Report on Workshop of Experts on Joint Implementation (JI)

REC
Szentendre, Hungary
18-19 April 2001

Subject: Business involvement in JI in Central and Eastern Europe (CEE).
Main objectives: The main objectives of the workshop were:

• Identifying the main barriers to business involvement.
• Providing recommendations for the creation of a framework for further, efficient business involvement.

Place/Date: The Workshop took place at the Regional Environmental Center Headquarters in Szentendre, Hungary on 18-19 April 2001.

Participants: Overall 45 participants (see list) including: CEE and Western government officials; representatives of international organisations, NGOs, business organisations and independent consultants.

Framework: The workshop was divided into three parts:

• identifying problems,
• options for addressing the identified problems, and
• action planning-recommendations for further activities.

The agenda of the workshop was very flexible. The underlying idea was to encourage participants to voice their input and provide maximum opportunity for brainstorming. During every session each participant was asked to single out the issues that he or she considered to be the most important. Their suggestions were organised into five general categories, which became the topics for further group discussions-i.e., one topic per discussion group. Each participant could choose a discussion group freely. The results of the discussions were presented at the plenary meetings.

1. Identification of problems:

1.1 Session I. Presentations from two keynote speakers:

1.1.1. Claude Culem (VP Environmental Affaires 'Holderbank') presented a business perspective on the problems of JI.

1.1.2. Erik Wissema (Ministry of Economic Affairs, Netherlands) shared information about the first instance of JI (17/04/01) in the Netherlands and presented donor governments' perspectives on the difficulties associated with JI development in CEE.

1.2. Session II. "Business Involvement in JI: Problems, Prioritisation". This section included the active involvement of the workshop participants as described above. During this session the participants expressed their understanding of the difficulties associated with JI development in the CEE region in general problems as well as those specifically connected to business involvement.

Every participant identified several problems he or she considered to be the most troublesome to JI development. Each concern was written down on a separate sheet of A4 paper and stuck on a blackboard. Then the ideas were then categorised by matters that coincided or were closely related. Thus, by obtaining a clear 'visualisation' of which problems were regarded as the 'first to be solved', general topics for the discussion groups were defined:

• Capacity Building
• International Environmental Politics
• Market
• Project Development
• National Policy

The participants were free to join any group following their personal priorities.

1.2.1. Capacity Building
The group concluded that capacity building in the region is insufficient and that this should be acknowledged by both donor and host countries. The donor countries should actively participate in the capacity building process in the host countries, which is usually not the case. The participants identified the following groups as potential targets for information dissemination on the capacity building process:

• officials at the political level;
• officials on the policy-making level; and
• recognised experts in NGOs, potential investors etc.

At the moment, the capacity building process is severely inhibited by:

• Lack of public awareness, and consequently a lack of 'green pressure' on governments, particularly, in the CEE region.
• Insufficient information about concrete "success stories."
• Lack of models that set examples and are worthwhile to follow.
• The low involvement of the experts from the CEE region in JI projects.
• Lack of cooperation between host and donor countries.

1.2.2. International Environmental Politics
The second group focused on the general problems of international climate politics under the new US administration's current position and the uncertainties it causes. The following questions were raised:

• Why is the US against Protocol?
• Is Kyoto Protocol (KP) enforcement is possible without the US?
• Is the JI mechanism possible without the Protocol?

Their main conclusions were that there were a variety of reasons as to why the US turned against KP, including:

• Technical and political issues related to the Protocol itself, for instance the reluctance of many parties to accept 'sink' projects as qualified for Flexible Mechanisms.
• The reluctance of less developed countries to make their own clear commitments.
• The internal politics of the US.
• Cultural-reasons related to maintaining the 'American Way of Life.'

The assessment of different scenarios indicated that KP could still be implemented even without US participation under the condition of strong Russian Federation, Japanese and EU leadership. The support of the American companies interested in JI would also be important.

Such Flexibility Mechanisms as JI can be also implemented without the ratification of KP, if certain countries give high priority to the environment and all countries create a favourable environment for clean technology trade.

1.2.3. Market
This group discussed the following questions:

• Does the JI market exist?
• Is the JI market a separate one or a part of the Emission Reduction Unit (ERU) market?
• What are the main competitors of JI?
• What are the driving forces for enterprises in both host and donor countries to enter the JI market?
• What are the associated risks?
• Who owns the ERUs?

The group concluded that currently there was no such market for JI. Hence, one can call the current situation a pseudo-market or a JI market in the preparation phase. This pseudo-market is highly regulated by the government leaving almost no room for self-regulating market forces. What might motivate an enterprise from a host country to enter this market would be its willingness to have an "environmentally-friendly" image and the probability of acquiring ERUs in the first commitment period. As there is yet no market for ERUs, their prices are established through bi-lateral governmental agreements. Under the current practice, this price is skewed towards the donor. Donors pick up the cheapest projects, as well, threatening the host country's own compliance. (If KP is ratified, then the countries may face risks of non-compliance payment.) There was a suggestion that an independent broker would be needed to prevent both sides from cheating and to avoid governmental corruption. Clean Development Mechanisms (CDMs) are JI's major competitor for funds, as they offer an "early crediting mode" to investors. Allowing for "early crediting" in JI may increase its attractiveness.

1.2.4. Project Development
This group discussed problems related to the project design itself, as well as costs associated with the project. The group focused on the fact that apart from CDM there is another competitor, Emission Trading, which might crowd-out JI because of lower transaction costs. The group also pointed out that the current high transaction costs and risks were due to the following factors:

• Lack of practice in bundling small projects into a bankable packages (except EBRD).
• Lack of clear rules and models for baseline assessment. The practice shows that baselines for the projects in the energy sectors do not reflect the nature of those sectors.
• Lack of clear additional rules.
• Lack of legal framework for JI. Regarding established property rights for ERU, distribution mechanisms and enforcement mechanisms do not exist hence, the uncertainties are excessively high.
• Lack of financial institutions and financial mechanisms for JI.
• Competition between demand and supply-side projects.

1.2.5. National Policy
The group discussion revealed that the major countries in CEE did not have clear JI national strategies. Such strategies are likely to be part of a broader national policy to abate climate change rather than exist as separate programs.
At the same time, climate change policies usually have low priority in the region. One reason for this is the EU accession process, which forces governments to focus their attention on more stringent economic issues. Another reason is the lack of financial and human resources. Consequently, climate change policy becomes integrated into a wider picture of economic development. A country also needs a clear climate change policy, which will help it gain a more competitive position on the JI market in the near future. Countries in the region are at different stages in this regard. Hungary and the Czech Republic have a climate policy already in place, although the Czech one needs updating in order to accommodate new developments in the international climate process. Slovakia is currently developing a policy. Poland has not yet started, however, a JI unit exists in that country.

As soon as national climate policies are adopted it will be possible to set up a clear selection criteria for JI projects, since these criteria should reflect the country's priorities. Unfortunately, countries lack the selection criteria as well as the capacity to identify suitable projects for JI. The "positive" JI list database is usually obsolete. Hungary, for example, which has already prepared a JI positive list, is having difficulties finding donors. The responsibilities are not clearly divided between institutions. Therefore, there is a need for more transparency as well as a more pro-active industry to generate bankable project proposals.

Business people from CEE region complain about the shortage of government interest in "green" projects. The existing legal framework is, in some cases, inadequate. In Poland, for instance, it does not allow the government to sign the Memorandum of Understanding with a donor country.

Slovakian and Estonian participants expressed their interest in specific projects on renewables. Slovakia would like to focus on biomass-fuel electricity production. Estonia has already started a project on the landfill biogas. However, the legal framework does not provide enough incentives.

2. Addressing Problems and Making Recommendations for Further Activities
During the second part of the workshop, participants discussed the possible ways of removing barriers to successfully implementing JI. The framework was the similar to the first part in that participants brainstormed, identified possible actions, compiled lists of propositions, organized them into larger topics and formed discussion groups. The discussion topics were:

• Climate Policy
• "Green" Energy/Technology
• Market
• Public Awareness

The Market topic was divided in two sub-groups because of its popularity.
During the third part of the workshop, participants discussed the suggestions and proposals on improving the JI situation, which they could take back to their workplaces. The discussion continued in the same groups.

2.1. Climate Policy
The group stated that a clear climate policy was a precondition for creating JI policy. When a clear climate strategy is established, it should include a JI policy. Following that, the institutional framework with clear tasks and mandates must be defined. In addition, greater emphasis should be placed on creating the database necessary for JI.
The proposals made for action programmes appear below.

2.1.1. The first discussion topic was, "How to turn the governments towards more JI oriented policy?" It was stated and agreed that in CEE countries climate change is not a priority. As these countries have either an immediate or long-term interest in joining EU, priority is given to the environmental issues that are required by accession. However, countries should focus more on making future energy projections. It might happen that the present sellers will turn into buyers of ERU.
Three driving forces were identified to achieve this objective:

• UNFCC obligations,
• EU climate and renewable energy policy,
• domestic actions as institutional build-up, and
• creating a new "green market."

2.1.2. The second topic of the discussion focused on domestic actions. One possible method of institution building is to create a Steering Committee on JI, with representatives of:

• Ministry for Environment,
• Ministry of Economic Affairs,
• Ministry of Finance, and
• NGOs.

The advantage to having committee is that it would make for better cooperation among different stakeholders and help match different interests.
In addition to the committee, a JI Unit or Secretariat is also needed with clear mandates, rights and responsibilities. A basic database is also required (positive list, database, registries, list of potential partners, companies etc.).
Clear national legal framework should be developed on the following issues:

• The development of renewables, and
• Green tax-reform (coal tax, external cost included in energy price).

The governments of CEE countries are not very interested in the climate issue, for reasons mentioned above, namely that it is not included among the requirements for EU accession. Efforts will be needed from the civil society to push governments and request urgent actions. Unfortunately public awareness of climate problem is very low, so consciousness-raising will be necessary. This could be carried out in a variety of ways. One possibility would be to train the JI Steering Committee; another would be to organize trainings in local level, communal level or county level.

2.2. Green Energy/Technology
The group agreed that the Kyoto Protocol Flexibility Mechanisms and Joint Implementation in particular open significant market opportunities for energy efficiency and renewable energy technologies (so-called green technologies).

2.2.1. Despite these opportunities, there is a clear lack of information about the possibilities of this market among the involved institutions and especially among business entities.
The participants discussed the question of what could be considered green technology in relation to JI and concluded that it very much depends on the framework and location of the JI implementation. The group identified four main problems barring green technologies from greater market success:

• Competitiveness of green technologies with the classical ones on the market.
• Public acceptance of green technologies. (Sometimes even the green groups are against green technologies.)
• The narrow, sector-specific, view of policy-makers.
• Insufficient infrastructure to support green technologies.

The group agreed that innovative support mechanisms are necessary to facilitate a more widespread use of green technologies. Allocation of additional ERUs to green technologies by governments, adoption of "feed in" directives, focus of JI criteria on market penetration, and transfer of know-how on benchmarking and project bundling were identified as main support mechanisms.

2.2.2. The group therefore agreed to make the following recommendations for the Action Plan:

• Establishment of a Regional Information & Training Centre should be considered. The Centre should be charged with the responsibilities of information sharing and capacity building regarding the new technologies and should be accessible to all stakeholders.
• Institutions competent and responsible for Joint Implementation in the CEE countries should be made aware of available green technologies and should be fully informed about their potential for reduction greenhouse gas emissions.
• The priorities of the CEE countries for Joint Implementation and criteria for project selection should be clear and available to all stakeholders.

2.3. Market 1
The Market 1 group assumed that the JI-projects-market and the ERU-market were two different markets (different tradable goods, different risks, different competition means, etc.). However, those two markets are closely related. The group came up with possible ways of improving the market (See Chart 1).
The group's first suggestion was that if there was a clear Memorandum of Understanding, then the bureaucracy work could be removed from project development. The partners only need a good broker, who can act as an intermediary between them and the enforcement mechanism.
The second suggestion related to information flow correction. To improve the situation in both markets, the information flow between the two markets should circulate freely.
Third suggestion was to impose more obligations on host partners.

2.3.2. The next topic was elaboration on the potential for government intervention into the JI market in order to promote it. The criteria for intervention would be the relation between costs and benefits. If benefits clearly exceed costs then such "no regret" projects can be left to private sector. However, if costs exceed benefits, then governments may intervene in order to bring down some transaction costs and make "regret" projects attractive to businesses.

2.3.3. Other suggestions from this group included:

• More transparency in the approval cycle and well-established system for MOU enforcement.
• Involvement of the local expertise in project design. The Dutch experience shows that a good relationship between the investor and the local partner could help in developing JI projects.
• Information dissemination among business communities regarding the possibilities offered by JI. A better understanding of JI related issues by the company management would probably lead to a more proactive industry.
• Baseline methodology improvement.
• Improvement in project risk management, e.g. involvement of some well-established insurance companies. This could be very essential, since some potential investors do not have a strong financial standing and banks are reluctant to get involved in project financing.

2.4. Market 2
Elaborating on the earlier observation that the JI market was in the preparation phase, the Market 2 group discussed possible governmental and international activities that could provide businesses with economic incentives for JI.

• One possible economic tool for accomplishing this would be the allocation of emission caps among industries and companies at the national level. There is also the possibility of giving donor governments freedom to select the industries for cap allocations. Some industries might be exempted, while others ("big sinners") might receive the majority of KP emission reduction duties. In a host country where emissions are generally far below the targeted amount of reduction, the government should distribute a 'deficit' of emissions. When potential investors realise that abatement in countries with emissions 'deficits' is cheaper than abatement at home or having to pay penalties for non-compliance, investments in JI projects will occur.
• Another possible motivation for implementing JI is 'early crediting.' The position of JI in comparison with CDM mechanism will strengthen. The mechanism could work in the follow way: for the ERUs obtained in the interim period a company receives a benefit in the form of a smaller emission cap. Important factors to early crediting are international negotiations and the "green" taxation system.
• JI agents need an information centre, especially in CEE countries. REC can become a centre of information collection and dissemination on JI in order to provide JI with more transparency and efficiency.
• There should be more profound integration between EU and accession countries. EU might consider the opportunity of including accession countries in the emission bubble before 2008, since some accession countries will be in EU by 2005.
• EU should be more precise in their accession requirements, in the environmental and climate Change sphere as well.
• EU can make JI projects eligible for some of its funds, for instance, ISPA.

2.5. Public awareness
During the workshop it was stated several times that the lack of public participation and transparency are serious barriers to successful JI implementation, and public participation is contingent upon consciousness-raising.

2.5.1. The first concern of the group was funding sources for consciousness-raising. Based on the successful experience of different CEE countries, the following financial resources were identified:

• Eco-Funds, for example the Polish Eco-Fund;
• revenues from green taxation;
• grants from different ministries, especially that of education;
• voluntary contributions;
• sponsorship; and
• grants from donor countries.

2.5.2.The next issue was identifying target groups and ways of raising public awareness in those groups. The identified target groups were:

• The public sector-national government, ministries, local governments: For this target group, ways of raising public awareness included organising inter-ministerial working groups that would provide feedback about successful cases, organising multi-sector steering groups, and organising targeted seminars in order to incorporate environmental concerns in their common practice.
• The private sector: Here the most suitable methods of consciousness-raising were considered to be organising workshops and round tables, organising a media campaign, and providing the results of pilot projects.
• Households: These could be reached through different types of campaigns-media campaigns, distribution of leaflets and booklets in stores, supermarkets, etc.

2.5.3. The public awareness campaign should be organised and regulated by a special authority unit on climate change, which is interested in long-term results. This campaign should not only involve NGOs but people who play important roles in society, namely, university professors, school teachers and doctors.

3. Conclusions
Many barriers to successfully implementing JI were identified during the workshop, as were ways of overcoming them. A plan for undertaking worthwhile activities was also developed.

The above-mentioned activities are to be implemented by those institutions, which form the infrastructure for JI, i.e. government officials and NGOs. Although there were not many clear guidelines mentioned for business people, their concerns about JI provided stimulating material for the discussion groups and topics for future workshops.