Joint Implementation Pilot Phase in Estonia

Tiit Kallaste, Stockholm Environment Institute Tallinn Centre

1. Introduction

Estonia signed the United Nations Framework Convention on Climate Change (UNFCCC) during the UN Conference on Environment and Development (UNCED) in Rio de Janeiro in 1992. In May of 1994 the Estonian Parliament ratified the Convention, which was subsequently promulgated by the Estonian President. In October 1994 the Act came into force. In January 1995 a Governmental Committee on Climate Change was established to implement the Convention.

Estonia fulfilled its initial treaty obligations by presenting the First National Communication to the first Conference of Parties (COP 1) in March of. Estonia was assisted in the preparation of its communication by the United States Energy Department under the 1994 framework programme, "US Support for Country Studies to Address Climate Change". A baseline year of 1990 was employed in order to conform to IPCC methodological guidelines.

The Second National Communication was presented to the Secretariat in the autumn of 1998. It states that compared to 1990, the total emission of GHG had decreased significantly by 1996. As for CO2, a decrease of ~50% was achieved because of reductions in energy demand during the country's economic transition.¹ The compilation of the Third National Communication under the UNFCCC was recently launched, and should be completed in 2001.

Estonia's position on the Kyoto UNFCCC Conference of Parties (COP 3) in December 1997 was in conformity with that of the European Union. The target was a significant reduction of CO2 emissions by the year 2005, and further reduction by 2010. This demonstrated Estonia's high commitment to further GHG emissions reductions. GHG emissions should be decreased by 8% compared to 1990 and by the first budget period, 2008-2012. In numerical terms, this means reducing GHG total yearly emissions to 32 million tons. Considering the significant projected yearly growth rate of GDP, changes in legislative and economic policy must occur in order to reach this goal.

Estonia historically has close ties with Denmark, Finland and Sweden. Many joint projects within the energy sector have been carried out by those countries. These projects were undoubtedly geared toward decreasing GHG emissions, but at that time were not worded in the context of climate change.

The above-mentioned close cooperation between Estonia and its neighbors at the end of the 1980s resulted in many positive achievements. Grants from the Danish government enabled several boiler houses to be transferred from heavy fuel oil consumption to local biomass (i.e., wood waste, sawdust, bark and wood chips). A solar collector was also established in one hospital to partially supply it with warm water.

Cooperation with Sweden began shortly after the Rio Conference via programmes to mitigate GHG emissions through common energy conservation and efficiency projects. Sweden had already implemented so-called "fuel switch" projects well before the Kyoto decisions in 1993. Finland cooperated on energy conservation and energy saving issues. Unfortunately, not all of the projects could have been classified as Joint Implementation were registered as such. Nevertheless, Sweden has clearly been the most successful donor. Since 1993 Estonia, alongside Latvia, Lithuania, Poland, and Russia has participated in the Swedish National Board for Industrial and Technical Development (NUTEK) pilot programme on Activities Implemented Jointly (AIJ). Up to now, Sweden and Estonia have registered 20 AIJ projects with the Climate Secretariat in Bonn, a significant indicator of success of both the donor and host country.² On the basis of results achieved since 1993, Estonia has been one of the most successful host countries in the region.

In order for Estonia to attain its fixed international obligation of GHG reduction in the most cost-efficient manner, more large-scale endeavors geared toward bigger reduction potentials must be planned in the near future. The issue of oil shale-based power generation in Estonia must be strongly emphasized. New technological alternatives to power and heat generation should be taken into consideration in the long-term planning of the entire energy sector. This issue may be considered the most promising for future flexible mechanisms such as JI. Implementation of new combustion technologies in oil shale use could manifest a 50% reduction in CO2 emissions.³

Another high priority for Estonia is more intensive use of renewable energy sources, particularly biomass, for heat and power generation. The country's GHG emissions baseline is strongly dependent on the energy policy to be developed during the next few years, and a much wider use of renewable energy sources is one of the priorities fixed in the Long Term Development Plan for the Estonian Fuel and Energy Sector.⁴

Without a doubt, Joint Implementation is one of the most transparent and promising mechanisms by which to increase the proportion of renewable energy sources in Estonia. Experience in this area is already off to a successful start, particularly regarding the use of biomass.

In the following pages, possible solutions to the problem of GHG emissions in Estonia will be analyzed. Experiences leading up to the present will be covered alongside the challenges and opportunities which lie ahead for the future success of JI.

2. The Institutional Framework for Climate Change and AIJ Issues

A government committee on the implementation of the Climate Convention was established in January 1995. Its task is to facilitate strategic mechanisms for the reduction of GHG emissions, such as programmes of Joint Implementation⁵ (JI), and the preparation and launching of its pilot phase activities, or Activities Implemented Jointly⁶ (AIJ). The Commission must develop alternative strategies to be targeted in further work on climate issues and create a country specific implementation mechanism acceptable to potential donors among the Annex I countries. The Committee's obligations were fixed and the responsibilities shared between several institutions, amongst which the Ministry of Environment has the leading role. The Committee's mandate is to select the most suitable among the prospective country projects to be launched with the help of donor countries. The Committee should determine the main goals in the international negotiating process for the reduction of GHG emissions.

Estonia has good potential for cooperation with the main donor countries in Europe, especially with the Nordic countries. The Committee nevertheless lacks an efficient working institution such as a Secretariat on JI implementation or a JI Project Preparation Facility. Nor does it have a Steering Committee of any kind. Consequently, up to the present time the Government has lacked an appropriate system of identification and verification of future Joint Implementation activities.

The Government Committee has not done any real work to date; nor has it undertaken any significant measures to form a climate policy in Estonia. Other institutions have actually taken its place in developing relevant activities and programmes. Recently an Inter-Ministerial Joint Implementation Steering Group was created on the basis of an NGO, the Stockholm Environment Institute Tallinn Centre. The primary aim of the JI Steering Group is to bring together top-level decision-makers from the Ministry of Environment and the Ministry of Economic Affairs, the main agents in implementing the Climate Convention. The Steering Group has identified its main objectives, which include: building institutional capacity for future JI pilot phase projects; putting principles and regulations in the form of appropriate documentation for the guidance of potential Annex I donor countries; and outlining the procedures for identifying and approving potential Joint Implementation projects and activities. Another important task includes setting up a nationwide, prioritized list of JI projects and activities to cohere with the National Environmental Action Plan. The general target of the JI Steering Group is the preparation of Estonia for further Joint Implementation activities and emissions trading.

The JI Steering Group has developed a seminar with the Manager of the Joint Implementation Program, International Division from the Ministry of Economic Affairs of The Netherlands to study the ERUPT Program launched by the Dutch Government.⁷ In the seminar, possibilities for Estonia's role in international climate control measures are discussed and evaluated.

The day-to-day work in the field of climate change and abatement of GHG emissions is concentrated between two ministries⁸, the Ministry of Environment (MoE) and the Ministry of Economic Affairs (MoEA). The Energy Department within the Ministry of Economic Affairs is responsible for policy issues including energy efficiency, and thus indirectly the reduction of GHG emissions. Currently, measures to reduce CO2 emissions by improving energy efficiency fall under Estonia's Energy Act. The Act confers upon the Energy Market Inspectorate the authority to organize cooperation among energy traders for the conservation of energy and the environment (State Gazette 1, 1998, 71, 1201 §26). Better cooperation between the two key ministries is expected to increase overall efficiency in the area of GHG emissions reduction.

The Energy Conservation Division within the MoEA was established in order to coordinate the conservation of energy and the environment in Estonia. At present, the Energy Act and the Construction Act are in the process of amendment to cover the targets set in the European Union Directive 93/76/EEC. An expert group at the MoEA has currently established the new Energy Conservation Program (draft from May 24, 1999), which was adopted by the Government in January 2000. The MoEA determines the role of different institutions and ministries in the implementation of the Energy Conservation Program⁹.

All important strategic issues regarding energy production and consumption at the state level are thus in the competence of the Ministry. These include large-scale heat and power production, which pose the biggest problems regarding GHG emissions. Energy planning at the local level is also coordinated by the same institution. The Energy Department manages the Energy Conservation Fund, a key institution in implementing governmental policy on energy efficiency and related climate issues. The Fund is used to finance general studies on energy efficiency, as well as some small-scale pilot projects in energy saving. Unfortunately, the financial resources of the Fund are limited - during the 1998 fiscal year, only about EEK 7 million (approximately USD 470,000) was spent.

There is no special institutional unit in the MoEA that deals directly with climate issues related to energy. However, AIJ projects launched up to this point could in principle belong to Energy Department by virtue of their content. But at present their implementation and coordination are organized via the MoE.

The Ministry of Environment is the primary institution responsible for the Framework Convention on Climate Change and all other climate related issues. Within the ministry, international climate issues are coordinated by the Department of Foreign Affairs. A formally established position exists for the so-called "local focal point" - an individual who carries out all responsibilities concerning climate change related work currently done in Estonia. It is also the duty of the local focal point to represent Estonia in the Conferences of Parties, attend all climate negotiations, and have an overview of all JI pilot phase projects launched in this field, coordinating the JI project proposals, selection and verification. In principle, the yearly reporting on AIJ project results to the Convention Secretariat may also fall within their scope of responsibilities. The "local focal point" also serves as an advisor to the minister in all questions related to the UN Framework Convention on Climate Change.

In order to form a reliable institutional and professional base for future Joint Implementation projects, the AIJ unit has recently been established in the Department of Environmental Management and Technology at the MoE. Its function is to maintain records on JI pilot phase projects already in progress, and to help select, verify and launch future AIJ projects. This unit is responsible for reporting yearly to the UNFCCC Secretariat on the GHG emissions reductions resulting from AIJ projects. It also works toward fulfillment of Estonia's commitments in this area according to the Kyoto Protocol. The Department of Environmental Management and Technology deals with all issues related to the atmospheric environment; it was therefore decided to place the AIJ projects under its jurisdiction.

The key problem confronting all three Baltic States appears to be the lack of sufficient institutional capacity to implement the JI pilot phase. There is also a lack of monitoring and reporting experience in the host countries. In general, host countries anticipate receiving assistance in institution building from donor countries.

To date, Estonia's main donor country is Sweden, long experienced in the field of energy efficiency and conservation. Denmark has also supported several fuel switch projects and a solar-based energy conservation project in Põlva. However, the Danish projects, which are in principle grant projects, are not registered in the UNFCCC AIJ Register.

As the donor country representative, the Swedish Energy Administration, STEM, is continuing its assistance in monitoring and reporting the projects in five host countries. Experts from STEM, as well as the Swedish consultancy company AF Energikonsult provided guidance in methodology. Work was also supported by the host countries' energy efficiency development network, the Regional Environmental Center (REC) under the PHARE Program, and other research & development institutions.

The initial task of those responsible for AIJ in the MoE was to participate in the monitoring and reporting of AIJ projects along with the Swedish Energy Administration. Workshops were organized in 1999 by the donor country to increase the administrative capacities of representatives from three Baltic countries, and specifically to teach them monitoring and reporting skills. In April 2000 a day-long seminar for the Baltic partners was arranged by STEM in Tallinn. Several private consultants from host countries carried out the relevant monitoring and data verification work alongside the donor country consultants. The final report to the Convention Secretariat in 1999 was prepared by the donor country, i.e., by STEM experts and consultants from the Swedish company AF Energikonsult. The baseline¹⁰ calculations in the Estonian heating sector were performed by SEI Tallinn Centre and the Estonian Energy Research Institute. A publication on these baselines will available to the public in spring 2000¹¹.

In the near future (most likely the second half of 2000), the responsibilities of the AIJ unit in the Ministry of Environment will encompass coordination of the entire effort, including the international negotiating process, contracting, etc. Full responsibility for the enforcement and monitoring of various JI pilot phase projects will also be transferred to the host. Hopefully, the number of experts from the MoEA currently involved in surveying the projects will increase. Their knowledge on matters of energy conservation and CO2 emissions reduction is needed to increase the overall efficiency of project enforcement and ensure smooth implementation.

It has been agreed between the donor and host country representatives that new AIJ projects will have to follow a given format of systematic monitoring and reporting, both to the donor and particularly to the newly established AIJ coordination unit in the host country's Ministry of Environment. The AIJ unit will be the center for JI pilot phase coordination, an information resource for future potential investors and donors, and the institution responsible for working out AIJ criteria and procedures. Its responsibilities must also cover the selection of future projects, verification, monitoring and reporting to the Convention Secretariat.

Other institutions also deal with particular problems related to climate change, although they may not be engaged in the daily work related to climate policy or Joint Implementation.¹² Within the jurisdiction of the Ministry of Environment, the Estonian Institute of Meteorology and Hydrology participates in the work of the World Meteorological Organization. It is likewise affiliated with the Intergovernmental Panel on Climate Change, with a permanent representative. This links the work carried out in Estonia with international climate-related institutions and vice versa. Estonia receives direct feedback from those authorities.

As for the legislative basis concerning Joint Implementation and its pilot phase, no laws, regulations or formal procedures are yet in place. AIJ projects begun in 1993 (before the Kyoto Protocol targets and agreements on flexible mechanisms were established) were initiated by donor country energy institutions at the local, rather than national level. Loan contracts to initiate technology transfers or energy saving projects were signed between the NUTEK representative and the heads of the local boiler houses. It was not up to the local municipality to give guarantees for the relatively large loans provided by STEM. This way of working benefited the projects in many ways, namely very short lead time; and the straightforward involvement of the boiler house management or housing cooperative board members provided great incentive to work successfully with the projects. Yet risks to the donor authority were understandably greater.

3. General Objectives of the JI Pilot Phase

As a party to the Convention, Estonia is obliged to honor the commitments enumerated in the Kyoto Protocol. Estonia is listed in Annex I of the Protocol, and therefore enjoys the right to participate in the JI pilot phase. In addition to activities initiated locally, other cost-efficient means of reducing GHG emissions must be found.

Based on past experience and the analysis of AIJ projects in the Baltic States, the author recommends assessment of the AIJ projects in Estonia should have the following objectives:

• Limit emissions of GHG into the atmosphere by the most cost-effective means possible;
• Provide loans to AIJ projects at the local level for increasing efficiency in the production, distribution and consumption of (preferably) renewable energy for heating and power generation. The loan conditions should be extremely favorable for the host country enterprises or municipalities, with the payback period ranging from 10 to 25 years.
• Facilitate the transformation toward an ecologically sustainable energy system, subject to the conditions of the Climate Convention;
• Build up climate-related administrative capacities within the host country's government;
• Contribute to the realization of cost-effective climate measures by increased use of renewable energy sources both in heat and electricity production, and also to decrease energy losses at distribution;
• Adapt to more energy-saving consumption patterns;
• Develop experience in Joint Implementation so that it may become an efficient mechanism in donor/host country international climate cooperation;
• Develop a network for energy and climate cooperation in the Baltic Sea region, based on the Kyoto Protocol's target for reduction of GHG emissions;
• Contribute to increased awareness and knowledge in the energy and climate fields, with the aim of decreasing fossil fuel use;
• Support socially, economically and environmentally sustainable transformation and development through increased efficiency in the production, distribution and consumption of heat and electricity;
• Initiate business cooperation between donor and host countries, companies and municipalities.

4. Swedish EAES Programme

In late 1992 and early 1993, the Swedish Government initiated a programme aimed at mitigating climate change through improvements in the energy systems of the Baltic States and countries in Eastern Europe. These took the form of energy efficiency measures and the increased use of renewable energy sources. The Swedish Government Programme for an Environmentally Adapted Energy System (EAES) programme was actually one of the very first state level programmes in the world aimed at the rapid and efficient implementation of the UNFCCC. This programme was designed to conform to the AIJ criteria agreed upon at the first Conference of the Parties in Berlin in April 1995.

The first pilot projects of Activities Implemented Jointly (AIJ) were launched in the Baltic States, Russia and Poland. Estonia has participated in the NUTEK AIJ pilot projects from the beginning.

In 1998, the governments of Estonia and Sweden agreed on mutual cooperation in monitoring, reporting to the Climate Secretariat, and verification of the results of these projects13. The programme was financed by special allowances from the Swedish State budget. The total programme budget for the period 1993-1997 was SEK 295 million (approximately USD 42 million), of which SEK 230 million, or ~78% has been used to finance favorable investment loans, the rest being used for consultancy in the region. These significant funds were allocated to develop various types of energy projects leading to cutting GHG emissions in the above-mentioned five countries with economies in transition. The EAES Program received a further SEK 350 million from the government for the following period 1998-2005. An expansion can be foreseen in the number of projects in the Russian Federation, the Barents Region in particular (Karelia and the Murmansk and Archangelsk Regions), for further developing the JI. NUTEK was assigned as the implementing authority by the government until the end of 1997. As of January 1, 1998, the new Swedish National Energy Administration (STEM) has assumed responsibility for the EAES.

From the onset, the general direction of the EAES programme has comprised the following four categories of projects:

1. Conversion of heat production plants from fossil fuels to the local bio-fuels;
2. Reduction of heat losses in district heating systems;
3. Energy efficiency in the end-use within buildings;
4. Comprehensive projects, which combine all three of the above-mentioned.

Investment priorities differ slightly from those of the first stage. In recent years the programme has been adjusted and is further directed towards:

• Combined fuel conversion and measures in distribution and/or end-use;
• Combined heat and power production (CHP);
• Use of waste heat from industrial production for district heating and power production.
• Cooperation will continue to focus on joint projects to introduce environmentally friendly technologies for energy production and use in the Baltic region and Eastern Europe.

5. Criteria for Approval of AIJ Projects

Since the start of the first JI pilot phase projects in 1993, a set of operating principles has evolved. These are based mostly upon the Swedish Government initiative, but also on the input of enthusiastic local project managers. A set of principles for the selection and verification of projects was worked out by the implementing agency in Sweden, NUTEK. The host country governmental representatives have had a rather modest role in launching the projects.

The greatest role in the preparation of project launching has been undertaken by local county or municipal governments, boiler house owners and residential housing cooperatives. No guidelines or criteria have been fixed on the governmental level. In addition, contracting and all resultant financial responsibilities are fully the province of project owners. The responsibility taken by governmental institutions and authorities has been insignificant.

The biggest problem has been the lack of qualified staff. Although there are additional reasons for the passive attitudes of Estonian governmental institutions, low institutional capacity with regard to these issues is the most significant one. Unfortunately, a once wide public interest in environmental and energy conservation issues has waned since Estonia regained independence in 1991. At the beginning of the 1990s, priorities changed from environmental to economic issues.

The main provisions for the AIJ programme were stated by the donor country - the Swedish Government - as follows:

• Allocations for the programme are to be used for providing favorable loans to customers in the recipient (host) countries for investments increasing the use of renewable fuels in heating and electricity production, as well as improving efficiency in the use and distribution of energy. A minor portion of the allocations may be provided as grants.
• The relevant experience and competence of the Swedish production industry, as well as the technical and administrative competence of the recipient countries should be considered and utilized to the maximum possible extent in the planning stage.

These main provisions may easily be elaborated and adjusted to local conditions. Based on the understanding of the author of present overview, the following criteria are recommended for Estonia:

• AIJ projects should result in the most cost-effective solution among the available alternatives and lead to measurable climate improvement;
• No explicit demand is necessary for state guarantees to the proffered loans, unless the plant is state owned. The contracts may be signed by an individual at the level of project manager;
• The loans could be provided with a maturity period of approximately 10 years, including a grace period of up to 2 years to facilitate start-up;
• The projected emissions reduction must be evaluated according to established rules on baselines prior to the start of the AIJ project;
• The host country should be involved in baseline calculations, as it keeps the necessary statistical details;
• The ideal AIJ project should have a quick start-up period (3 to 5 months), be affordable, and employ sustainable and well-tested technologies, as well as a qualified and stimulated labor force;
• AIJ fuel switch projects should preferably be oriented toward the use of local renewable energy sources such as wood waste, sawdust, bark and wood chips;
• AIJ projects should be in line with Estonia's macroeconomic development, long term development of the energy sector, and energy conservation plans and programmes;
• AIJ projects should not only target the greatest emissions reduction potential, but their social significance should be considered equally important.

The Swedish EAES Programme was designed in accordance with the AIJ criteria set at the first COP in Berlin in April 1995. These provisions were thus fulfilled in the majority of the projects launched. It should be emphasized that at present no guidelines or criteria have been set forth by the recipient country government. This work should be developed by the Climate Unit, which was recently implemented within the Ministry of Environment, but there is currently a lack of qualified staff to do this work.

6. Analysis of AIJ Projects

The EAES Program's main activities were directed towards the reduction of CO2, NOx and SO2, emissions via the implementation of 21 related projects.14 Estonia has been a good host country in the sense that its level of technological know-how is relatively good, and there is keen interest in fuel switching and energy conservation. It should be mentioned that due to an economic blockade of the supply of heavy and light fuel oils from the east, the initiation of local renewable energy based projects was accelerated.

The main objectives of the programme were achieved through fuel switch projects. These were centered around heavy oil- or coal-fired boiler conversions to local fuel, mainly wood, in the form of wood waste, sawdust, bark and wood chips. Such projects were responsible for the major share of emissions reduction.

The transfer from heavy fuel oil or coal to natural gas was not applied within the framework of the EAES Program. The replacement of worn-out pipelines in heat distribution with pre-isolated pipes was important for maintaining the existing district heating network. Hence, eliminating the heat losses gave a significant energy savings, contributing to CO2 reduction. These projects may be classified as technology transfers.

Heat conservation projects in the housing sector also played an important role. Energy efficiency in residential buildings was emphasized as part of the overall concept of energy conservation. Although the expected outcome of the project in terms of carbon emissions reduction is somewhat lower, the residential buildings were significantly upgraded, which is equally important in terms of quality of life.

The Implementing Agency (NUTEK/STEM) of the donor country has been responsible for the selection of potential project sites and appropriate enterprises for technology transfer either in Sweden or in Estonia. They have launched the AIJ projects in cooperation with the host country, and have discussed the loan conditions with local authorities, boiler house owners and housing cooperatives. This may be construed as having both a positive effect in the sense of gaining valuable experience and a network of contacts, as well as a negative one, since the authority of the host country in deciding its own priorities has been reduced. However, most of the boilers in Estonia are either partly or fully owned by the municipality. Hence, the local population has a basis for participation in major decisions affecting them. Tenant/housing associations are also consulted when operational changes are being planned.

The projects initiated by the Swedish party in the context of the UNFCCC have had an impressive influence in overall GHG abatement in Estonia. Up to 15% of the emissions reduction in Estonia can be attributed to the Swedish JI pilot phase projects, quite a significant result in the post-Kyoto process. Future research conducted by the Swedish National Energy Administration is necessary to determine the exact abatement figures. In addition, other sectors should be analyzed.

The construction of baselines for power generation and the housing sector seems a good opportunity for activating the next AIJ projects in Estonia. It was decided at COP 4 that AIJ projects should be continued in order to pave the way for emissions accounting and trading during the first commitment period. Judging on the basis of preliminary calculations, the avoided GHG were found to be rather significant in Estonia. Some preliminary calculations have already been performed by SEI-Tallinn Centre in connection with the analysis of GHG emissions reduction in the heating and housing sectors.

The calculations made by STEM over the course of the projects' lifetime show that the saved/converted energy resulting from the various AIJ projects in Estonia equals 302,770 MWh/year, or 1,635,900 accumulated tons of CO2. It is especially important to stress the mitigation of the emission of greenhouse gases and other environmentally hazardous compounds. For example, annual emissions of the main GHG, CO2 was reduced by 100,260; SO2 by 1,120; NOx by 40 tons; and solid particulate matter by 130 tons.¹⁵

An assessment of CO2 abatement costs may give a preliminary evaluation on costs per ton of avoided CO2. The average investment cost per ton of CO2 over the programme is EUR 18.3/ton of CO2, and for Estonia - EUR 20/ton. Average consultancy costs are EUR 4.9/ton, and for Estonia - EUR 5.3/ton of CO2. Estonia and Latvia differ with their significantly better results in emissions reductions, having rather similar investment and consultancy costs. One must still consider the often-great differences in the character of various project categories, the host countries' economic conditions, and the growing experience of the donor country in the course of implementing the programme. Despite differences in the data of the five countries, some trends may nevertheless be identified.

The important principle applied by the donor country is that AIJ projects are performed primarily through the aid of loans. The share of grants is relatively low, i.e. ~15% in the case of Estonia. The long-term loan conditions, of course, are extremely favorable for the host country enterprise or municipality, with the payback period ranging from 10 to 25 years. Compared to many other AIJ projects launched in countries with economies in transition (Poland, for example), grants for investments in Sweden-Estonian Joint Implementation projects are not the typical practice. Based on the experience of Estonia, a major conclusion is that grants are not the most efficient means of aid in reducing GHG emissions, as the enthusiastic involvement of host country project owners might be hindered by relatively low incentive.

The social and economic consequences of the projects are difficult to predict. One significant change was the rapid increase in the price of wood chips, which nearly doubled during the period from 1994 to 1997. This resulted in increased heating costs. The main reason for the price increases was an upsurge in demand for exports after Estonia liberalized its trade. Prices have now stabilized, but the margin of savings projected in the conversion project estimate has decreased. But a positive aspect of the growing use of wood chips has been an increase in rural employment. Unemployment has been a growing problem (7-10%) in the country, but the increase in revenues from the forestry sector has helped to control it. It is estimated that every MW from biomass-based boiler installations creates three new jobs.

In conclusion, it must be acknowledged that AIJ projects have played an active role in overall GHG abatement at the local level.

7. Donors for Estonian AIJ

In the case of Estonia, there is unfortunately only one donor country, Sweden, in place. We can attribute this to the low activity of the host country's governmental institutions, which are responsible for the implementation of the Convention. No applications exist with regard to Joint Implementation project proposals to seek GHG reductions. Nevertheless, there are other countries that have performed GHG emissions reduction, energy conservation, efficiency or other related activities in Estonia. Next to Sweden, Denmark must be mentioned for implementing several energy and climate related projects in Estonia. Other potential AIJ donor countries might be identified who are ready to cooperate within the framework of Joint Implementation in the near future.

8. Specific Features Making Swedish Donor Partnership Successful

The particular success of the NUTEK/STEM Environmentally Adapted Energy Systems Program including AIJ projects in Estonia was based primarily on the following features, which might be considered in planning future activities:

• Good preconditions for cooperation between the Nordic and Baltic countries. Similar cultural and historical background;
• Long experience in environmental aid programmes, including various energy projects, with Denmark, Finland and Sweden;
• PHARE supported Regional Environmental Centre (REC) programme in Estonia has efficiently expanded to include practical implementation, verification, monitoring, and reporting of AIJ projects;
• Close cooperation between the parties and partners: NUTEK, Swedish and Estonian consultants, boiler plant owners and local municipalities;
• Flexibility in finding the best solutions in each case by discussing different options with consultants and contractors;
• Increased interest in energy conservation projects in the housing sector lead to an extended local initiative to involve commercial banks in the energy conservation programme;
• Considerably less bureaucracy compared to that of international financing institutions, which resulted in quick fiscal transactions to open lines of credit;
• Personal enthusiasm of engineers, scientists, and local municipality officers in connection with developing AIJ projects;
• Local decision-making, since all of the decisions throughout the project implementation stage were made on-site;
• High competency of most of the project owners (plant managers, municipalities, etc.) in the host country. Some of the technical solutions in the reconstruction of the boilers were positive discoveries for the donor country technical experts;
• Enterprises in the host country established joint ventures with the donors to enlarge their scope of activities (mostly in fuel switch projects) to include third countries.

The practical outcome of the pilot phase of Joint Implementation forms a sound basis for preparing guidelines for launching climate oriented energy efficiency, energy conservation, and fuel switch projects in the future.

9. New AIJ Perspectives on Increasing the Role of Renewable Energy Sources

Besides oil shale, Estonia has other domestic primary fuel resources - wood, peat, water and wind. The wider use of renewable energy has gained importance in the country during recent years, and there is good potential in Estonia for future AIJ projects to be carried out in this field.16 Renewable energy resources are considered to give off zero CO2 emissions, since they do not have any impact on the global carbon cycle.

Because Estonia lacks natural gas, oil and coal, these must be purchased at world market prices. The shift to European prices of energy carriers has caused an increase in the use of domestic fuels as a primary energy supply. For example, the share of oil shale in the fuel balance increased from 58% in 1990 to 61% in 1997. The share of wood and peat reached 10% and 2% respectively up to the year 1997 as compared with a total of 3% in 1990. At the same time the share of imported fuel oils dropped from 18% in 1990 to 3% in 1997. The share of domestic fuels in the primary energy supply is presently nearly 70%. Wood and peat are predominantly used for the production of heat, although peat is to some extent burned for electricity generation as well.¹⁷

Approximately 44% of Estonia's land area is forested. It is possible to harvest 4-4.5 Mm3 of wood from these forests, which is equivalent to 26-30 PJ of primary energy. One consideration for the implementation of future AIJ projects is that there are adequate resources of wood and wood waste, key materials in fuel switch projects. Approximately 22% of Estonia's territory is covered in bogs and mires. The reserves of peat are estimated at 2.4 Gt. Peat resources may be considered renewable only with certain reservations because of their slow recovery. Their recovery rate is approximately 1 Mm/y, which is equivalent to 0.8 Mt. As the consumption of peat does not surpass this increment, it may be defined as a renewable energy source.

Wood and peat may be burned at boiler houses where once the most commonly used fuels were crude oil, coal or natural gas. The reduction in the emission of air pollutants is somewhat lower than for oil shale power plants. The use of wood or peat is economically feasible only if the fuel is located not farther than 50-100 km from the boiler house. Good prospects for wood and peat combustion exist in the southern part of the country where smaller towns, extensive peat bogs and large forests are situated.

Wood and peat differ from each other in the content of the pollutants they emit. For peat the CO2 cycle is long and its emission takes place both during excavation (beginning with drainage) and combustion. However, SO2 and NOx emissions can be kept at relatively low levels, significantly reduced compared to fuel oil or coal combustion.

In the case of wood combustion, the emitted CO2 will be quickly used during photosynthesis. NOx, and especially SO2 emissions can be kept low as the sulfur content in wood is minimal. If wood and peat are also used for electricity generation, the potential reduction in GHG emissions is even greater.

The assessment of policy options for encouraging utilization of wood energy in Estonia has been analyzed in depth by Prof. P. Muiste of the Estonian Agricultural University.18 In this study, which was performed at the request of Estonian and Swedish National Boards of Forestry and financed by STEM, the author proves the high sustainability of wood fuel usage. The available fuel resources depend on multiple factors such as biological increment, level of cutting, harvesting technologies, cost of labor, situation on the wood market, taxation, location of forest industry enterprises, etc. The author analyses the feasibility of wood energy and finds a promising outlook for its much wider use.

The Swedish EAES Programme has played a role in the increasingly popular use of wood and peat in recent years. The share of those AIJ projects responsible for the rise in the use of these fuels may be assessed at up to 15%, although at present no precise calculations on this figure have been made. The Long Term Development Plan of the Energy Sector19 envisages raising the share of peat, wood and wind energy in the primary energy supply to 13% by the year 2010. This target had practically been reached already in 1997, at 12.7%.

Estonia has considerable wind energy resources, especially in coastal areas. The first wind turbine for commercial energy production with a capacity of 150 kW has been operating since September 1997. A maximum 0.3 TW·h of electricity could be produced annually without conflicting with other requirements. In order to achieve this, 120 MW of wind turbines should be installed in regions with good wind conditions. Because of high capital costs, the price of wind-generated electricity is rather high compared to that presently generated on the basis of oil shale. This is the main obstacle to harnessing wind energy. However, the price of electricity is expected to rise at least 15% during the year 2000; hence the two price levels may soon well be comparable.

On the initiative of renewable energy experts, Parliament decided to amend the Estonian Energy Act in June 1998. The amendment involves an obligation to buy electricity generated on the basis of renewable energy sources (including wind) by the public grid at a preferred price level (90% of the customer price), which will help overcome the obstacle posed by low prices.

Wind energy is a good basis for future AIJ projects, but the obstacle remains in making these investments attractive for donor countries. Problems involved in connecting the wind farms to the existing power grid must also be studied. Research in this area was launched by the Tallinn Technical University last fall. Construction of several 10-30 MW wind farms in Estonia has shown good potential for involvement in a pilot phase of Joint Implementation. Institutional help from the government is needed in order to achieve this. Financing of renewable energy projects may be considered the weakest link in the chain, and capacity building in applying for investments and cooperating with potential partners is of great importance.

The amount of waterpower is very limited due to the generally flat surface of the country. Today eight mini-hydropower plants with a total capacity of about 1 MW are in operation. A maximum 60 MW of hydropower may be installed, and only a few former power plants with a total capacity of 4-5 MW may be restored in the near future.

In terms of environmental protection, the total costs (including pollution damage and resource depletion) of energy produced on the basis of renewable sources will very probably be lower compared with those of fossil fuels. Rough estimates show that every kWh of electricity produced by wind or hydropower instead of pulverized firing of oil shale in existing power plants will avoid the emission of 1350 g CO2, 10 g fly ash, 1 g NOx and 9 g SO2.

Thanks to increasing use of waste wood in the energy sector, domestic production of equipment for biomass boilers has begun and is rapidly expanding. But as there is no domestic industry producing the elements for hydro or wind turbines, most of this equipment has to be imported. Domestic production of these items might be considered an option. The need for investments might be partially met through Joint Implementation. As for solar energy, the only noteworthy application in the future would be water heating during the summer. The photovoltaic cell has no significant potential in Estonia.

10. Conclusions and Recommendations

• Efficient execution of the Joint Implementation pilot phase plays a significant role in Estonia's meeting the Kyoto Protocol targets. A precondition for increasing the scope and variety of AIJ projects is capacity building at various levels of decision-making. Current awareness on climate issues in general and Joint Implementation in particular has been raised significantly in the course of current capacity building projects. Knowledge in certain areas must nevertheless be improved, and the success of current AIJ projects should be furthered throughout the country.
• Participation of Government entities in the selection, verification, monitoring of and reporting on AIJ projects should be raised significantly. Such work has begun within the Inter-ministerial JI Steering Group, and institutional capacity has been improved within the Ministry of Economic Affairs and the Ministry of Environment. Further activities must be planned to support and invigorate endeavors in the climate and energy related sphere.
• The procedures for selection and approval of JI projects must be public, and should be prepared by the relevant experts in the Ministry of Environment and the Ministry of Economic Affairs. All interested parties must have access to project planning in the initial stages.
• The private sector is becoming increasingly active in JI related energy projects. A growing number of stakeholders are involved in capacity building seminars and renewable energy workshops coordinated by SEI-Tallinn Centre in cooperation with the MoE. A major obstacle is finding partner countries and enterprises to initiate future AIJ projects. The JI Initiative Group is targeting its work toward this end.
• Financing of governmental and research institutions should be improved in order to involve more individuals in dealing with climate and energy problems. At present there is no fixed budget for implementing the targets projected in the UN FCCC Kyoto Protocol. This obviously hinders the normal course of work. As a result, a number of cooperation projects and AIJ projects are not developed until practical implementation.
• The substantial experience gained by Estonia as a successful host country since the start of EAES Programme in 1993 should be channeled into compiling relevant methodological guidelines and a set of criteria for subsequent JI projects. Only then will Estonia as host country be attractive to donor countries.
• The appropriate legislative basis should be established in order to prepare a good investment climate. Conditions should assure donor countries of all necessary guarantees and relevant information.
• Monitoring, reporting and verification of future AIJ projects should be well defined at the start-up phase. This will provide a sound basis for following reporting procedures to the Climate Convention Secretariat as well as for further emissions trading activities. This work must be undertaken through the initiative of MoEA and MoE in the near future. The JI principles, rules and regulations should be discussed openly, documented, and made available to investors, donor country representatives and local entrepreneurs.
• Further development of AIJ projects in Estonia should be geared towards enlarging the pool of potential donors as well as the variety of projects. This will provide necessary knowledge for the implementation of other mechanisms under the Kyoto Protocol.

References

• Accounting and Accreditation of Activities Implemented Jointly, (1999). Final report, prepared for DG XII of the EC under the Environment and Climate Programme 1994-1998, Contract No. ENV4-CT96-0210 (DG12-ESCY), March 1999.
• Muiste, P., Assessment of Policy Options for Encouraging Utilization of Wood Energy in Estonia, (1998). Report of Phase 1 to the Swedish National Forestry Board. STEM. Tartu. 25pp.
• Climate Related International Energy Cooperation, (1998). Progress report of The Swedish Government Programme for an Environmentally Adapted Energy System (EAES), Stockholm. 14pp.
• Eds. Tarand, A. and Kallaste, T., (1998), Country Case Study on Climate Change Impacts and Adaptation Assessments in the Republic of Estonia, Stockholm Environment Institute Tallinn Centre, Estonian Ministry of Environment. Report to UNEP/GEF. Tallinn, 146pp.
• Criteria and Perspectives for Joint Implementation -Ten Nordic Projects in Eastern Europe, (1997), Nordic Council of Ministers, Tema Nord.
• Ed. Kallaste, T., (1998), Economics of GHG Limitations. Phase 1: Establishment of a Methodological Framework for Climate Change Mitigation Assessment. Estonian Case Study. Stockholm Environment Institute Tallinn Centre, UNEP/GEF Project No. GF/2200-96-15 Report, June 1998. 193pp.
• Estonia's First National Communication under the United Nations Framework Convention on Climate Change, (1995), Ministry of Environment of the Republic of Estonia. Tallinn, Estonia. 38pp.
• Estonia's Second National Communication Under the United Nations Framework Convention on Climate Change, (1998), Ministry of Environment of the Republic of Estonia, Tallinn. 68pp.
• Ellis, J. and Bosi, M., (1999), Options for Project Emission Baselines. OECD and IEA Information Paper. Paris, 60 pp, October 1999.
• Energy Conservation Programme, (2000), Ministry of Economic Affairs. Tallinn. 20pp. (in Estonian), January 2000.
• IPCC, (1996), Revised 1996 IPCC Guidelines for National Greenhouse Gas Inventories, Vol. 1-3.
• Joint Implementation Quarterly Magazine, Vol.5, No. 3, September 1999. Foundation JIN, Paterswolde, Netherlands.
• Kallaste, T., (1999), "Fulfillment of the Commitments under the UN FCCC by Estonia" [in] Proceedings of the WEC Forum. Central and East European Energy Policies, Markets and Technologies for the 21st Century, 16-18 September 1999, Vilnius. pp. 250-257.
• Kallaste, T. and Roos, I., (2000), Top-Down Baselines: Setting for the Revised Calculations of CO2 Emission Reduction, Swedish National Energy Agency, SEI-Tallinn Centre and Estonian Energy Research Institute. Stockholm (in print).
• Long Term Development Plan for the Estonian Fuel and Energy Sector, (1998), Ministry of Economic Affairs. Tallinn, 17pp.
• Michaelowa, A., (1999), Project-Specific, Benchmark, Top-Down Approaches for Baselines and Additionality: A Comparison, presentation for the UN FCCC Technical Workshop on Mechanisms, Bonn, April 9-15, 15pp.
• Eds. Kallaste, T., Liik, O., and Ots, A., (1999), Possible Energy Sector Trends in Estonia. Context of Climate Change, SEI-Tallinn Centre, Tallinn Technical University, Tallinn, 190pp.
• REC-WRI, Capacity for Climate: Economies in Transition after Kyoto, June 1999.

Endnotes

1. Country Case Study on Climate Change Impacts and Adaptation Assessments in the Republic of Estonia, (1998), Eds. Andres Tarand and Tiit Kallaste. Stockholm Environment Institute Tallinn Centre, Estonian Ministry of Environment. Report to UNEP/GEF. Tallinn, 146pp. Economics of GHG Limitations. Phase 1: Establishment of a Methodological Framework for Climate Change Mitigation Assessment, Estonian Case Study, (June 1998), Ed. by Tiit Kallaste. Stockholm Environment Institute Tallinn Centre, UNEP/GEF Project No. GF/2200-96-15 Report, 193pp. Accounting and Accreditation of Activities Implemented Jointly, (Final Report March 1999). Prepared for DG XII of the EC under the Environment and Climate Programme 1994-1998, Contract No. ENV4-CT96-0210 (DG12-ESCY). Kallaste, T., (1999), Fulfillment of the Commitments under the UN FCCC by Estonia In: Proceedings of the WEC Forum. Central and East European Energy Policies, Markets and Technologies for the 21st Century, (16-18 September 1999), Vilnius. pp. 250-257.

2. Joint Implementation Quarterly Magazine, Foundation JIN, Paterswolde, Netherlands, Vol.5, No. 3, Sept. 1999.

3. Possible Energy Sector Trends in Estonia. Context of Climate Change, (1999), SEI-Tallinn Centre, Tallinn Technical University, Eds. Tiit Kallaste, Olev Liik, and Arvo Ots. Tallinn, 190pp.

4. Long Term Development Plan for the Estonian Fuel and Energy Sector, (1998), Ministry of Economic Affairs, Tallinn, 17pp.

5. Joint Implementation means that a country (the investor country) where the costs of reducing GHG are assumed to be high, invests in emission-reducing measures in a country with lower reduction costs (the host country) and is credited, in whole or in part, for emission reductions in its own GHG accounts.

6. The pilot phase of Joint Implementation was titled AIJ to differentiate it from the JI.

7. ERUPT may help companies that invest in energy efficiency, renewable energy, waste processing and forests in Central and Eastern Europe to improve the results of their projects. Through ERUPT the Netherlands Government buys the emission reductions of GHG from these projects. In this way an additional source of finance is introduced that can speed up project implementation and can make projects feasible.

8. In other ministries, like the Ministry of Agriculture and Ministry of Transport and Communication, Ministry of Economic Affairs, etc. there are advisors in the field of environmental protection. They are thus responsible for all the issues related to climate change.

9. Energy Conservation Programme, (2000), Ministry of Economic Affairs. Tallinn. 20pp. (in Estonian), January 2000.

10. The Kyoto Protocol establishes two project-based mechanisms: the clean development mechanism and Joint Implementation. Emission baselines for JI (and also CDM) projects aim to quantify "what would have happened" in terms of greenhouse gas emissions in the absence of those projects. Actual emissions from projects are measured against baseline emissions, and if lower, they can generate emission credits. Baselines are, by definition, hypothetical reference cases and are subject to a number of uncertainties (Ellis and Bosi, (1999), Michaelowa). In other words, a baseline is a projection of the development path of the economy and technology into the future. The baseline is a "business as usual" scenario and does not include additional JI projects. Therefore the baselines are important in deciding which potential JI projects are additional (they are not included in the baseline).

11. Kallaste, T. and Roos, I., Top-Down Baselines Setting for the Revised Calculations of CO2 Emission Reduction, (2000), Swedish National Energy Agency, SEI-Tallinn Centre and Estonian Energy Research Institute, Stockholm (in print).

12. As a party to Convention, Estonia has its' obligations in regards to prepare regularly the National Communications under the Convention. This work is coordinated by the Ministry of Environment and carried out by several research and development institutions (Estonian Energy Research Institute, Institute of Ecology, Tallinn Technical University, Stockholm Environment Institute Tallinn Centre etc.

13. Still, no Memorandum of Understanding or official contract on co-operation exists.

14. Different sources of information give the slightly different number for AIJ projects. STEM presents the number 21 for AIJ projects in Estonia. The list of registered AIJ projects in Bonn, UN FCCC Secretariat gives the list of reported projects limiting to 20. The reason might be the measure of relevance of the projects to set criteria.

15. Climate Related International Energy Cooperation, Progress Report of The Swedish Government Programme for an Environmentally Adapted Energy System (EAES), (1998), Stockholm, 14pp.

16. Ed. Kallaste, T., (1998), Economics of GHG Limitations. Phase 1: Establishment of a Methodological Framework for Climate Change Mitigation Assessment, Estonian Case Study. Stockholm Environment Institute Tallinn Centre, UNEP/GEF Project No. GF/2200-96-15 Report, June 1998, 193pp.

17. Eds. Kallaste, T., Liik, O., and Ots A., (1999), Possible Energy Sector Trends in Estonia. Context of Climate Change, SEI-Tallinn Centre, Tallinn Technical University, Tallinn, 190pp.

18. Muiste, P., (1998), Assessment of Policy Options for Encouraging Utilization of Wood Energy in Estonia. Report of the First Phase to the Swedish National Forestry Board. STEM. Tartu. 25pp.

19. Long Term Development Plan for the Estonian Fuel and Energy Sector, (1998). Ministry of Economic Affairs. Tallinn, 17pp.