Chatham House to arrange the present conference and will listen with interest to the discussions, hoping that this conference will yield results which can be followed up internationally.

Thank you very much!