DIPARTIMENTO DI SCIENZE POLITICHE E INTERNAZIONALI

Corso di Laurea Magistrale in Scienze Internazionali

From the Kyoto Protocol to the Long Term Cooperative Action: Critical

implications and opportunities for a New Market based Mechanism (NMM)

Relatore:Ch. mo Prof.

SIMONE BORGHESI

Correlatore:Ch. moDr.

SEBASTIANO CUPERTINO

Tesi di Laurea di: MICHELE MARINI

Anno Accademico 2013/2014

What is now plain is that the emission of greenhouse gases,

associated with industrialisation and strong economic growth from a world population that has

increased sixfold in 200 years, is causing global warming at a rate that began as significant, has

become alarming and is simply unsustainable in the long-term. And by long-term I do not mean

centuries ahead. I mean within the lifetime of my children certainly; and possibly within my own. And

by unsustainable, I do not mean a phenomenon causing problems of adjustment. I mean a challenge so

far-reaching in its impact and irreversible in its destructive power, that it alters radically human

existence.

[Tony Blair, 2004]

v

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Table of Contents

Abstract vii

List of acronyms.. ix

List of figures.. xi

Introduction 1

1 Climate Change, Global Warming and International Regulation

1. Premise / preliminary statements. 5

2. The global governance of climate change 11

2.1 Making progress toward a Post-Kyoto Agreement -

Warsaw COP19

16

3. The forms of governance's architectures 17

3.1 Defining a better future agreement through the

governance process....

20

3.2. The hybrid - dynamic approach... 23

4. Characteristics and options for a new successful agreement. ... 25

5. A proposed review process of negotiation 28

5.1 The club approach . 30

2 The Kyoto Protocol and flexible mechanisms: valuable goals

achieved

1. Kyoto Protocol: results and experiences accumulated. 33

2. The Kyoto Protocols Flexible Mechanisms 37

2.1 Characteristics of the CDM... 41

2.2 Characteristics of the JI. 48

3. The European Emission Trading System.. 55

3.1 Performance, business profits and product price

impact

57

3.2 Impact on investment and innovation 68

vi

3 The New Market Mechanismand Framework for Various

Approaches

1. The future rule of carbon markets. 71

2. The road toward the NMM and the FVA. 75

3. The current definition and objectives for New Market Mechanism and Framework for Various Approaches..

78

4. Motivations for the NMM. 84

5. The Design of an NMM. 88

6. Key design issues 95

6.1 Type of Mechanism. 95

6.2 Coverage of the system. 97

6.3 Sector Target or Crediting Threshold 100

6.4 Requirements for Data collection and MRV.. 112

6.5 Ways of managing the transition from CDM to the NMM

Relationship with existing and future mechanisms.

113

6.6 The design of the trading/crediting and policy framework.. 114

7. Implementing the NMM 124

Conclusions. 133

Bibliography 139

Sitography 149

Annex 151

Acknowledgements 155

vii

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Abstract

Market (and non-market) mechanisms for the reduction of GHG emissions, were not

able to contain the rise in global temperatures.

Among the new and advanced solutions within the context of the carbon market, the

adoption of a new market mechanism (NMM) that can help reduce emissions of

greenhouse gases on a global level through adopting the so-called sectoral crediting

mechanism or trading has recently been proposed.

To understand if and how this new market mechanism can be effective and whether

it can really be implemented in the near future is the main purpose of this research

thesis.

The new instrument has been the subject of significant and articulated debates

within recent international meetings and relevant Conference of the Parties (COP):

therefore a similar measure is expected in view of a possible agreement / Post-Kyoto

Protocol in 2015.

The idea is to create an ambitious market-based approach, extended to all

developing countries and economies and complementary to the flexible mechanisms

already in place, by way of taking advantage of the benefits that are derived from the

experience gained through the existing market instruments. Such an approach could

offer many opportunities for companies that may participate, for countries in the

developing world who would adopt more efficient methods and technologies for the

reduction of emissions, and more generally, to create a new market demand for permits

and credits within the internal carbon market.

Given the complexity of this ambitious new proposal, it is reasonable to think that,

in theory, a NMM might still encounter too many political, economic and technical

obstacles within developing countries that adopt it. The thesis proposes as a possible

solution to overcome these obstacles, to adopt a mechanism NMM with a hybrid

viii

structure of governance and variably designed architecture that takes into account the

specificities of each country where it should be implemented. Such a solution requires a

long time to be implemented, and in consideration of the increasingly complex

requirements of part of the old and new flexible market systems, which even today many

economies must seriously deal with, the thesis focuses on how it is necessary to put in a

joint effort by the entire community to develop and disseminate knowledge about an

NMM, evaluating through further policy analysis, technical, economic and empirical

research, especially in the context of the experience already gained.

All this might enable the development, possibly by 2020, of an effective NMM that

is able to increase the ambition to contain and reduce global warming which is

increasingly necessary and urgent for the global environmental system.

ix

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List of acronyms

AAUs Assigned Amount

Units GHGs Greenhouse Gases

ADP Durban Platform

Action IEAs International Environment Agreements

APP Asia-Pacific

Partnership on Clean

Development

IET International EmissionsTrading

AWG-

LCA

Ad Hoc Working

Group on Long-term

Cooperative Action

IPCC Intergovernmental Panel on Climate

Change

AWG-KP Ad Hoc Working

Group on Further

Commitments for

Annex I Parties under

the Kyoto Protocol

JI Joint Implementation

JISC JointImplementationSupervisoryCommittee

BAU Business As Usual KP Kyoto Protocol

BOCM Bilateral Offset Credit

Mechanism MEF Major Economies Forum

CDM Clean Developed

Mechanism MRV Measurement Reporting and Verification

CERs Certified Emission

Reductions NAMAs Nationally Appropriate Mitigation Actions

COPs Conference of the

Parties NAPs National Allocation Plans

DNA Designated National

Authority NGOs Non-Governmental Organizations

EB Executive Board NMBM New Market-Based Mechanism

EC European Commission NMM New Market Mechanism

ERUs Emission Reduction

Units NZ-ETS New Zealand Emission Trading Scheme

ETS Emissions Trading

Scheme PAMs Domestic mitigation policies instruments

and measures

x

EU European Union PMR Partnership Market Readiness

EUA European Union

Allowance POAs Programme Of Activities

EU-ETS European Union

EmissionsTrading

Scheme

ppm parts per million

FDI Foreign Direct

Investment REDD+ Reducing Emissions from Deforestation

and forest Degradation plus

FVA Framework for Various

Approaches

R&D Research and

Development SBI Subsidiary Body for Implementation

RGGI Regional Greenhouse

Gas Initiative SBSTA Subsidiary Body for Scientific and

Technological Advice

SCM Sectoral Crediting

Mechanism US United States

UNFCCC United Nations

Framework Convention

on Climate Change

WB World Bank

xi

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List of Figures

1.1 Total GHG emissions per country... 6

1.2 Temperature anomaly 1880-2014.... 7

1.3 Precipitation anomaly 1900-2010... 7

1.4 List of Annex I, II and Non Annex countries and related index of total

GHGs emissions 1990-2005

9

1.5 Emissions projection Annex I and Non Annex I. 13

1.6 Contribution of major GHGs emitting countries 14

1.7 Multiple purpose diagram 25

2.1 Perspective of carbon Markets launching programs on 2013.. 34

2.2 Greenhouse gas emissions in Kyoto Protocol countries and their targets... 36

2.3 CERs and ERUs issuance 2008-2012, and expected issuance of CERs. 39

2.4 Number of CDM projects each month 40

2.5 Potential demand and supply of credits 2013-2020 40

2.6 A possible scheme for gradual incorporation of developing countries... 43

2.7 Distribution of registered projects by Host Party-March 2014... 45

2.8 Distribution of registered PoAs by Host Party-March 2014... 46

2.9 Track 1 vs Track 2 JI... 49

2.10 Summary of steps required for Track1 and Track 2 JI projects.. 49

2.11 Differences between CDM and Track 2 procedures. . 50

2.12 Kyoto Protocol participation map (commitment period: 2013-2020) 51

2.13 Average time required for project registration methodology, in days 53

2.14 ERUs issuance by host Party as of February 2013. 53

2.15 Brief overview of coverage of EU-ETS.. 55

2.16 The long life of the EU-ETS system confronted with other cap and trade

operational and expected in future..

56

2.17 CO2 emission trend within EU-27.. 59

xii

2.18 over allocation of allowances in Europe. 59

2.19 CO2 emission trend in EU-Phase I and II... 60

2.20 EU ETS and carbonleakage .. 62

2.21 Free allocation and auctioning provisions.. 63

2.22 Review of tools implemented within the EU-ETS.. 65

2.23 EUA and CER prices (2009-2013). 65

2.24 EUA price development. 66

2.25 Demand/supply surplus-deficit of EUAs 68

3.1 The Durban Platform for Enhanced Action process... 72

3.2 Evolution of market and non-market mechanisms under the UNFCCC 74

3.3 Relevant decision from COP 16 and COP 17. 75

3.4 Several new market based mechanisms proposals. 81

3.5 The FVA scheme 83

3.6 Comparative evaluation of the different mechanisms.. 87

3.7 Transitional flux for a CDM 89

3.8 Sectoral crediting mechanism. 96

3.9 Sectoral trading mechanism 97

3.10 Setting crediting thresholds for the new market mechanism.. 102

3.11 Illustrative example of NMM operational cycle. 110

3.12 Flowchart for setting crediting thresholds.. 111

3.13 Typology of approaches for calculating and distributing credits 117

3.14 Comparison of total credits issued in individual performance and group

performance approaches..

118

3.15 Host government frameworks. 120

3.16 Policy framework proposals.... 122

3.17 Evaluation of alternatives frameworks for three key actors 123

3.18 Key differences between the proposals... 124

3.19 Constraints and Opportunities for an NMM... 126

3.20 Coexistence of mechanisms in various sectors . 130

1

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Introduction

The fifth report of the Intergovernmental Panel on Climate Change (IPCC)

concluded that humans are causing a sudden change in Earth's climate due to rising

emissions of greenhouse gases in the atmosphere. (IPCC, 2013).

Alongsidethe intense uprising of scientific condemnation, the United Nations, the

European Union, as well as other nations and international organizations, would like to

see carbon emissions and greenhouse gas emissions significantly reduced.

The goal would be to overcome the international commitments already existing

(Kyoto Protocol), in order to limit or avoid the rise in average global temperature and to

stay within a 2 degree Celsius maximum average global increase.

At the global level, the current market- and non-market-based mitigative solutions,

together with the existing flexible mechanisms (i.e. CMD, JI and ETS) implemented

after the establishment of the Kyoto Protocol, have not managed to a achieve a

substantial reduction in the level of greenhouse gases emissions in the environment;

therefore one of the proposed solutions seems to lie in the realization of a scaled-up new

market-based mechanism (NMM).

This thesis has as its main goal the analysis of the new market mechanism (NMM)

which adopts a mechanism that covers the emissions of broader sectors of a country's

economy rather than single and individual industries,proposed as a complementary

solution to the current active market instruments.

To this end, the new market mechanism might further reduce GHG emissions in the

atmosphere by extending the carbon market, and especially by encouraging the

economies of developing countries to achieve ever more ambitious abatement (scaling

up the market), thus accelerating the deployment of green technologies to reach long-

term environmental sustainability.

2

Introduced during the Durban Conference of the Parties held on December 2011, the

idea of the NMM, whichtakes a sectoral approach instead of a project-based one, is

currently much debated by scholars on the field, as well as by policymakers. Although a

broad consensus on this mechanism is still lacking, the international community is

moving forward by adopting case studies and pilot projects that are gradually taking off

in order to test this new mechanism.

Research approach

To find out whether the new market mechanism can be advantageous as a means to

increase mitigation, we are going to evaluate the system from several points of view:

particularly analyzing the expected role and design features, and tracing a brief

indication on the functional feasibility within developing countries.

The theme of the NMM raises many questions in the scientific community about the

possibility of reaching ambitious levels in reducing emissions, and in particular whether

and how this premise could overcome the limitations imposed by the Kyoto Protocol.

The research is developed on the basis of the contributions of several economic and

political studies that have examined the matter following the Conference of the Parties

held in Durban at the end of 2011.

Retracing the main lines followed by this recent research, we will first try to

understand if indeed there is a (real) need to adopt a new market mechanism in addition

to the existing ones.

First, it was considered necessary to explore the systemic context/architecture

within which the new market mechanism will be likely adopted. There is extensive

literature on the governance of the international system that can help us to clarify the

current and future role of markets within international climate policy.

It was then necessary to analyze the existing flexible mechanisms developed

through Kyoto. Thanks to the large number of studies that have focused mainly on the

calculation of performances achieved, it was considered useful to examine the factors

that have restrained the performance of the system in order to try to show how the new

3

mechanism has originated: partly in searching for a solution to overcome the issues

encountered.

It is interesting to notice that even today the design and a real role for this

mechanism has not been formalized. The author believes that it is undoubtedly necessary

to take brief and short-term precautions before formulating a unique, final and long term

decision regarding the system. To this purpose,it will be useful to draw up a scenario that

includes the time required for the implementation. Some of the early empirical research

has brought to light some clear prerequisites for several host countries. The author will

investigate these issues in order to finally draw the appropriate conclusions on the

practical feasibility of the mechanism.

Contents of the thesis

After a brief introduction, to contextualize the issue of climate change and point out

the responses from the international community through the United Nations Framework

Convention on Climate Change (UNFCCC), the Kyoto Protocol and flexible

mechanisms, the first chapter of the thesis will focus on the evolution of the method of

centralized international governance, and will try to give an answer to the problems that

this global approach has met over the years, illustrating some possible solutions and the

ways in which the UNFCCC has moved forward.

In front of the changing responsibilities on climate change, partly due to the impact

of new emerging economies, the problem of how to designate a new post-Kyoto

international agreement, and how to resolve the issue of negotiation between countries

with regard to the latter, require urgent consideration. We will try to understand if there

is maneuvering space,with reference to the last COP, held in Warsaw in 2013.

Although some useful features on how to achieve an effective agreement will be

given, the negotiating problem will require substantial structural revision, which, as we

shall see, should carefully review some basic features in the UNFCCC architecture.

In the second chapter we will summarize the main results in terms of performance

of the Kyoto Protocol and its flexible market mechanisms (CDM, JI, ETS).

4

In these terms, we will try to understand if and what were the main lessons learned,

with particular attention given to the critical reasons that have led to a weakening in the

overall performance of the systems. Focus will be finally given to the European

Emission Trading Scheme, which is now the largest system for the reduction of GHG

emissions currently in operation. Such performances will be analyzed within the two

main phases of operation of the EU-ETS (between 2005 and 2012), the changes adopted

with the implementation of the third phase (2013), and the critical role that the economic

crisis has had, assessing how much and in what ways it impacted the system.

The results will be quantified in terms of the amount of emissions reduction

achieved, and in terms of the impact on business profits and product prices. A final

section of the second chapter will be dedicated to calculating the impact that the EU-

ETS has had on investment and innovation.

The third chapter will focus on the current proposal regarding the so-called new

market mechanisms (NMM). The NMM and FVA constitute two new proposals for the

cost-effective reduction of emissions of GHGs. Although the first is considered a

mechanism, and the second a de-facto regulatory framework, both are systems that aim

to encourage participation and ambition among States. Having clarified this distinction,

the thesis will proceed to analyze in detail the NMM. In a first step we will clarify the

role that this mechanism will likely play, dedicating particular attention to the

motivations and the main driving principles that have originated and developed. In a

second step, we will focus our attention on the possible forms of design that could be

prefigured. Particular attention will be dedicated to the major role of responsibility that

the government of the host country will be required to have, compared to other flexible

market mechanisms.

The last paragraph of the thesis verifies and analyzes the considerations to be made

concerning the possible application of pilot projects within developing countries that

should adopt the NMM. In the latter case, we are going to identify the main obstacles

that can be found within the economies considered, and at the same time the

opportunities that could be available. Then, a list of suggestions is made by the literature

on the subject. Important questions that need to be assessed are as follows: whether the

5

system is applicable; approximately how much time is needed; which parameters must

be complied with, and especially if the NMM will be sustainable in the future.

6

__________________________________________

Chapter 1

Climate Change, global warming and international regulation

1 Premise / preliminary statements

Climate change will double el Nio events

Draughts in Australia and flooding in the Americas associated with the deadly El

Nio weather phenomenon are likely to be twice as common this century because of

climate change, scientists warn.(Banning-Lover, 2014)

The most authoritative scientific advisory Forum set up by the United Nations

Organization, the Intergovernmental Panel on Climate Change (IPCC), observed a

clearly changing outlook in theEarths regulative processes, confirming that there has

been a general and repeated worsening inglobal weather conditions in recent years.

The fifth report of the IPCC concluded that, over the past century, there has been a

well-documented sudden change of surface temperatures due to the increase of

Greenhouse Gases emissions (GHGs). (IPCC, 2013)(Fig. 1.1)

The report shows the high correlation of emissions due to human activity and the

climate change phenomenon, and it advocates that is necessary to take a more

cooperative action in order to reach greater reductions of emissions on a global scale.

Although the growing scientific warnings against the risks for the events registered

during the last decades, such as el Nio and other growing anomalies of the climates

natural cycles, the variability in temperatures does not seem to be stopping.(Condon &

Sinha, 2013) (Fig. 1.2)

7

Figure 1.1 Major GHGs gas concentration over time

Source: National Oceanic and Atmospheric Administration (NOAA), 2014

The rising temperatures create scenarios which are for the most part unpredictable

and uncertain. Scientific research also showsthat there will be more droughts in more

places than before, more storms, more hurricanes, as well as more

inundations.(Condon & Sinha, 2013, p. 7)(Fig. 1.3)

While these events will have an environmental impact, they will also have

economic effects with enormous implications for the financial industry.(Condon &

Sinha, 2013, p. 7)

According to authoritative economic research, the Stern Review of the Economics

of Climate Change, if serious action is not taken within 15-20 years, then the cost of

coping with climate change could be in excess of 20% of the total annual global income.

Furthermore, the World Bank has estimated total income currently at some US$35

trillion per annum, rising by 2050 to perhaps US$135 trillion, which is some US$27

trillion per annum, or 5% of global GDP.(Stern, 2007)

8

Figure 1.2 Temperature anomaly 1880-2014

Source:

Figure 1.3 Precipitation anomaly 1900-2010

Source: IPCC, 2013

Due to this disconcerting trend, there is a current need for serious investments in

new technology and innovative approaches to tackle both mitigation and adaptation

measures in the proper prospective.(Condon & Sinha, 2013, pp. 817)

Since the first published report of the IPCC, the first step toward the mitigative

cooperative action was the Conference of the United Nations for Environment and

Development, held in Rio De Janeiro in 1992. The conference had two main merits.

First, it creates a series of principles with the purpose of establishing a common strategy

to pave the way for environment sustainability for the new generations to come;

http://data.giss.nasa.gov/gistemp/graphs_v3/

9

secondly, it was where the UN Framework Convention on Climate Change (UNFCCC)

which now counts 192 Member States, was created.

The main purpose of the UNFCCC is the stabilization of GHG emissions at a level

that will further prevent dangerous interference with the climate system, through the

establishment of a series of cooperative principles and guidelines. Even if these

standards of conduct do not impose any obligation for the Member States, a framework

for a global cooperative action has been specifically set. Through Articles 3 and 4 (i.e.

the principle of common but different responsibility) the Convention determined a

preeminent outcome. In particular, the principle requires that developed countries

demonstrate that they are taking the lead in modifying longer term trends in

anthropogenic emissions, consistent with the objectives of the Convention. For this

purpose, the Convention divided Member States among groups: Annex I-II (countries

that are developed or with their economies fully in transition) and Non-Annex

(developing countries), therefore leading to the creation of different levels of

responsibility for GHG emissions. (Fig. 1.3)

This rigid separation is becoming a frequent problem discussed in terms of a future

post-2012 Kyoto policy architecture, because the Convention does not indicate any

modality whereby an Annex-II State can shift to an Annex-I group in future, or vice

versa. Also, article 4(7) goes even further by imposing an implementation condition:

the extent to which developing Country Parties will effectively implement their

commitments under the Convention will depend on the effective implementation by

developed Country Parties of their commitments under the Convention relating to

financial resources and transfer of technology.(UNFCCC, 2004, p. 8) These factors

together have been consistently advocated during the recent negotiations about Kyoto

Protocol phase II (post 2012 commitments). In particular this has, for the most part,

created a consistent block to the recent proceeding of negotiationsfor Kyoto phase II.

10

Figure 1.4 List of Annex I, II and Non Annex countries and related index of total GHGs

emissions 1990-2005

Source: European Environment Agency

In 1997 the Kyoto protocol was presented at the third Conference of the Parties

(COP-3) in Kyoto (Japan). The main objective of the protocol was the creation of a clear

mitigation commitment request to the Member States of the Protocol to reduce the actual

emissions to 5,4% of the total 1990 GHG levels between 2008 and 2012 (first

commitment period). Furthermore, the Kyoto Protocol, in referring to the principle of

common but different responsibility, established a set of targets (Assigned Amount, AA)

that were specifically assigned to every country between Annex-I and II; ranging from

Iceland and Australia, which were permitted to increase their emissions from the 1990

base levels, to the countries of the European Union which accepted an 8% reduction

from 1990, but without any recommendation for the Non-Annex group (developing

countries).

The most innovative aspects of the protocol may not only be the strict target

commitments but the introduction of three new market-based mechanism or so-called

flexible market mechanisms: emission trading (ET), Joint Implementation (JI) and the

Clean Development Mechanism(CMD).

At that time, it was already clear thatin order to obtain a concrete emissions

11

decrease, it would be necessary to go beyond the common command and control

regulation. (Simoncini & Romano, 2011, pp. 2731) For the new broader ecological

modernization process these policy instruments were considered inefficient in reducing

the States emissions. (Stephan & Paterson, 2012) The Kyoto Protocol created three kind

of flexible market mechanisms in order to help Annex I countries reduce their emissions

in a less costly way, at least without economic loss or differential implications for their

economic growth.

The flexible mechanisms identified two distinct (but integrated) segments or sectors

of the carbon market, emission trading and the carbon credits sector.

Emission trading (ET) is the first mechanism envisaged by the Kyoto Protocol

which allows for the exchange of parts of the Assigned Amounts (or Assigned Amounts

Units, AAU) among Annex I countries. Annex Parties may emit GHGs into the

atmosphere if they have sufficient permission rights to use against their emissions. At

the beginning of the commitment period, each Annex Party is allocated ex-ante an

Assigned Amount up to a fixed emission cap calculated ex-ante. The GHG emissions in

each Partys territory during the commitment period may not exceed its Assigned

Amount. At the end of the commitment period, the Party must retire (surrender)

emissions rights (the Assigned Amount Units), for the purpose of demonstrating its

compliance with the Kyoto commitments. Parties that emit less than their cap may sell

their surplus AAUs, and Parties whose emissions exceed their cap must buy additional

emission rights from the carbon market.

The Joint Implementation and the Clean Developed Mechanism are baseline-and-

credit systems. Under both systems, emission rights can be earned (ERUs and CERs,

respectively) by participating in emissions reduction projects abroad. Each emission

right represents one metric ton of CO2 equivalent reduced. At the begin of the period, a

baseline is established by calculating the amount of emissions that would occur in the

absence of the scheme (the baseline-as-usual scenario). The difference between this

baseline and the actual (lower) emissions as a result of the plan is converted into

globally tradable emissions rights.

12

2 The global governance of climate change

Throughout the 1970s, there had been growing scientific evidence concerning the

climate change issue in the most diverse fields of human knowledge. As a result, this led

to establishing a convergent view among the International Community against the

worrying future case scenarios illustrated by the first climate panel of the IPCC.

Although even today these scenarios are difficult to predict, the International

Community clearly argued that a cooperative form of action would be highly necessary

in order to stabilize these dangerous trends. Strong cooperation between States would be

necessary because no single State could play an effective and crucial role to solve the

emission zero sum game,which is the environment global public good. (Barrett, 2006,

pp. 4984) Global governments should contribute to establishing the path toward

environmentally sustainable development and, to do so, the current climate change issue

imposed the institution of a global governance system to achieve the goal.1 (Viola,

Franchini, & Ribeiro, 2012)

The architecture of the negotiating process for the Kyoto protocol has been agreed

upon thanks mainly to the principle of common but differentiated responsibility.

Notwithstanding, this principle has been at the same time the core problem for

negotiations to make any further steps during the successive Conference of the Parties

meetings (COPs).

The principle was sanctioned because there was clear evidence that the developed

countries were the main producers of GHG emissions in the past and, because of that,

obviously they have to carry the greatest part of the related climate changes cost burden.

At that time, perhaps until recent years, most developing countries did not have any

responsibility for the climate change emissions, and clearly they would not have any

obligation to contribute for the industrial emission reduction. This consideration is based

on an ethical principle which is correctly assumed if we consider that the main

industrialized economies such as the USA and Europe had been economically

1 The primary result of this process was the creation of the UNFCCC in 1992 at the end of the Rio

Conference. The Convention has the merit of being at the core of the Kyoto Protocol creation in 1995, that

is the first mandatory instrument for emissions reduction.

13

developeda long time before, without taking into account the implications for the

environment. Therefore, it seems rather clear that the environmental issue should be

treated as a public common good, especially by those countries, which experienced fast

economic growth in the nineteenth and twentieth century.

During the establishment of the Kyoto Protocol in 1997, the principle has been

subsequently translated into a de facto distinction between Annex-I (developed

countries) and Non Annex (developing countries), creating a dichotomy between

countries with commitments toward emissions reduction, and countries without.

It has been well observedthat at the time of the Kyoto Protocol in 1997, half of the

total GHG emissions were caused by Non Annex I countries.(Leal-Arcas, 2013, pp.

294300)

Currently, this difference has more than doubled, and the projection of the disparity

in future is even more marked. (see Fig. 1.4)

All together, developing countries have already surpassed the industrialized world

in total GHG emissions, and will account for more than 75 percent of growth in GHG

emissions in the next 25 years. (Fig. 1.5)

This means that the situation has dramatically changed since the UNFCCC divided

the world in two categories on 1992. For the most part, the division was the consequence

of weak progress on international climate negotiation in the subsequent Conferences of

the Parties (COPs).

From the beginning, the strict Annex-I/Non Annex distinction has created a crucial

question about a gross inequality that concerned the treatment of north vs south

countries. During the Kyoto Protocol, it was emphasized that, although developed

countries should take the lead in emission reduction, developing countries should make

full use of assistance (coming from the latter) and adapt themselves to climate change.

Thus, with the rapid growth of the emerging economies and the change of structure in

geopolitics, this conducive assumption became responsible for a de-facto negotiating

block during the Kyoto phase II, when industrialized economies started to ask

developing ones to submit emissions reductions pledges in order to cover mitigations

measures. It became clear that the historical progressive change over the emission

distribution situations with the growing emerging economies has led to a blurring

14

process of the Kyoto negotiating progress: on the one hand it became clear that the

Kyoto Protocol should be reviewed as soon as possible including commitments for the

developing countries, which are therefore responsible for half of the emissions in the

atmosphere; on the other hand it should be considered that the developing countries still

want to defend the principle of common but differentiated responsibilities without taking

any constraining pledges over the Kyoto phase II. This became evident at the time of the

Copenhagen COP-15 in 2009: the negotiation process reached an impasse when the

discussion concerned the agreement for the post-2012, second phase of the Kyoto

Protocol. Developed countries refused to take legally binding measures in order to

increase the pledges over the medium term reduction targets for 2012. Since the main

group of Annex I countries have started to oppose progress towards Kyoto II

commitments, alternative solutions were taken into consideration..

Figure 1.5Emissions projection Annex I and Non Annex I

Source: Leal Arcas, 2013.

15

Figure 1.6 Contribution of major GHGs emitting countries

Source: World resource institute, 2013.

More precisely, it was even before the COP-15 in Copenhagen, at the Bali COP-13

in 2007, that the ongoing negotiating progress over the global environmental agreement

became divided into a dual-track approach for international climate negotiation. At

that time this was shaped into a two-stream process, the Ad Hoc Working Group to

Enhance Long-Term Cooperation Actions (AWG-LCA), and an Ad Hoc Working Group

on Further Commitments for Annex I Parties under the Kyoto Protocol (AWG-KP). The

main scope of the AWG-KP was tofocus on how to bear the maintenance of the Kyoto

Protocol over the second 2012 commitment period, whereas the AWG-LCA would

establish the path ahead for progress towards a new global agreement, or protocol, under

the UNFCCC framework that will be implemented beyond Kyoto.

This dual track process has been developed having in consideration the complex

situation of differing quantities of emissions between developing and developed States

which are Parties of the Protocol, leading, as a result, to the blunting of the rigid

distinction between commitment pledges for Annex I countries and only voluntary

pledges among Non-Annex I. Moreover, the dual approach can represent a formal

compromise among the leading forces over the negotiating phase, during the successive

16

Conferences of the Parties.(Wang & Zheng, 2012)

The two-track process was critically opposed by almost all the Annex I countries,

but especially by the USA (which had always refused to sign the Kyoto Protocol).

Indeed, the USA and the EU insist on removing it and put pressure on large developing

countries to become part of the Kyoto's emissions reductions goals. On the contrary,

developing countries, China first of all, have also strongly objected to the merging of

two-tracks. This, in order to defend the principle of common but different

responsibilities, without taking on board any commitment measures, and still asking

developed Parties to take the lead in emission reduction, while receiving full assistance

from the latter in order to better address the environmental situation. The latest opposing

process explains why there was a general agreement in reaching the dual-track

compromise during the negotiations procedures over climate change. This dual track

option has been further kept in existence as a symbol of formality in order to sustain

the bargaining forces in the game during the subsequent COPs.For instance, if the formal

treatment over the Kyoto Protocol group (AWG-KP) were lost, developing countries

may not have any reasonable bargaining chip in climate change negotiation, and their

demand for the financial support of developed countries, might be finalized only under

the AWG-LCA talks. (Wang & Zheng, 2012)

In December 2011, at the Durban COP-17, the dual track process, which allowed

the second commitment period of the Kyoto Protocol to be maintained in existence,

came to an end, through the renewed reconsideration over the wrong dichotomy

between Annex I and Non Annex I groups emissions. At Durban, The delegates

decided to reach an agreement by 2015 that will finally be applicable for all countries

by 2020, the so called Durban Platform Track (ADP)... The Durban Platform focused

instead on the pledge to create a system of greenhouse gas reduction including all

Parties... [In a new international climate regime] by 2015 that will come into force by

2020.2

2Stavins Robert Blog: http://www.robertstavinsblog.org/2013/11/28/the-warsaw-climate-negotiations-and-

reason-for-cautious-optimism/

17

2.1 Making progress toward a Post-Kyoto Agreement - Warsaw COP19

With the ultimate decision to conclude the phase II of Kyoto Protocol in 2020, the

International Community has been questioned and engaged in the search for a global

common legal framework to address significant emission reductions in an appropriate

timetable and with acceptable costs.

Along with the well-known weak performances of the Kyoto Protocol 3, the COP-17

in Durban has taken a further relevant step through the establishment of the so-called

Durban Platform Action (ADP). The Durban Platform could be seen as an innovative

and differentiated approach from the old Bali Action Plan in 2007 in two specific

ways. First, the ADP process makes no reference to the principle of common but

differentiated responsibility; indeed it contains no reference to developing, developed,

Annex I or Non Annex countries, giving new opportunities to advance within the

negotiations progress for global environment governance. Secondly, it creates a new Ad

Hoc Working Group on the Durban Platform for Enhanced Action (ADP), providing the

startup procedure for the further elimination of the two working groups (AWG-LCA and

AWG-KP), that were established in Bali at COP-13.

The main objective of the ADP consists in the negotiation of a treaty, another legal

instrument or an agreed outcome with legal force in order to establish a new global

common legal framework considering different issues that include mitigation,

adaptation, finance, technology development and transfer, transparency of action and

support and capacity-building. The Durban Platform opens an important window

concerning climate governance, leading to the creation of a set of new mechanisms and

instruments, and proposing new climate governance architectures, but remaining

circumscribed within the overall framework provided by the UNFCCC.

Recently, at the COP-19 in Warsaw, making progress toward a post-Kyoto

agreement has been a central issue of discussion in order to establish the long-term path

toward a new global agreement in 2015 at COP-21 in Paris.

For the success of the new agreement, it may be necessary to review the

3 For further details see chapter 2

18

normative rules schemes, since the large emerging economies could tend to view the

agreement as one without any legal force. (See paragraphs 1.5)

Indeed, for example at the Warsaw Conference, developing countries have

demanded that, in an eventuality affecting developing States participation within the

agreement, then only for the latter, the word commitments must be replaced by

contributions. This makes it evident that there are still difficulties in finding a

balanced way toward an equity principle, leaving behind the principle of common but

differentiated responsibility, that will serve to stabilize and harmonize the different but

real emissions trends between different countries. Although each of these states have

different abilities to contribute to the solution in reducing the emissions, and to proceed

a step forward in searching for a new agreement, this latter will remain a priority task

that must be quickly addressed during the next COP(s).4

3 The forms of governance's architectures

Since the first UNFCCC Conference, the international community was engaged in

finding the most appropriate governance architecture for success in addressing the

renewed cooperation process within the environmental field.

Historically, through the Kyoto agreement, climate governance was first

implemented in a recognized top-down architecture. Through this modality, different

states could implement the Kyoto commitments(i.e., through flexible mechanisms),

under a system supervised by the global UNFCCC framework. The universal

architecture, mainly related to three issue areas, can be achieved in all countries

concerned, worldwide. First, in case they are subject to the same regulatory framework;

second, countries participation over the same decision-making procedures;third, there is

agreement on a core set of common commitments. This universal top-down governance

architecture can be seen as an international regulatory system that, essentially, today has

become divergent in empirical results. Indeed, with the entry in force of the Protocol in

2005, there has been an increased level of fragmentation in the climate change regime.

4Carraro Carlo: http://www.carlocarraro.org/en/topics/climate-policy/the-warsaw-cop19-between-weak-

commitments-and-tiny-bland-successes/

19

Numerous analyses, such as(Benecke, Friberg, Lederer, & Schrder, 2008;

Biermann, Pattberg, Asselt, & Zelli, 2009; Tuerk, Mehling, Kppl, & Kettner, 2011),

demonstrated that the increasing fragmentation level of governance of the climate policy

has been due to various reasons. Coherently, different implementation approaches of the

Kyoto Protocols flexible mechanisms have been followed by an increasing emergence

of diverse market actors working withits commitments and implementations. For

example, the Clean Developed Mechanism (CDM) has been a driving mechanism for the

appearance of new actors such as non-State actors, international organizations, NGOs,

private businesses, and so on. Furthermore, institutional arrangements were growing

within different levels of the political system, including regional initiatives, such as the

European Emission Trading (EU-ETS), public/private initiatives,for example Asia-

Pacific Partnershipon Clean Development (APP), or Climate or bilateral initiatives,

including the Japanese Bilateral offset Crediting Mechanism (BOCM). Finally, there are

growing difficulties in conserving the Kyotos universal framework for counting,

recognizing and measuring emission reductions among national schemes. This was due

to fragmented rules and policies among countries, which leads to a fragmented

framework for domestic measurement, reporting and verification tools (MRV).

According to Biermann et al., 2009, it is possible to assess three different forms of

fragmentation that shape the current climate regime: cooperative, integrative and

conflictive. The analysis show that the major academic inquiry strands namely

cooperation theory, environmental policy theory, and international law, has offered

different hypothesis about the relative costs and benefits of the assessed forms of

fragmentation. In sum, these results show that on balance, fragmentation of global

governance architectures appear to bring more harm than positive effects.(Biermann et

al., 2009, pp. 3132)

Therefore, since the establishment of the Kyoto Protocol, the increasing

fragmentation of global governance of climate change started to be an unavoidable

condition that poses different challenges between observers and policy-makers alike.

Overall, the fragmented reality has led to a complex regime in which a single

institutional response (i.e. top-down approach) has been exceptionally difficult

toorganize, and the multiple one (i.e. bottom-up architecture) undesirable, especially for

20

the leading States: from a strategic standpoint, the benefits of a comprehensive regime

may not seem sufficiently to justify the bargaining effort and concessions that would be

required of individual states with often divergent interests. On the other hand, an

entirely fragmented response is unlikely to satisfy the interests of leading states that

expect first-mover advantages and make the larger investment in building

institution.(Keohane & Victor, 2011, pp. 1415)

Notwithstanding the above, this increasingly fragmented architecture in climate

governance is likely to continue in the future. In order to address the fragmentation

issue, which is clearly a crucial topic to be considered in the creation of a new future

agreement, different policy debates have been conducted. Today we can distinguish

theories which are promoting central governance, and conversely policy proposal that

consider the possibility of being engaged in further institutional fragmentation.(Joseph

E. Aldy & Stavins, 2010, pp. 1316; Biermann et al., 2009, pp. 1315)

The central governance model still appears to be the most supported one by the

European Union: indeed, according to the EU, this architecture approach can advance

more ambitions in terms of global emission reductions and in creating a system of

universal accounting options (MRV), which can facilitate the universal recognition of

varying GHG reduction units between different countries and mechanisms, resulting in

more convergence, and measurable green environmental performance. Conversely, a

proposed fragmented architecture, supported mostly by the United States, can be seen as

more flexible for being implemented between States, because it can take specific host

countries circumstances more into account.

At the last COP-19 in Warsaw, there was a growing consensus over the type of

governance to be implemented by the next agreement in 2015. The discussion took into

account the hybrid complex regime. This approach is a mix of top down architecture,

that would establish a centralized management of oversight, guidance and coordination,

with the possibility of increasing the ambition over time, and a bottom up architecture in

favor of national commitments or national contributions, which is at least consistent with

national policies and goals.

This approach has been strongly favored especially by Japan, and could be seen as a

mix that takes into consideration the advantages and disadvantages between the top-

21

down and bottom-up measures. Such a design would be more realistic, dynamic and

efficient in addressing the diverse national commitments, and it is today seen as the most

able to accommodate different approaches and different institutional venues in a more

synergistic way.

3.1Defining a better future agreement through the governance process

One of the biggest challenges for the international community is to search out a way

to establish a new agreement or treaty, following the demands of the Durban COP-17, in

order to follow the Kyoto Protocol. The design of a new regulatory regime is essential

but does not seem to be a quick outcome. Indeed, creating a global common agreement

is a difficult task, because what can be regarded as a public good, namely the

environment, is actually creating wide conflicts of interests between main powers such

as China, Europe, and the USA. 5(Leal-Arcas, 2013, pp. 249287)

Climate change is a global phenomenon and given the heterogeneity of costs and

benefits, mitigation efforts inevitably cause distributional conflict between states. For

instance, several analysts warn that the cost of climate changewill largely fall on

politically weak developing countries, whereas the costs of emission reduction will

largely fall on industrialized countries.(Keohane & Raustiala, 2010, p. 1)

The complexity of the problem becomes deeper, as we consider that uncertainty

over the long time horizon is difficult to avoid: Consequently agreement on any

meaningful international regulatory system has been and will continue to be

difficult.(ibid)

The major literature concerning the new treaty design, offers numerous solutions

that the International Community should consider when attempting to define a new

climate change agreement. Most suggestions have been favored through the experience

acquired due tothe failings and weaknesses that Kyoto has produced so far. Indeed,for

the most part, the problem of the distributional conflict and deep uncertainly regarding

climate change as a long term issue has been engaged through a comprehensive top-

down policy action (e.g. through the Kyoto Protocol). This critically argues that the

5Stavins Robert Blog: http://www.robertstavinsblog.org/

http://www.robertstavinsblog.org/

22

Kyoto Protocol has been inefficient in addressing different issues such as how to enlarge

the participation of countries within the Protocol, how to raise ambitious mitigation

measures between States, how to accommodate different domestic interests of Parties,

and most importantly, how to guarantee the equity of treatment between Annex

countries. Furthermore, these studies have tried to focus on the causes that create

different obstaclesfor the successful outcome of the Kyoto Protocol, and their

respective solutions.6

As we have seen in the preceding paragraphs, the Protocol has been efficient in

starting the commitment phase between countries, but not in addressing the growing

political and economic differentials of emission commitments between States.

Therefore, it requires a real re-examination of the complex political and economic

reality, in order to successfully assess a careful institutional design, that will take in

consideration the current fragmented reality context.

There is a highly growing consensus among policy makers, international

organizations, business and economists about how the design of a new regulatory regime

should favorite criteria for political participation, effectiveness, and compliance between

States. (Edenhofer, Flachsland, Stavins, & Stowe, 2013)

The results of a recent workshop have suggested that these criteria are highly

dependent on the governance structure of the regime. (ibid) Indeed, the workshops key

purpose has been to find which governance structure is the most suitable. For example, a

top down approach may favor ambitious emission programs but at the cost of a lower

level of presence of countries, conversely a bottom-up governance approach may favor

more participation, obtaining a less ambitious program of emission.

In sum, while this field of studies is not new, a central question discussed in this

workshop is how to guarantee that both of the requested results criteria indicated, could

be successfully achieved together: for instance, a broad range of countries in mitigation

commitment and then how to tie ambition to this commitment over time.

Considering the latter criteria, various proposed alternative international policy

architectures have been analyzed through several research studies. Among these studies,

6For more details see chapter 2

23

the assessments range from top-down project to the bottom-up architecture. As regards

the top-down approach, the two main eminent studies were proposed by (Bosetti &

Frankel, 2009; Jayaraman, Kanitkar, DSouza, & Purkayastha, 2011; Messner,

Schellnhuber, Rahmstorf, & Klingenfeld, 2010).

The first approach, that builds on the fundamental relation deficiencies of the Kyoto

Protocol, would establish a progressive emission target commitments range between

different countries. By taking in consideration the different capacity of GHG abatement,

this top-down approach, would ask relative wealthy States to abate more respect to

developing ones. The increasing abatement threshold level would then proceed

gradually, toward an equalization factor which moves the world toward equal emission

per capita.(Edenhofer, Flachsland, Stavins, & Stowe, 2013b, p. 6)

The methodology is designed to yield caps that gives every country reason to feel

that it is only doing its fair share, and it is flexible enough that it can accommodate

major changes in circumstances during the course of the century.(Joseph E. Aldy &

Stavins, 2010, p. 13)

The second top-down approach, namely the carbon budget system, would specify a

total amount of GHGs that could be emitted globally over a certain period of time. This

amount would then be divided through a cap on cumulative emissions between countries

over the same global period of time.

Together, these approaches do not appear to be politically feasible, considering that

some countries would not appear to accept an entire global constraint mechanism.

(Edenhofer et al., 2013)

Among the main bottom-up approaches proposed, selected architectures would vary

from singular and independent cap and trade regimes between States, that guarantee

more flexibility and participation for GHGs emission reduction; to an eventually

foreseen linkage system that would provide, if well designed, a successful process

toward independent cap and trade systems between States.

Even if these latter mechanisms may present some weaknesses, these schemes

would particularly suffer in creating ambitious programs, but also (from a more

technical prospective) in how to guarantee a correct implementation. Therefore, there are

complex and different specific singular States parameters that need to be considered.

24

However, the challenge here is to find the best approach in order to achieve

participation, effectiveness, and compliance, while considering the more complex

fragmented governance methods of the current reality.

3.2. The hybrid - dynamic approach

At the recent workshop in Berlin (Edenhofer et al., 2013), it was recognized that the

best results would achieved through a dynamic type of governance (i.e. hybrid). A

potentially hybrid approach can favor criteria of participation, effectiveness, and

compliance between States into a new agreement. The method disposes different States

in deciding which kind of targets and actions have to be achieved, predisposing internal

mitigation policies, but also mechanisms such as the Kyoto's flexible ones. At the same

time, a centralized system, i.e. UNFCCC framework, supervises the regimes additional

aspects. For instance, a set of structured rules from an international body may implement

the use of uniform methods for measurement, reporting and verification (MRV),

finance, and technology-related issues. These may better guarantee firstly environmental

integrity, making larger actions and contributions towards solving the climate change

problem, and secondly provide both more confidence and credibility as regards the

entire regime.

The hybrid approach has been further considered at the Warsaw COP-19.

A summary of proposal options for creating an efficient dynamic process in

promoting participation and increasing ambition is made by Aldy et al. (2003): this

study evaluated how this hybrid approach needs to be carefully designed and projected

before implementation. (Joseph E. Aldy, Barrett, & Stavins, 2003) At first, major weight

has been given to the design of the central governance regime. States would be free to

choose the appropriate bottom-up mitigation measures, but in aggregate, such national

policies would not be able to reduce emissions sufficiently to avoid climate change.

Therefore, the UNFCCC and the broader international regime might be assigned a

range of top-down responsibilities related to a 2015 agreement. (Edenhofer et al.,

2013)

According to the analysis, a top-down procedure could comprehend a set of

25

approaches useful to facilitate participation and enhance ambition between countries at

the same time. These, for example, could range from reinforcing scientific review

processes over the growing climate change phenomenon in order to increase

international participation, to designing new mechanisms for incentives, in order to

enhance ambition over time, such as green jobs or reduced air pollution options between

States. Moreover, the process could also consider the development of a new approach

called political conditionality. In this case, State party might condition increased

ambition, linkage between regulatory system or international finance support on that of

other parties, perhaps including provisions to reverse the more ambitious policy in case

of breach, as a form of sanction.(ibid)

Nevertheless, forsome analysts, such measures alone may not guarantee sufficient

results, given the fact that these would not surely be implemented, or, even if

implemented, they would not turn out to be efficient.

The analysis show that a set of dynamic top-down approaches would better integrate

the single bottom-up approaches. Furthermore, the new agreement must attempt to

motivate increased national ambition over timeto create a self-reinforcing loop in

which countries offer national policies, actions, and targets rooted in their domestic

political processesand review these over time in light of information on aggregate

global outcomes, equity considerations, and (in the case of developing countries)

international support. (ibid)

In substance, the central architecture should develop principles, rules and metrics;

international support (aligned with domestic policies) for finance, market mechanisms,

and technological innovation; specifying a legal form, i.e. adjusting national obligations,

and, last but not least, a procedural mechanism to review certain regime elements. For

instance, a good process could be assessed step-by-step by establishing big dreams

through realizing small dreams. 7

Finally, as a matter of fact, an hybrid - dynamic approach would maintain the

purpose to establisha framework in assessing ambitious mitigations results that would

7A comprehensive global governance i.e. top-down approach, would create and maintain big dreams,

infeasible in the present but not necessarily in the future such as stabilize the world's GHG emissions.

These big dreams will guide small dreams notably, countries' mitigations strategies contained within

the bottom-up approaches. (Urpelainen, 2012)

26

give major credibility to the international system. Credibility would later bring countries

to increase cooperation, i.e. establishing links, and especially, once a single country

knows about the real and effective commitments of others, leading to a general increase

of the mitigations ambitions.

4 Characteristics and options for a new successful agreement

Beyond the governance system established, a successful agreement would need to

entail a set of characteristics, features, and options which can increase the potential

global response toward effectiveness of the discussed criteria: political participation,

effectiveness, and compliance between States. These criteria have been posed in a recent

deep research, with the main purpose being to assess multiple solutions in the critical

debated field of International Environmental Agreements (IEAs).

The analysis shows how to better drive, motivate and implement the assessed

criteria, e.g. how to motivate participation and compliance; to find what drives

investment in green technology; the appropriate duration of a treaty (and how to update

it); and also how to establish the appropriate level of emission caps in the eventuality of

an ETS.

According to Harstad, 2013, complex interactions exist between these variables, that

could be assessed through a multiple cause-and-effect process. (Fig.1.6)

Figure 1.7 Multiple purpose diagram

Source: Harvard Project on Climate Agreements.

27

Starting from what drives investment in green technology, it has been found that the

greater demand for green technology depends on how ambitious the climate treaty is.

Therefore, it is important to stimulate ambitious plans for the climate treaty, though, as

Harstad suggested, in lowering disposable quantity caps distributed between countries,

equity criteria of caps distributions between developing and developed States must also

be considered. Furthermore, the higher is the demand for green technology, the more

this latter would bring success in creating larger profits for investment in new abatement

technology, thus, automatically reproducing incentives for further investments in

reducing pollution emissions.

Another important factor concerning the green-abatement technology investment is

the length of a treaty contract. A long-term contract would better induce technology

development considering the typical low rate return of a green-technology investment,

and low profit return risk for the investor. The demand in green-technology would

therefore increase with positive rational future expectations for the investor. While this

observation is not new, a crucial factor here is that a short-term treaty, would favor an

increase in participation criteria over the treaty. Here, further considerations are

necessary: participation (i.e. a countrys committed presence in a treaty) is a well-known

problem that could frequently occur along with the establishment of an international

environmental treaty. In particular, it is the frequently questioned free riding issue,

that represents serious threat to the final compliance process. Indeed, a public good such

as the environment, constitutes a long term benefit that can be enjoyed also by those

countries who decide to opt out from participating in a multiple agreement. As a matter

of fact, less participation would means a decrease in the total amount of GHG

abatement. Furthermore, it may also result in more expense for the rest of the coalition

to guarantee a certain amount of emissions reductions. This latest effect is due to a so

called carbon leakage effect. For instance, in countries under emissions commitments,

firms that face a limitation in the quantity of emissions disposal, may find it attractive to

switch the production processesto countries that are not participants, i.e. in States out of

emissions limits.

Participation criteria is also connected with the time length of a contract.In his

analysis (Harstad, 2013), further explains how the duration of a contract depends on the

28

size of the coalition: if few countries participate, it is in their interest to only sign short-

term commitments, while waiting for the coalition to grow. (ibid) This indicates that

usually participants would prefer to establish a short-term agreement if they are few,

hoping for more countries to join later. Moreover, short contracts may reduce the

negative free ride incentives between states, because a country that contemplates

whether to participate in a treaty may fear that, by opting out, the remaining countries

end up signing a short-term treaty (reducing the possibility to free ride). (ibid)

Short term agreements would therefore incentivate participation. Nevertheless,

although in a short-term agreement the free-riding problem becomes weak, the

investment in abatement technology would may also face a so-called hold-up problem:

notably, investments [in green technology] before negotiation, may weaken a

negotiator's bargain position, this may happen because countries that have already

installed the best existent technology, will have more to gain and less to lose in relation,

conversely,to a country which is without such technology. As a matter of fact, both of

them will have nothing to lose from an agreement in terms of technology. In summary,

in a short term agreement, the hold-up problem may generate a credible threat which

would reduce even more the free riding risk.8 However, the hold-up issue may

incentivate a stronger participation, but at the cost of a decrease in investments in

abatement technology as we assessed above.

In synthesis, subsequent analyses have demonstrated that the longer the treaties

length, the greater are the incentives to invest in abatement technology, and increasing

green ambitions result through the years. Anyway, shorter treaties would increase the

level of participation between countries at the expense of a slower development of

technology, and consecutively, abatement performances. (Battaglini & Harstad, 2012)

Further treaties would need to strike a balance within these two options especially

when environmental contracts are incomplete, i.e. where investments in green

technology are not further contractible, as in those under analysis.

Last but not least, the effectiveness of a contract would also highly depend on the

effective measures for compliance established. As with participation, for global

8 This, because of the low expected increase in investments between State's parties of the treaty, and, thus

low future profits for eventual free riders.

29

regulatory regimes to work well, states must, on the whole, choose compliance over

violation.(Keohane&Raustiala, 2010, p. 17)

Basically, international agreements would favor formal compliance between States.

These could range from States that agree to a treaty in order to maintain political

sympathy with the others, to increasethe States vesting processes:where international

law becomes considered the same as internal law and, as such, constraining and costly

for breaking the norms.

Formal sanctioning processes, or perhaps punishment measures, can also be useful

as incentives for compliance. For instance, carrot and stick policies can be available

using trade policies and sanctions.

5 A proposed review process of negotiation

As we assessed above, considering that climate change is a global problem, a global

first-best solution would therefore need to find a universal multilateral agreement

answer. (Biermann et al., 2009)

According to Leal-Arcas, 2013, considering the multiple challenge of moving the

climate agenda forward among the 195 Parties of the UNFCCC has led many to

question whether the UNFCCC is, in fact, the best and most effective forum for

mobilizing a global response to climate change .(Leal-Arcas, 2013, p. 301)

Indeed This current approach to negotiating a comprehensive, universal, and

legally binding global agreement on climate change is unlikely to succeed.(Leal-

Arcas, 2013, p. 302)

As a result, it is important to identify policy issues, options, and ways to overcome

negotiations obstacles.

One proposal would be to make negotiations less ambitious within the UNFCCC, by

for example abandoning decision-making by consensus. For instance, consensus is

based on an oligopolistic and duopolistic world order, but fails to deliver under

conditions of an emerging multi-polar world, accompanied with great shifts in economic

power. The turn today towards a multi-polar world indicates that approaches based on

consensus are unlikely to produce results. No country, or group of countries, today is in

30

a position to forge a global deal.(Leal-Arcas, 2013, pp. 303304).

Furthermore, the old principle of common but differentiated responsibilities, also

could be seen at the core problem of the deadlock of the actual negotiating process.

Today, there is an urgent need to modify, upgrade or even eliminate the common

principle, at least with a careful observation of the current developing and developed

countries' relative emissions trends. China and USA together, count for almost 42% of

the total GHG emissions of the world, but today they are still outside of the Kyoto's

protocol for different reasons.

For instance, any effective review process of the UNFCCC should definitely take

into consideration these large emitters. Perhaps, a useful option would be to provide for

a fair distribution of emission burdens among all countries, leading to the elimination of

the distinctive Annex I attribute.

Various difficulties in the negotiations processes have also caused an increase in the

general fragmentation of the governance system. Any correct evaluation, before the

creation of an effective and comprehensive global climate-change agreement, should

take into consideration the different complex-fragmented reality in which the global

landscape is today involved. Notwithstanding, as we have assessed in the preceding

paragraphs, a process of re-evaluation of the current top-down regime, should

necessarily go beyond the crucial central role, also providing more flexibility within

specific practical pledges between States. Here pragmatism is a crucial element, such as

bilateral agreements, flexibility against rigidity, practical results over utopian ideals.

Indeed, experienced bottom-up mechanisms have been rapidly applied, and are still

provided in different waysbetween developed and developing countries. Regarding this,

according to Edenhofer et al., 2013 and Urpelainen, 2012, the dynamic climate

governance approach, would be seen to be today's most effective approach.

In summary, it is important to consider the possibility of a complementary

combination of top-down and bottom-up approaches to building a global climate

landscapein order to also reduce the negotiation issue.(Leal-Arcas, 2013, p. 293)

31

5.1 The club approach

According to Leal-Arcas, 2013, there are also important and different plausible

venues to be further analyzed outside the UNFCCC negotiation process.(Leal-Arcas,

2013, pp. 325342)

A recently recognized option would depart from the issues discussed and would be

built based on a so called variable geometry of power. This would consist on making

deals within smaller clubs such as the Major Economies Fund (MEF), the G-2, the G-3,

the G-20 groups instead of a comprehensive global institution such as the UNFCCC.

Together, those groups of clubsof countries, compose a big part of the worlds total

GHG emissions percentage.

According to recent analysis, a more effective process of revision, should start from

negotiating processes between these clubs of countries, whereas this would achieve

better mitigation performance, considering that the main emitters are de-facto grouped

among the clubs. This approach would create a faster, more efficient decision process

within a small group of countries instead of the comprehensive UNFCCC system. Less

time would be spent on procedural matters when dealing with a small group of countries.

In addition, based on international negotiating experience from other fields, the

only way to get any real business done is in small meetings (sometimes tte--tte

meetings between key leaders.(Leal-Arcas, 2013, p. 328)

Another advantage that would result comes from considering the previous

agreement characteristics such as how to enhance participation criteria. Adopting

strategies of less starting participation such as clubs of countries, would better create

the possibility of a further expansion of the group.

Last but not least, these small groups of countries could better address the needs of

the single States parties. Indeed, a forum option with the purpose of better addressing

the important necessities of the less developed economies, may have more weight in

international climate policies. According to Leal-Arcas,2013, a collective action

problem can be solved within a polycentric system because it would produce

cooperative methods for better developing participation options between State parties

through both cooperation programs and partnership initiatives.

32

Instead of an uncertain future multilateral global climate treaty, the club approach

would result in a more plausible and realistic second best option that should

necessarily be placed under further empirical examinations.

33

__________________________________________

Chapter 2

The Kyoto Protocol and flexible mechanisms: valuable goals achieved

1 Kyoto Protocol: results and experiences accumulated

In the preceding chapters, we have argued that the Kyoto Protocol has been

successfully in creating an initial path toward a global emission reduction of GHGs. This

can be attested considering that the Protocol constitutes the first legally binding

international agreement on climate Protection and, also the first that builds on market

based instruments (i.e. flexible mechanisms), that determine cost-efficient responses for

the States to the undisputed need for GHG abatement through the carbon market.

At the same time, we have seen that the Kyoto system has some structural

weaknesses regarding reformative processes in the long term. This occurred essentially

for two reasons. First, the Protocol has been inefficient in general adjusting terms, i.e.

has run out of flexibility targets among states in the long term.(Grubb, Vrolijk, & Brack,

1999)9

Second, the existence of the Kyoto agreement has been involved in complex

negotiations processes that reflected a real difficult state of equilibrium between States'

political power. For instance, the withdrawal of Canada, New Zealand, Japan, and

Russia during the second phase of the Protocol in 2012, has weakened the negotiation

progress for the second phase, leading, as we saw, to block further progress in countries

participation, notably the developing non-Annex group.

Fifteen years after the Kyoto Protocol, we can say that several different studies

9(for further details see chapter 1)

34

argue that the Protocol has been crucial for further policies processes on climate

protection. (Bhringer, 2003)

A certain idea among these studies, is that the agreed targets have also been

enhanced through a flourishing growth in the use of Kyoto's flexible market

mechanisms. More specifically, instead of a unique global carbon market under the

UNFCCC, there has been a growth in multiple independent carbon markets around the

world, such as the European Emission Trading Scheme (EU-ETS), the Regional

Greenhouse Gas Initiative in the northeastern United States (RGGI), the New Zealand

Emission Trading Scheme, and Australia, California, Quebec, South Korea and even

India and China. (Fig. 2.1)

What emerges according to these analyses, is that even if the Kyoto Protocol has

been insufficient to reach all the UNFCCC parties and also to enable a long term reform

process, it has been successful in establishing and stimulating a growing number of

jurisdictions nonetheless continue to pursue emission reductions in the absence of an

International agreement among all major emitters to reduce emissions.(Newell, Pizer,

& Raimi, 2013)

35

Figure 2.1 Perspective of carbon markets launching programs in 2013

Source: World Bank, 2013

In order to show the impact of the Kyoto Protocol in terms of CO2 emissions

reductions, an empirical analysis is taken by Grunewald & Martnez-Zarzoso, 2012.

According to this large dynamic model research, the States with emissions

commitment under Kyoto, emit on average 24.5 percent less CO2 than similar

countries that did not ratify the protocol. Yet, even if is evident that the protocol has

some potential effect, it is still not clear if the Annex I countries would have been doing

the most to tackle their CO2 emissions, even in the absence of the protocol. Countries

would increase their emission-reducing action with a positive function of per capita

income, instead of through the modest commitment required by the Kyoto Protocol.

Here, at least two considerations could be evaluated in assessing the Kyoto's

performance.

First, for a possibly stronger performance calculation, we should necessarily take

into account different Annex-I commitments in emissions reductions, especially within

the field of internal-domestic policy measures and instruments. 10 An empirical analysis

taken by (Zhang, 2003) shows that, when counted alone, the Kyoto's flexible

mechanisms performance would exclude an important part of avoidable GHG emissions

i.e. domestic policy measures, that separately perform, on average, 37% of the total

Annex-I emissions reductions required from Kyoto in 2010.11

Secondly, although Annex-I Parties reduced CO2 emissions by nearly 7% out of

5.2% of the Kyotos emission reduction requested in 2009, a large part of the decrease

was due to a drop in economic activity in response to the crisis.(Grunewald &

10

These latter for example, would include Environmental Voluntary Approaches, NAMAs (national

appropriate mitigation measures), National Carbon Tax etc... 11

The global empirical model illustrated from Zhang, is based on considering the marginal abatement costs

of 12 selected countries. Under specific hypothesis, and within three case scenarios a domestic

performance is calculated: a no-limit scenario in which no caps are imposed on the use of the flexible

mechanisms, a EU (proposed) ceiling scenario that impose a limit to the use of flexible mechanisms, and a

no-air scenario where trading in hot air (emission quotas) are not allowed. Of the total emissions

reductions required by Annex-I countries in 2010, domestic actions account, starting from a minimum of

27.7% under a no limit scenario, up to 50.8% under an EU ceiling scenario. Moreover, a successive

analysis shows that CDM credits contribution are estimated to range from 31.5% under the EU ceiling, to

57.6% under the no hot air scenario.

36

Martnez-Zarzoso, 2012)

This is true perhaps in Europe, where the European Trade Mechanisms (EU-ETS)

have largely surpassed the Kyoto's targets. For instance, the total average emissions

reductions of the European countries EU-15 reached between 2008 and 2012, was 12.2

percent of GHG emissions avoidance respect to 1990 levels, surpassing the 5.5 % of the

EU-15's base-year emissions. (European Environment Agency, 2013)(Fig. 2.2; for

further details see paragraph 2.3) This result should also consider that, according to an

analysis by Borghesi (2010), in Europe, the Kyoto's targets have been achieved

differently among countries. Among these, in 2008 there was an over-achievement with

some virtuous countries, and conversely a so called Kyoto gap for the others.

Figure 2.2 Greenhouse gas emissions in Kyoto Protocol countries and their targets

Source: Joint Research Centre, 2013

Nevertheless, in this context, (Laing, Sato, Grubb, & Comberti, 2013) reported how

it is difficult to disentangle the impact of the EU-ETS on emissions performances from

other factors, such as the economic crisis; and that there are still different, and

contrasting, results, in assessing the impact of the recession in emission performance due

37

to the complex outlook of the crisis. Results are conflicting: some of such analyses

conclude that the immediate post-crisis phase II of the EU-ETS had looked similar, in

performance terms, to the pre-crisis phase I, showing that the system led to some small

levels of abatement, and it was not only, and perhaps less than expected, caused by the

recession impact; other analyses, seem indicate that the reductions in overall EU

emissions that have been occurred since the inception of the EU ETS are more the result

of the impacts of the financial crisis than the EU ETS.(Grubb, Laing, Sato, &Comberti,

2012)

In summary, based on these performance results, the Kyoto Protocol alone is not

sufficiently able to solve the global warming problem, even considering the GHG

reduction performance obtained with all the Kyoto's effective flexible mechanisms.

Furthermore, according to Grunewald & Martnez-Zarzoso (2012), emerging countries

such as China and India, that are not parties to the Protocol, are expected to increase

their emissions levels over the next decades.

As we see, through these performance analyses, the Kyoto Protocol has been

successful in initiating an optimal effort toward emission reduction, but more

importantly, in some countries and regions: commitment targets not only have been

achieved, but also have been further enhanced. (European Environment Agency, 2013)

As a matter of fact, performance would be better assessed considering and looking

at the flexible market mechanisms that have been developed and implemented inmany

countries.

2 The Kyoto Protocols Flexible Mechanisms

Since the establishment of the Kyo