Assessing the Constraints and Opportunities for Private Sector Participation in Activities Implemented Jointly: Two Case Studies From the U.S. Initiative for Joint Implementation

This paper assesses the constraints and opportunities for private-sector participation in Activities Implemented Jointly under the United Nations Framework Convention on Climate Change. After some initial background, the discussion turns to the United States Initiative on Joint Implementation (USIJI)—its objectives, proposal review and evaluation criteria, and a classification of project proposals by project type and stage of development. Two USIJI projects are developed as case studies. One case is an energy end use project that has gained formal acceptance and financing. The other case is an energy production project proposal that has not secured acceptance or financing. In both cases, transaction costs were substantial, and project proponents regarded gaining formal host country acceptance as the principal impediment to project development. The cases illustrate how the host country JI project approval process can become entangled in broader struggles over economic reforms. The cases also suggest that JI project proponents may have divergent perspectives on the speculative value of greenhouse gas (GHG) credits. An enforceable cap on GHG emissions in the project funders’ countries, which is a prerequisite to establishing any market for the credits, is contrary to the position of energy and power suppliers who promote voluntary emissions reductions. For emissions reduction technology firms, however, establishing a value for GHG credits would help generate demand for the firms’ stock in trade. Finally, the study underscores that notwithstanding transaction costs associated with JI proposal development and acceptance, financing remains the ultimate hurdle to project implementation.

Implementing the Clean Development Mechanism: Lessons from U.S. Private-Sector Participation in Activities Implemented Jointly

The "Clean Development Mechanism" (CDM) contained in the December 1997 Kyoto Protocol to the United Nations Framework Convention on Climate Change provides, for the first time, the capacity for industrialized countries to claim credits for greenhouse gas (GHG) emissions reductions or offsets undertaken in cooperation with host developing countries. However, the Protocol provides no guidance on how these cooperative activities for GHG reduction and sustainable development would be undertaken in practice, including the particularly important issue of the relationship of the private sector vis-à-vis government institutions in designing, financing, and securing approval for jointly implemented GHG abatement projects. The pilot program for "Activities Implemented Jointly" under the Framework Convention provides an opportunity to better understand the practical constraints and opportunities for successful private sector participation in the CDM. This paper highlights some of the lessons for establishing a successful CDM by examining a small number of cases from the United States Initiative on Joint Implementation (USIJI). The authors first review the objectives, proposal review and evaluation criteria of this program, and provide some overall information on project proposals by project type and stage of development. They then develop case studies of two energy-related USIJI projects from the earlier phase of the program. These cases illustrate several potential problems that can arise in establishing CDM transactions. Further investigation of more recent cases sheds some light on the extent to which these problems change over time. To be successful, the CDM must be based on a solid institutional footing, with clear incentives for all parties involved. The cases examined here illustrate how transactions can become entangled in the same kinds of problems that bedevil other transactions in developing and transitional economies. In both early cases, "transaction costs" were substantial. The latter projects indicated that while the nature of transactions costs changed over time, they still remained somewhat substantial. Project proponents regarded gaining USIJI acceptance as one of the principal impediments to JI project development. The cases also illustrate the need for clear and widely understood goals and procedures for investor country approval. In addition, the analysis underscores how attitudes of different project proponents regarding the value of GHG credits can affect their perspective on the transaction. Finally, the study underscores that financing remains the ultimate hurdle to project implementation, and that the expectation of a clear financial return on investment is a prerequisite to a successful project.