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International climate negotiations have specified that projects under the Clean Development Mechanism (CDM) should not lead to a „diversion“ of official development assistance (ODA). It is however unchallenged that ODA can be used in capacity building for the CDM. Diversion can be interpreted in financial, sectoral and regional terms. There are possibilities to use ODA benchmarks to define diversion such as the UN 0.7% target but they are unlikely to be politically acceptable. On the project level, three main options exist but none of them is perfect. The value of emissions credits (CERs) could be deducted from ODA. This however leads to a long-term pressure on the ODA level. Differentiating an ODA-financed baseline project and a „piggyback“ CDM option is likely to be arbitrary in many circumstances. Even if CERs do not accrue for the ODA share of the investment, still private CDM projects are crowded out due to the subsidising of CDM projects.

The countries wishing to join the EU have a high potential for low cost greenhouse gas emission reduction. As they cannot join the ?bubble? agreement for the first commitment period of the Kyoto Protocol, project-based Joint Implementation (JI) could be a powerful strategy to integrate accession countries into an overall EU climate policy strategy. An important question in this context is whether the ?acquis communautaire? will be used to define the baseline for the calculation of emission reductions from JI projects. A problem is that the grace periods for several environmental sectors, e.g. for application of the IPPC directive, differ considerably among countries. The EU should help accession countries to establish a predictable legal framework on which to base JI preventing in this way the current legal uncertainty regarding procedures of JI. Moreover, it should aim at an early implementation of the monitoring guideline and couple it with technical assistance. This would allow to build strong inventory systems in the accession countries and thus avoid the risk that JI is restricted to the second, strongly supervised track. In den Ländern, die der EU in den nächsten Jahren beitreten wollen, gibt es ein erhebliches Potenzial kostengünstiger Maßnahmen zur Treibhausgasverringerung. Da die Beitrittsländer der EU-Zielgemeinschaft für die 1. Verpflichtungsperiode des Kyoto- Protokolls nicht beitreten können, könnte projektbasierte Joint Implementation (JI) eine wichtige Strategie zur Integration dieser Länder in eine EU-weite Klimapolitikstrategie sein. Eine wichtige Frage ist in diesem Zusammenhang, ob der ?Acquis Communautaire? die Referenzfälle für die Berechnung der Emissionsverringerung aus JI-Projekten bestimmt. Problematisch hierbei ist, dass sich die Übergangsperioden für verschiedene Sektoren, z.B. für die Anwendung der IVU-Richtlinie, zwischen den Ländern erheblich unterscheiden. Die EU sollte den Ländern bei dem Aufbau eines Rechtsrahmens für JI unterstützen, um die derzeitige rechtliche Ungewissheit zu beseitigen. Außerdem sollte sie eine frühzeitige Umsetzung der Berichterstattungs- Richtlinie anstreben und dies mit technischer Hilfe verknüpfen. Somit könnten gute Inventarsysteme aufgebaut werden und ausgeschlossen werden, dass JI auf den zweiten, kontrollintensiven Weg eingeschränkt wird.

The Clean Development Mechanism of the Kyoto Protocol could create a great chance for developing countries to profit from projects that reduce greenhouse gas emissions and improve the economic and environmental situation in the host country. The project cycle for the CDM differs from a usual investment project due to the need to develop a baseline for the calculation of emission reductions, registration by a national CDM body and monitoring and verification of the emission reduction by an independent entity. Before a project can be registered, its eligibility has to be checked. This means that it has to fulfil the international and national CDM criteria. We suggest national criteria concerning the CDM component, adherence to national policy goals, technological aspects, attractiveness for investor and host enterprise as well as avoidance of negative externalities. A set of sustainable development indicators is proposed for Uzbekistan. We then look at each step of project preparation and concentrate on baseline determination, using small hydropower stations in the Uzbek irrigation system as case studies. Determination of system boundaries, leakage and the lifetime of the projects are assessed. Different benchmarks for the Uzbek electricity sector are calculated. We calculate the economic attractiveness of three hydro power stations to determine whether the investment is really additional, using different discount rates and electricity price scenarios. In all scenarios we find positive costs, making the projects additional. Der Mechanismus für umweltverträgliche Entwicklung (CDM) des Kyoto-Protokolls eröffnet für Entwicklungsländer eine große Chance, von Projekten zu profitieren, die gleichzeitig Treibhausgasemissionen senken und die Lage der Ökonomie und Umwelt im Gastland verbessern. Der Projektzyklus eines CDM-Projekts unterscheidet sich von einer herkömmlichen Investition dadurch, dass ein Referenzfall für die Berechnung der Emissionsverringerung aufgestellt werden muss, das Projekt bei einer nationalen CDMAgentur angemeldet werden muss und eine Überprüfung und unabhängige Kontrolle der Emissionsverringerung erforderlich ist. Bevor ein Projekt angemeldet werden kann, muss geprüft werden, ob es überhaupt zulässig ist. Das bedeutet, das es die internationalen und nationalen CDM-Kriterien erfüllen muss. Wir schlagen nationale Kriterien bezüglich der CDM-Komponente, der Förderung nationaler Politikziele, technologischer Aspekte, Attraktivität für Investor und Gastfirma sowie Vermeidung negativer Externalitäten für Usbekistan vor. Wir betrachten dann die verschiedenen Schritte der Projektvorbereitung und konzentrieren uns dabei auf die Referenzfallbestimmung anhand von Kleinwasserkraftwerken im usbekischen Bewässerungssystem. Die Bestimmung der Systemgrenzen, indirekter Effekte und der Lebensdauer der Projekte werden diskutiert. Unterschiedliche Standard- Emissionsfaktoren für den usbekischen Stromsektor werden berechnet. Wir analysieren die ökonomische Attraktivität dreier Kleinwasserkraftwerke, um zu bestimmen, ob eine derartige Investition wirklich zusätzlich ist. Dabei werden unterschiedliche Diskontierungsraten und Strompreisentwicklungen berücksichtigt. In allen Szenarien kommen wir zu positiven Kosten, was bedeutet, dass die Investitionen zusätzlich wären.

China has had an enormous growth of energy and electricity consumption during the last decades. This has been fuelled primarily by using domestic coal resources. Until 1997, annual construction of power stations averaged around 15 GW which was not sufficient to alleviate the demand surplus. Forecasts envisaged continuation of this growth. The majority of power stations is small scale and reather inefficient. Local air pollution is becoming very strong and is increasingly seen as a politi-cal issue. Foreign investment in the power sector has been hampered by bureaucracy and unclear competencies. On the demand side, energy efficiency has improved markedly in the last two dec-ades, albeit from a very low basis. Due to the economic transformation, many proven incentives for efficiency improvement cannot be used any more. The Clean Development Mechanism (CDM) opens a host of possibilities to link foreign investment in the energy supply and demand sectors with projects that enhance efficiency and reduce greenhouse gas emissions. All big industrial countries have been very keen on climate policy coop-eration with China. While the official Chinese negotiation position towards the CDM and climate policy in general has been extremely cautious, many government bodies show great interest. The Asian financial crisis, which led to an electricity oversupply in 1998, gives the possibility to retire the most inefficient power plants. China wies in den letzten Jahrzehnten ein enormes Wachstum des Energie- und Stromverbrauchs auf. Es wurde hauptsächlich durch heimische Kohleressourcen gespeist. Bis 1997 belief sich der jährliche Zubau an Kraftwerksleistung auf ca. 15 GW, aber selbst das reichte nicht aus, um den Nachfrageüberhang abzubauen. Die Mehrzahl der Kraftwerke ist klein und ziemlich ineffizient. Die lokale Luftverschmutzung wird sehr stark und zusehends als politisches Problem angesehen. Ausländische Investitionen im Energiesektor sind durch bürokratische Hürden und unklare Kompetenzverteilung behindert worden. Auf der Nachfrageseite ist die Energieeffizienz in den letzten Jahrzehnten stark verbessert worden, allerdings von einer sehr niedrigen Ausgangslage. Aufgrund der ökonomischen Transformation können viele bewährte Anreize zur Effizienzsteigerung nicht mehr eingesetzt werden. Der CDM eröffnet vielfältige Möglichkeiten zur Verbindung von Direktinvestitionen in Energieangebot und - nachfrage. CDM-Projekte erhöhen die Effizienz und verringern Treibhaus-Gasemissionen. Alle großen Industrieländer sind sehr an Klimaschutzkooperation mit China interessiert. Während die offizielle chinesische Verhandlungsposition bezüglich des CDM und Klima-Politik im allgemeinen sehr zurückhaltend ist, sind viele Regierungsinstitutionen sehr stark am CDM interessiert. Die Asienkrise, die 1998 zu einem Angebotsüberhang im Stromsektor führte, ermöglicht die Abschaltung der ineffizientesten Kraftwerke.

Currently, the EU-15 forms the only bubble under the Kyoto Protocol and has negotiated an internal burden sharing. A strategic EU climate policy should include accession countries. Thus, even in the case of early ratification of the Kyoto Protocol by 2002, it would be sensible to form a bubble with all countries that are certain to be EU members during the commitment period 2008-2012. Of course due to Art. 4,4 of the Protocol the EU-15 has to stick to its own bubble. However, nothing prevents it from forming an implicit bubble including all first wave countries by inducing them to form a bubble on their own and transfer the surplus to the EU-15. Similarly, second wave countries should form a bubble of their own to co-ordinate JI and permit transfers to the EU. This would reduce the gap between business-as-usual and the target by about 50%. If ratification is delayed to a point where it is clear which second wave countries will be members by 2008, the bubble should be extended by those countries. When in 2005 target negotiations start for the second commitment period, the EU should negotiate a bubble consisting of all states being certain to be members by 2013. Derzeit ist die EU der 15 die einzige Emissionsgemeinschaft nach den Regeln des Kyoto-Protokolls und hat eine interne Lastenteilung vereinbart. Eine strategische EUKlimapolitik sollte die Beitrittsländer einschließen. Selbst im Fall einer frühzeitigen Ratifizierung des Kyoto-Protokolls wäre es sinnvoll, eine Emissionsgemeinschaft mit allen Ländern abzuschließen, die in der Zielperiode 2008-2012 EU-Mitgliedsländer sein werden. Aufgrund Art. 4,4 des Protokolls muss die EU der 15 ihre Emissionsgemeinschaft aufrechterhalten. Jedoch hindert sie nichts daran, eine implizite Emissionsgemeinschaft mit den Ländern der ersten Beitrittswelle zu bilden, indem diese eine eigene Gemeinschaft bilden und den Überschuß an die EU der 15 weitergeben. Gleichermaßen sollten auch die Länder der zweiten Beitrittswelle eine Gemeinschaft bilden, um ihre Transfers an die EU abzustimmen. Dies würde den Abstand zwischen "weiter so" und dem Kyoto-Ziel um ca. die Hälfte verringern. Wenn die Ratifizierung so lange verzögert wird, daß klar ist, welche Länder der zweiten Welle 2008 EUMitglied sein werden, sollte die Gemeinschaft entsprechend erweitert werden. Bei den 2005 beginnenden Verhandlungen über Ziele für die zweite Budgetperiode sollte die EU eine Zielgemeinschaft für alle Länder anstreben, die 2013 sicher EU-Mitglied sein werden.

The EU has been a leader in international climate policy. However, due to activities of interest groups, domestic action, an area which the EU has strongly defended, is proving difficult to carry out, particularly for cohesion member states. Although their behaviour resembles free-riding, at least in an international dimension, Cohesion country targets are actually challenging in the face of their economic boom. Portugal accepted accepted limiting its GHGs emissions to a 27% increase up to 2010 whereas current projections lead to doubt that Portugal is capable of achieving its target unless more stringent policies are implemented. Underdeveloped institutional capacities and lack of abatement interests accompanied by the rapid economic and road traffic growth are the main causes of the inefficiency of current "quasi-policies". If Portugal is unable to comply, a consistent EU-wide climate policy is impossible and the risk that the EU as a whole fails to reach its Kyoto targets rises considerably. To reduce this risk, the EU could try to introduce strong enforcement rules and sanctions to prevent member states overshooting their targets. This will be extremely difficult as past efforts to enforce EU regulation have shown. A second way may be to use EU enlargement to enlarge the bubble by the accession countries and thus gain a safety margin. The third and easiest way would be to give the EU Commission the power to buy emission permits from abroad if the target is not reached and reduce EU transfers to those countries that have not reached their target proportionally to their degree of nonattainment. This would open a safety valve while leaving an incentive to countries not to default on their target. Even if the EU manages to keep its bubble intact, Portugal represents the problem of future high emitters which will be followed by developing countries in the near future. Moreover, Portugal also represents an equity dilemma vis-?-vis developing nations as it will be difficult to ask the latter to limit their emissions when a developed country such as Portugal will have them increased. Die EU hat bislang eine führende Rolle in der internationalen Klimapolitik eingenommen. Allerdings ist die von der EU betonte Umsetzung heimischer Emissionsverringerungsmaßnahmen gegen den Widerstand mächtiger Interessengruppen nur schwer durchsetzbar, insbesondere für Kohäsionsländer. Obwohl die Emissionsziele dieser Länder international eher als Beleg für Freifahrerverhalten gesehen werden, sind sie angesichts des ökonomischen Aufschwungs ehrgeizig. Portugal akzeptierte die Begrenzung seines Treibhausgaswachstums auf 27% bis 2010. Jedoch zeigen aktuelle Prognosen, dass die Zielerreichung zweifelhaft ist, sofern nicht wirksamere Politiken eingeführt werden. Unterentwickelte Institutionen und das Fehlen von Interessengruppen, die von Emissionsverringerung profitieren, gehen mit starkem Wirtschafts- und Verkehrswachstum einher und sind Hauptgrund der Ineffizienz der derzeitigen "Quasi-Politik". Wenn Portugal sein Ziel nicht erreicht, wird eine konsistente EU-Klimapolitik unmöglich und das Risiko nimmt zu, daß die EU ihr Kyoto-Ziel nicht erreicht. Es könnte durch die Einführung strenger Sanktionen gegenüber Mitgliedsstaaten, die ihre Ziele verfehlen, reduziert werden. Allerdings zeigen Erfahrungen mit der Durchsetzung von EU-Regeln, daß dies mit erheblichen Schwierigkeiten verbunden ist. Eine zweite Möglichkeit ist die Nutzung der EU-Erweiterung zur Erweiterung der Emissionsgemeinschaft, die damit eine Sicherheitsreserve gewinnen würde. Die dritte und einfachste Möglichkeit wäre, der EU-Kommission die Möglichkeit einzuräumen, Emissionsrechte einzukaufen, falls das Ziel nicht erreicht wird. Die Finanzierung würde durch die Reduzierung von EU-Transfers an die Länder erfolgen, die ihr Ziel nicht erreicht haben. Eine derartige, proportionale Transferverringerung würde einen Anreiz schaffen, das Ziel zu erreichen. Selbst wenn die EU-Zielgemeinschaft intakt bleibt, zeigt Portugal das Problem zukünftiger Großemittenten auf, das für Entwicklungsländer relevant werden wird. Darüber hinaus gibt es auch ein Gerechtigkeitsproblem: wie können Entwicklungsländer überzeugt werden, ihre Emissionen zu verringern, wenn selbst Industrieländer wie Portugal sie erhöhen dürfen?

The environmental integrity of the CDM under the Kyoto Protocol depends on the possibility to avoid giving emission credits to projects that would have happened anyway. Whether and how ?Investment Additionality? of CDM projects has to be determined is currently part of climate negotiations. We discuss the rationale of companies to invest in projects and analyse possible criteria to determine Investment Additionality from a theoretical point of view. A number of case studies is used to show the implications of the different criteria. The use of a single criterion is not possible, especially due to the importance of non-monetary barriers. However, some criteria are better than others. Moreover, the institutional framework for the selection and application of criteria is very important. Concluding, we suggest a combination of a threshold Internal Rate of Return with a risk factor as primary criterion. To take nonmonetary barriers into account, additional criteria could be used such as the existence of similar privately financed projects in the host country. If no explicit criterion is politically feasible, stringent baseline methodologies could at least capture some aspects of Investment Additionality. Die umweltpolitische Integrität des im Kyoto-Protokoll verankerten CDM hängt davon ab, ob Projekte, die ohnehin stattgefunden hätten, Emissionsgutschriften erhalten können. Ob und wie die ?Zusätzlichkeit der Investition? nachgewiesen werden muss, ist derzeit Bestandteil der Klimaverhandlungen. Wir diskutieren die Entscheidungsgründe, die Firmen zu Investitionen in Projekte bewegen und analysieren mögliche Kriterien für die Bestimmung der Zusätzlichkeit aus einer theoretischen Perspektive. Darüber hinaus werden Fallstudien zur Untersuchung der Auswirkungen der verschiedenen Kriterien herangezogen. Sie zeigen, dass die generelle Beschränkung auf ein einzelnes Kriterium nicht möglich ist. Jedoch sind einige Kriterien besser als andere. Außerdem sind die institutionellen Rahmenbedingungen für die Auswahl und Anwendung der Kriterien sehr wichtig. Zusammenfassend befürworten wir die Kombination eines Schwellenwerts für die interne Ertragsrate mit einem Risikofaktor. Um nicht-monetäre Hindernisse zu berücksichtigen, können zusätzliche Kriterien wie die Existenz von ähnlichen, privat finanzierten Projekten im Gastland überprüft werden. Wenn kein derartiges Kriterium politisch durchsetzbar ist, können strenge Regeln für die Referenzfallbestimmung zumindest einige Aspekte der Zusätzlichkeit einfangen.

Currently, international climate negotiations concentrate on design issues for the flexible instruments outlined in the Kyoto Protocol. As the 6th Conference of the Parties to the U.N. Framework Convention on Climate Change in late 2000 or early 2001 has to take decisions on these matters, it is imperative to develop solutions that combine long-term economic efficiency with long-term environmental effectiveness. Sometimes, a reconciliation of these targets is difficult and compromises have to be made. This report discusses solutions for three critical issues which have got different degrees of attention until now but are linked inasmuch their solution will be crucial for the success of the Kyoto Protocol. The authors have come across them due to their close involvement in the negotiation process. The first issue has been a major topic of debate - the possibility that Russia and other countries in transition may have an enormous surplus of emission permits due to their economic collapse. Unfettered trade in this surplus would artificially depress permit prices, reduce the incentive for long-term innovation and would not be linked to any efficiency improvement in the selling countries. Koch and Michaelowa discuss ways how incentives can be devised to link sales of emission permits with actions that lead to long-term emission reductions. They include an element of early action designed to prevent lock-in on an emission-intensive path of economic recovery by fostering investments whose emission reduction cannot be quantified but is nevertheless real. Early project-related Joint Implementation plays an important role in this context. The second issue is relatively technical but a necessary condition for the functioning of a global market in emission permits. It deals with the design of a system of national registries that track trades in permits. An International Registry would be the node of this system and guarantee that no fraudulent trades enter the system. A homogenous trading unit would be created. The way how trades are processed, the information requirements and the time-related aspect of the implementation of the registry system are discussed. Finally, the third issue seems remote but may prove challenging in the long term. International conflict will impact upon the Kyoto Protocol commitments. Wars like the one in Kosovo will lead to additional greenhouse gas emissions that have to be accounted for. Territorial changes will lead to changes in commitments. The authors discuss the different possibilities that change commitments and make recommendations how they could be accommodated in the Kyoto framework. Dr. Axel Michaelowa, a former staff member of HWWA Institute for Economic Research, is now working as an independent climate policy expert in Paris. Among other functions, he serves as a permanent advisor and project coordinator for HWWA on the economics of international climate policy. Tobias Koch is a specialist on Russian climate and energy policy. He is doing research with the Center for Energy Policy in Moscow and has also worked for the UN climate change secretariat on issues of emissions trading. However, the views expressed in this report are his personal ones.

The implementation of activities aimed to mitigate global greenhouse gas emissions is more cost-efficient in developing countries than in most of the industrialized world. A Clean Development Mechanism (CDM) is to assure that the interests of all parties implicated in Joint Implementation between industrialized and developing countries be equally represented. This mechanism was decided upon on the Kyoto Conference of the Parties to the Framework Convention on Climate Change, but no provisions on the construction of the CDM were taken. The authors propose it to take the form of a clearinghouse and a project fund. In the light of game-theoretical analysis and practical experience collected during the pilot phase for Activities Implemented Jointly which started in 1995, they advocate a clearly defined set of rules and incentives in order to balance the variety of interests involved and at the same time make the CDM an efficient instrument in preventing man-made climate change.

Joint Implementation (JI) is a potentially powerful instrument of climate policy that could lead to a high amount of additional financial flows to developing countries. Nevertheless, many NGOs and developing country representatives are very skeptical about JI and fear that it would not take into account development priorities and create new kinds of dependence on industrial countries. Therefore, developing countries and industrial countries found a compromise at the Berlin Conference of the Parties as they instituted a pilot phase for JI lasting until 2000 which does not allow crediting of reduction achieved via JI. The paper discusses first results of the JI pilot phase in Costa Rica which could be important for the evaluation of the whole pilot phase. This country has a relatively high level of economic and social development and a well-developed environmental policy which is comparable to that of advanced industrial countries. It is a major destination for ecotourism. Nevertheless, it suffers from high deforestation due to unequal distribution of land, migration and cattle ranching as well as plantation expansion. Moreover, transport emissions are rising rapidly and fossil fuel electricity generation is growing despite a target of phasing out fossil fuels completely. Costa Rica's knowledge base is high and capacity building almost not necessary. Thus, Costa Rica was able to develop creative environment policy instruments such as debtfornature swaps and biodiversity prospecting to attract foreign funding. It is not surprising that it was the first developing country to open a JI office, develop project approval criteria and host JI pilot projects. The framework for JI in Costa Rica can therefore be described as ideal compared to the average developing country. Nor is it surprising that more than half of the approved pilot projects in developing countries are situated in Costa Rica. Nevertheless, the success can at best described as mixed. Only a third of the projects are actually funded though several of them seem to be profitable even without a value for carbon. Most of them are proposed by US entities. To attract more funding, the JI office now certifies tradable carbon certificates and en-courages multi-sector large-scale projects where transaction costs are lower and coherence with national development objectives can be more easily checked. It directs its attention to public JI investors such as the Norwegian government. The renewable energy projects suffer from the unrealistic target to phase out fossil fuels by 2001 thus making JI projects in this sector impossible from that time. Therefore the bulk of projects concern forestry which is prone to uncertainties in calculation of emission sequestration. A comparison of the estimates shows wildly differing assumptions in baselines and sequestration capacity of the forests. Whether actual project implementation conforms to the plans remains to be seen. An independent verification of project results is being undertaken. The analysis of the Costa Rica case shows that JI can be only successful in the long run if the industrial countries offer incentives for investors and if baseline determination rests on a clear set of guidelines. Human and technical capacities are necessary but not sufficient conditions for successful JI in developing countries. They seem to be able to prevent complete project failures, though and can lead to innovative approaches. The issue will only be settled if large-scale JI investment is forthcoming under a regime of legally binding emission targets for industrial countries. Then the ability to process huge number of project proposals and check whether they conform to development priorities as well as monitoring and verification becomes crucial.