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Technology transfer and investment risk in international emissions trading

Emissions trading, Joint Implementation (JI), and especially the Clean Development Mechanism (CDM) are central to the United Nations Framework Convention on Climate Change and the Kyoto Protocol. The flexibility offered by these mechanisms allows for two important policy ideas to be pursued. First, the notion of ‘common but differentiated responsibilities’ can be harnessed to account for the different levels of development between countries. Second, a system is created for incentives (1) to reduce greenhouse gas (GHG) emissions where they can be reduced at the lowest costs and (2) to spur innovation. In other words, it differentiates fairness and equity considerations from short-term and long-term efficiency objectives. This is important in order to continue and enhance the participation of developing and newly industrialized countries (e.g. Brazil, China and India). Negotiations on a post-2012 climate regime are accelerating. In March 2007, the European Union’s Environment Council agreed on ambitious targets for the reduction of GHGs and renewable energy, aiming at achieving a reduction in GHGs of 20% by 2020 independent of further international agreements. The Council also agreed to pursue the objective of a reduction in GHGs by 30% in 2020 in the context of an international agreement. Clearly, the European Union Emission Trading Scheme (EU-ETS) is the cornerstone of EU climate policy. After having decided on the allocation for phase II (2008–2012), the policy debate is now focusing on the post2012 stage. An essential element in this discussion is the role of JI and CDM in meeting the EUETS cap for the CO2 allowances and the expected carbon price. An underdose of JI/CDM might lead to inefficiencies and increased carbon leakage. An overdose of JI/CDM might lower the incentives to reduce GHG emissions in the EU and thereby slow the development and diffusion of new climate-friendly technologies. The right balance needs to be struck.