S-CDM in a Post -2012 Scenario.

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SECTORAL CDM IN A POST-2012 SCENARIO

(LL.M Graduate Paper)

By Kalpana Murari

I. INTRODUCTION

Kyoto Protocol1 to the United Nations Framework Convention on Climate Change

(UNFCCC)2

executed after several years of negotiations remains one of the most crucial

multinational environmental treaties (MEAs) ever executed by a body of nations. The Kyoto

Protocol implements the UNFCCC and when the parties meet to discuss the UNFCCC, they

meet as the Conference of Parties (CoP) and as Conference of Parties meeting as Parties to the

Protocol, (CoP/MoP) to discuss the Protocol.

The Kyoto Protocol imposes binding emission limitations on developed countries ratified by

about 187 countries. United States remains a party to UNFCCC but failed to ratify the Kyoto

Protocol. President Obama, while addressing CoP15 at Copenhagen, agreed to meet America‟s

share of global responsibility in fighting climate change. He reiterated America‟s binding

commitment of cutting down emissions reduction by 17% by 2020, and by more than 80% by

2050.

The 1985/1987 Villach Conferences and the 1987 Bellagio Conference consolidated the

scientific consensus on global warming issues by commencing an interaction with policy makers

to combat climate change. The Toronto Conference on the Changing Atmosphere, 1988 called

for an Action Plan for Protection of the Atmosphere and a global convention as a framework for

protocols. By 1991, the European Community (EC) committed to returning its joint CO2

1 See http://unfccc.int/resource/docs/convkp/kpeng.pdf 2 See http://unfccc.int/essential_background/items/2877.php



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emissions to 1990 levels by the year 2000 and promised to provide financial assistance to

developing countries to combat climate change effects. The Group of 77 developing countries,

attributing major energy-related carbon dioxide emissions to industrialized nations, called for

transfer of environmentally sound technologies (ESTs) to developing countries on preferential

and non-commercial terms3. These negotiations led to the UNFCCC, which recommended no

binding commitments on reducing greenhouse (GHG) gas emissions demanded significant

international commitment to counter climate change. The UNFCCC, which came into force in

the year 1994 promoted sustainable development and looked at improving international free

trade.

This climate regime was grounded on the principle of “common but differentiated

responsibility” where all States shared common responsibilities to protect the environment, given

their diverse social, economic and ecological situations4. Article 3.1 of UNFCCC deems parties

to protect the climate system for “the benefit of present and future generations of humankind” by

invoking the concept of intergenerational equity. These underlying principles, an integral part of

the UNFCCC, were eventually carried forward in the Kyoto Protocol. The parties under

UNFCCC include all Parties; Parties listed in “Annex I”, lists industrialized country Parties; and

Parties included in “Annex II”, lists all industrialized country Parties except those in the process

of economic transition. Non-Annex I parties, which are the developing countries, remain

vulnerable to the drastic effects of climate change and do not have any binding emission

reduction targets under the Protocol.5

3 Chris Wold, David Hunter and Melissa Powers, Climate Change and Law 146 Lexis Nexis 20094 Id .; see at 1615 See http://unfccc.int/parties_and_observers/items/2704.php



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The first meeting of the Conference of the Parties (CoP1) was held at Berlin and a group of

developing countries executed the “Berlin Mandate” establishing a timetable for developed

countries to negotiate a Protocol with clear “quantifiable emissions limita tion and reduction

objectives” (QELROs).6

The Berlin Mandate sets out working parameters for the Kyoto Protocol

subsequent to the release of the Second Assessment Report of Intergovernmental Panel on

Climate Change (IPCC)7, a report that ascribes human activities to climate change effects. The

year 2001 witnessed the implementation of Kyoto Protocol by Europe, Japan, and rest of the

World as they agreed to the terms of Marrakesh Accords. The Kyoto Protocol came into force in

the year 2005.

II. THE KYOTO PROTOCOL

The Kyoto Protocol contemplated “quantified emissions limitation and reduction objectives

(QELROs)” for industrialized countries (Annex I) Parties to help them reduce their net emissions

over a five-year commitment period (2008-2012). The ratification of the Kyoto Protocol by

sufficient number of countries established its political viability exhibiting a show of promise for

a post-Kyoto agreement. The Bali Conference led to the Bali Action Plan where all countries

agreed to establish post-2012 commitments at the CoP meet in Copenhagen in the year 2009.

Eventually, when CoP15/MoP5 did meet at Denmark, the Copenhagen Accord drafted by the

U.S. China, India, Brazil and South Africa was neither passed unanimously nor adopted by all

parties. The Accord deemed it essential that global temperature increases be kept below 20C to

avert dangerous levels of climate change.8

6 See Wold, supra note 3, at 2057 http://www.ipcc.ch/organization/organization.htm8http://www.denmark.dk/NR/rdonlyres/C41B62AB-4688-4ACE-BB7B-F6D2C8AAEC20/0/copenhagen_accord.pdf, see para 1, at 2



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In its present form, the Protocol turned out to be unsuccessful at certain levels of its

implementation, primarily, because of its non-binding nature. Following a „not-so- positive‟ meet

at Copenhagen, 2009, the focus of concerned parties shifted to the next meet at Cancun, Mexico,

where they are expected to reconvene later this year.9

With emerging economies and their

increasing emissions, it became clear that the Kyoto Protocol had to necessarily reinvent itself

through a post 2012 climate agreement by adopting a rationale to re-list nations under the

Protocol. The post-2012 climate agreement is expected to be truly functional and effective for

those developing countries and the least developed countries (LDCs) that rely on industrialized

nations for financial and technological assistance to gain energy efficiency and achieve

sustainability.

The Kyoto Protocol uses “a combination of regulatory techniques and economic instruments

to help countries achieve sustainable development and counter climate change effects.”10 In

addition to „targets and timetables‟ the Protocol sets forth four different flexibility mechanisms,

Emissions Trading, Joint Implementation (JI), Bubble and the Clean Development Mechanism

(CDM).11

12

With appropriate changes to its regulatory framework CDM could be a successful

instrument for mitigation actions.

This paper explores Sectoral CDM (S-CDM) in a Post-Kyoto framework and its application

to the construction and transportation sectors in India. It further discusses the role of industry and

industry organizations in taking this option forward by executing Sectoral Agreements.

9 http://unfccc.int/meetings/unfccc_calendar/items/2655.php?year=2010. 10 The Kyoto Protocol and Beyond, Legal Policy and Challenges of Climate Change: W.Th.Douma et al., at11 See Wold, supra note 3, at 20612 COP 7 (COP/MOP) in Marrakesh, Morocco, 2001 established the procedural rules for CDM, See alsohttp://unfccc.int/cop7/documents/accords_draft.pdf.

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III. CDM AS THE „WIN-WIN‟MECHANISM.13

CDM14, defined under Article 12 of the Protocol, is considered most innovative among

all the flexibility instruments drafted under the Protocol, and was expected to manage transfer of

technology to developing countries in helping them attain energy efficiencies. The Protocol

bespoke CDM to assist in arranging funding of certified project activities15

ensuring that a share

of such proceeds was used to cover administrative expenses and meet costs of adaptation.

Investments from developed countries flowed into developing nations towards projects in

Methane recovery, cogeneration (use of waste heat from electricity generation) renewable

energy, transportation, land-use activities and the construction industry. Annex I parties could

undertake qualifying projects that reduced GHG emissions in non-Annex I countries under the

CDM and use tradable „Certified Emission Reduction units‟ (CERs), popularly known as

„Carbon credits‟, to meet their own emission reduction targets committed under the Protocol. 16

Annex I parties invest in carbon abatement technologies in Annex II countries, assisting

developing countries to grow in a sustainable manner while providing developed nations a cost-

effective means to achieve their GHG emissions targets17

. CDM creates emission credits through

the reduction of GHG emissions against a project baseline of a „business-as-usual‟ (BAU)

scenario.18

The investor from an Annex I country can either be a corporation, governmental or

non-governmental organization. The Marrakesh Accords state that to be eligible to participate in

CDM, a country needs to be a Party (that has signed and ratified) to the Kyoto Protocol.

13 The Clean Development Mechanism and local sustainability by Mari Nishiki, Kyoto University.14 See http://cdm.unfccc.int/about/index.html. 15 http://unfccc.int/essential_background/kyoto_protocol/items/1678.php16 See Wold, supra note 3, at 23317 See Wold, supra note 3, at 233.18 Emissions reductions must be demonstrated to be additional to BAU trends, stating that a “CDM project activity is

additional if anthropogenic emissions of GHGs by sources are reduced below those that would have occurred in theabsence of CDM project activity”.

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CDM host countries need to identify a Designated National Authority or DNA for

approving CDM projects. The host country must approve each of the CDM project and ensure

that it conforms to their sustainable development criteria. The Designated Operational Entities

(DOEs) created under the framework for CDM are either domestic or international legal entities

accredited by the CDM Executive Board (CBE) and authorized to certify the methodology

proposed by the project proponent and verify emission reductions for issuance of CERs. The

CBE, created under Article 12, supervises CDM and reports directly to the CoP, CoP/MoP. It

receives administrative support from the UNFCCC secretariat.19 The CBE that was elected at

CoP7 has ten members representing both industrialized and developing countries. It is

responsible for approving new methodologies for baselines, accrediting and suspending DOEs,

reviewing accreditation procedures, developing and maintaining a CDM project registry and

issuing verified CERs.

The success of CDM can be evidenced in the reducing mitigation costs for industrialized

countries. Till date, more than 2,112 of Projects have been registered under CDM in 64

developing countries.20

These projects are either bilateral with the participation of an Annex I

country or unilateral with the participation of any one of the non-Annex I countries.21 CDM is

expected to assist developed countries in achieving compliance with their quantified emission

reduction targets that are “real, measurable and long-term benefits related to the mitigation of

climate change.”22

The Kyoto Protocol itself does not offer any guidelines to operate the CDM. Several

barriers have been attributed to the failure of CDM achieving the expected results. These barriers

19 See Wold, supra note 3, at 233.20 See http://cdm.unfccc.int/Statistics/Registration/NumOfRegisteredProjByHostPartiesPieChart.html. 21 See Wold, supra note 3 at 233.22 See Wold, supra note 3, at 233.

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reiterate the need to usher in reforms that offer incentives acting as impetus to investments by

private sector in least developed countries (LDCs). One of the contentious issues surrounding

CDM has been the veracity of claims relating to sustainable development. The other misgiving

relates to the uneven geographical distribution of projects where countries like China, India and

Brazil recorded substantial numbers of CDM projects isolating other developing nations which

lacked the necessary infrastructure to host a CDM project.23 Despite CDM dominating the

global carbon market, CDM is believed to be on its way out likely to be replaced by Joint

Implementation (JI). This is primarily due to CDM‟s failure in addressing technology transfer

and capacity building. Reforms to CDM have been debated under the Ad-hoc Working Group

on Further Commitments for Annex I Parties under the Protocol (AWG – KP). The challenges in

scaling up existing CDM machinery include “safeguarding environmental integrity, maximizing

economic efficiency and improving the existing regulatory functioning”.24

A report prepared by International Emissions Trading Association (IETA)25 prior to

Copenhagen meeting, recognized the systemic limitations of CDM. The report attributed

“unproductive part-time governing bodies, inappropriate division of responsibilities, inadequate

standardization, neglect of due process and unclear guiding policies” to CDM‟s inherent flaws.

CDM relies on third-party DOEs to assess project eligibility and performance. The regulation

and oversight of Designated Operational Entities (DOEs)26 and their Accreditation standards27

adds to delays in registering projects. The Board “maintains the CDM registry established for the

purpose of issuance of CERs, approving methodologies for measuring baselines and

23 http://cdm.unfccc.int/Projects/MapApp/index.html, Interactive map displaying CDM projects.24 Christina Figueres, Charlotte Streck, The Evolution of CDM in a Post-2012 Climate Agreement, Sep, 2009.25 State of the CDM 2009, Reforming for the Present and Preparing for the Future. Working paper prepared forIETA.26 http://cdm.unfccc.int/DOE/index.html. 27 http://cdm.unfccc.int/DOE/acc.html.

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additionality, accrediting entities that verify CERs for CDM projects28. The project proponents

submit a Project Design Document (PDD) to the host country national authority identified by the

parties, known as the Designated National Authority (DNA)29. The PDD30, inter alia, provides all

technical and financial details of the proposed project, including proposed baseline methodology

for emission reductions, means to meet the additionality requirement and transfer of technology

to the host country.

Another functional flaw attributed to CDM is that the members of DOE are often private

consultants who receive payment from the project proponents for the purpose of certifying and

verifying emission reductions leading to inaccurate verifications.31 Frequent revisions to

proposed baseline methodologies have been a contentious issue when approvals were sought for

registration of projects.32 Concerns surrounding the quality of CDM credits emanated from the

„additionality‟ requirement under Article 6 of the Protocol. The numerous tools that were used to

determine or assess additionality33 lacked standardization. The quality of CDM credits remain

centered on the „additionality‟ determination, rather than monitoring and verification standards

for project emissions and removals.34

The „environmental additionality‟ which are „real‟

emission reductions that might not have occurred in the absence of a CDM project is articulated

under Article 6,1(b) of the Protocol which provides that „Annex I countries can transfer or

28 See Wold, supra note 3, at 23329 http://cdm.unfccc.int/DNA/index.html30 http://cdm.unfccc.int/Reference/PDDs_Forms/PDDs/PDD_form04_v03_2.pdf 31 See Wold, supra note 3, at 23732 See Wold, supra note 3, at 23433 http://cdm.unfccc.int/EB/016/eb16repan1.pdf. 34 See supra note 33 “CO2 is removed from the atmosphere by photosynthesis and emitted back into the atmospherethrough the respiration of plants, decomposition of dead plant material and natural disturbances.”

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acquire emission reduction units (ERUs)35 from projects that reduce GHG emissions or enhance

anthropogenic removals by GHG sinks, provided, the environmental benefits of such projects are

additional to any reductions that might otherwise occur.36

Besides the need to prove “environmental additionality” projects are not permitted to

substitute official development assistance (ODA) or other financial obligations under the

Protocol leading to „financial additionality.‟37

The need to transfer safe and sound technologies

which are the best available and practicable for the circumstance of the host party is the

„technological additionality‟ of the project. The „Project/ Program additionality‟ requires CDM

projects to demonstrate the fact that emission reductions achieved are additional to the reductions

which might have happened in the absence of such a project and finally, in the absence of CDM

the project itself may not have been implemented due to economic and technological reasons.38

Additionality is to be assessed on a case to case basis and increasing the transaction costs and

CDM administrative costs which invariably take away most of the revenues from CERs that a

project is likely to generate.39

The result of Bali Conference40 was the agreement on the „Bali Action plan‟ which

established an „Ad-hoc‟ Working Group on Long-Term Cooperative Action under the

Convention (AWG-LCA) to undertake cooperative sectoral approaches and sector-specific

actions to enhance mitigation efforts.41 The Bali Conference highlighted issues relating to

35

ERU is a Kyoto Protocol unit equal to 1 metric tonne of CO2 equivalent. ERUs are generated for emissionreductions or emission removals from joint implementation project. See alsohttp://unfccc.int/essential_background/glossary/items/3666.php#E. 36 See supra note 33.37 Environmental policymaking, Assessing the use of alternative policy instruments by Michale T.Hatch at 15738 See Hatch, supra note 37, at 15739 Measurement, Reporting and Verification in a Post-2012 Climate Agreement, Pew Centre for Global ClimateChange40 http://unfccc.int/meetings/cop_13/items/4049.php41 http://unfccc.int/meetings/items/4381.php.

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financing and technology transfer in CDM paving way for post 2012 negotiations at

Copenhagen. The Bali Action Plan adopted Decision 1/CMP.3 which envisages enhanced

“measurable, reportable and verifiable” (MRV) developing country mitigation actions

“supported and enabled” by MRV technology, financing and technology building from

developed countries. The Bali Action Plan, inter alia, considered “Nationally appropriate

mitigation actions by developing countries in the context of sustainable development supported

and enabled by technology, financing and capacity-building, in a measurable, reportable and

verifiable manner ( NAMAs)”. Credit-generating NAMAs are actions funded through the carbon

market including CDM and Sectoral „no-lose‟ targets. Sectoral „no-lose‟ targets depend on the

GDP, fuel prices, urban density, transit and road infrastructure and fuel taxes and subsidies

Emission reductions based on policies and standards are not considered additional and

therefore ineligible for CERs. This can be overcome by adopting a sectoral approach to CDM

and bringing together industries from developing nations with developed nations providing the

necessary regulatory and policy assistance.

IV. SECTORAL APPROACH TO CDM.

CDM rules permit bundling of projects and this bundle of projects shall have the same

crediting period, with no option to be debundled at a later point of time. This rule led to project

proponents taking up sectoral approach to implement the CDM. Under (S-CDM) developing

countries work on “regional, sectoral, sub-sectoral or cross-sectoral projects that may be the

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those on the international emission reduction market”.42 Sectoral approach has attracted a lot of

attention among political negotiators due to its multinational dimensional aspect. This approach

enhances government‟s role in making internationally binding commitments to adopt domestic

policies for mitigation. Some of the examples of S-CDM projects include modernization of

cement‟s industry, cleaner transportation and energy efficient resources.43 The electricity and

major energy-intensive industries like iron and steel, aluminum, electricity, oil refining and

cement are well suited for a „no-lose‟ sectoral approach. Project proponents could earn tradable

credits by reducing emissions below the sectoral crediting baseline, while emissions above the

crediting baseline may not be penalized. This approach can be country-based or industry-based.

Under country-based programs, individual countries are responsible for ensuring that the

emission levels of the covered sectors meet the intensity targets, and in the industry-based

programs targets are established f or a sector‟s global operations.(Watson et al., 2005). The

industry-based approach addresses concerns surrounding leakage (firms moving operations from

covered to non-covered countries) and international competitiveness (covering one firm but not

its competitor)44. Participation of developing countries that are considered highest-emitters in a

particular sector is expected to cover about 80-90% of developing country GHG emissions.45

“The final sectoral GHG intensity pledges made by any participating developing country would

be the outcome of negotiations between industrialized nations and that developing country.”46

Energy intensity levels for major processes within each chosen industrial sector shall be

determined by international institutes and used for negotiations between industrialized nations

and the participating developing country. The international institution would then assess the

42 Evolving to a Sector-Based Clean Development Mechanism, By Samaniego and Figueres, at 92.43 Id.; See at 93.44 Sector-based approach to the post-2012 climate change policy architecture, Jake Schmidt et al;45 Id. at 49646 See Schmidt, supra note 44, at 497



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applicability of each benchmark to their individual domestic facility.47 S-CDM could improve

working relationship between nations creating healthy and viable international partnerships

bridging gaps between different economies. Under this approach, governments work in tandem

to create uniform policies for a particular sector and improve its efficiency. S-CDM entails

government intervention in collecting data on technology, production forecasts and reduction

cost and legally binding industries from within a single sector. Governments entering into

transnational agreements arrive at consensus within a sector and make necessary pledges to

ensure compliance within each country. S-CDM helps build consensus through international

partnerships. S-CDM shifts the ideal of CDM from being a mere mitigation policy to that of a

comprehensive international strategy in combating climate change effects.

“Sectors may be identified and all participating nations under a sector may liberalize

imports within these sectors. Each member may seek liberalization form its major trading

partners in sectors of its comparative advantage in return for its own liberalization of sectors of

comparative disadvantage.”48

A working example of this concept has been the Information

Technology Agreement signed by a group of countries under the auspices of WTO, committing

themselves to free trade in a set of technology products.49 Another approach is where countries

negotiate to liberalize and reduce tariffs for those industrial products that face high tariff barriers.

A combination of these two approaches may be worked out to roll back tariffs and draw up

bilateral agreements to reduce other trade barriers.

47 See Schmidt, supra note 44, at 49748 See Alternative Approaches to Reciprocal Tariff Liberalization by Arvind Panagriya; at 4.49 Id.;



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The triptych approach50 in S-CDM is based on the notion of sharing emission

allowances among sectors. This approach when executed globally takes into consideration

national circumstances and potential for emission reduction of each country providing flexibility

to choose methods to achieve emission reduction. S-CDM, as a project-based mechanism

establishes baselines that are defined for a particular sector51 where baselines are applied to the

entire sector and overall emissions in the sector are credited against these baselines.52 The

crediting baseline is usually set at the business-as-usual (BAU) emissions level.

The aviation industry endorsed sectoral approach, permitting its emissions from

international aviation to be accounted for at a global level. Many of the aviation companies have

urged their governments to confirm the existing global sectoral approach under the post-Kyoto

framework. This approach enables the aviation industry to pay for its emissions only once

avoiding double-counting, irrespective of whether such emissions emanate from international or

domestic flights. This approach derives application from Article 2.2 of the Kyoto Protocol which

tackles the issue of emissions outside the boundaries of nations by directing developed countries

to address emissions from international aviation through UN‟s international Civil Aviation

Organization rather than by including them in their national emission inventories and limiting

their emissions from „aviation bunker fuels.‟53

54

These Aircraft operators believe that the

International Civil Aviation Organization (ICAO) might be an appropriate vehicle to develop and

50 http://www.fiacc.net/app/apptriptych.htm51 http://unfccc.int/resource/docs/2009/awg7/eng/inf02.pdf. 52; Lambert Schneider, Martin Cames, A framework for a sectoral crediting mechanism in a post-2012 climateregime, May 2009 for Institute of Applied Ecology.53 http://www.icao.int/env/climateChange.htm54 http://www.grida.no/publications/other/ipcc_sr/?src=/climate/ipcc/aviation/index.htm

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implement a global sectoral approach to address aviation emissions since it contemplates equal

treatment of all aircraft operators.55

Sectoral approach carries a major advantage for those developing countries experiencing

energy crunch due to fast economic growth by undertaking mitigation actions and reducing the

number of individual projects. “Sectoral approaches will enable industries to make cross-border

commitments to equitable targets, mitigating disparities among countries regarding carbon-

restrictions to escape a tilted playing field.”56

The basic fabric of Kyoto Protocol visualizes

interplay between nations that are unequally placed with regard to emissions restrictions and

imposing unfair competition upon energy-intensive industries in a regulated framework. The

Protocol allows countries to choose its method of compliance leading to uneven and unequal

regulation of the same industry in different nations. The Protocol places no uniform restrictions

or uniform compliance procedures raising issues of international competitiveness and carbon

leakage. Sectoral approach could prevent leakage caused by those industries which attempt to

escape strict carbon restrictions and establish businesses in countries that are less restrictive.

Technology transfer, an important objective of CDM can be achieved through this approach if

sectors impose uniform technology standards. Technology transfer in the definition adopted by

the IPCC57

involves the diffusion and adoption of technology between parties to a multilateral

environmental agreement (MEA). The technology transfer regime contemplated under a MEA

focuses on the need to transfer ESTs to developing countries. The 1973/78 MARPOL

55 See http://www.iata.org/pressroom/pr/Pages/2009-05-24-01.aspx56 Akihiro Sawa, A sectoral approach as an option for Post-Kyoto framework, working paper.57 “technology transfer encompasses the broad set of processes that cover the flows of knowledge, experience, and

equipment for mitigating and adapting to climate change among different stakeholders. These include governments,international organizations, private sector entities, financial institutions, NGOs and research and/or educationinstitutions. It comprises the process of learning to understand, utilize, and replicate the technology, including thecapacity to choose it, adapt it to local conditions, and integrate it with indigenous technologies.”



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Convention58, a multinational environmental treaty on prevention of pollution from ships

establishes discharge and emission standards for vessels sailing international waters.

The boundary of a sectoral project includes all individual plants of a relevant sector in a

country or region where existing CDM projects can be incorporated into S-CDM to avoid double

counting. S-CDM eventually renders CDM as a government driven mechanism that applies

uniform policies and standards to a particular sector across the country. Projects that use similar

technologies are bundled together creating economies of scale that reduce transaction costs.

Developing countries need to be presented with the prospects of gaining financial and

technological incentives if and when they participate in S-CDM. A policy-based sectoral

approach on introduction of appropriate polices by participating governments can draw more

commitments from the international community of participating nations.59

Credits generated

through S-CDM are issued to governments instead of individual companies which participate in

emissions trading acting as a major incentive for companies to put in more efforts to achieve

compliance and generate more credits for the cross-border emissions trading market.

Sectoral approach needs sectoral crediting mechanisms (SCM) based on “sectoral no-

lose60 targets” (SNLTs) where the crediting baseline is set below business-as-usual emissions

and negotiated internationally for the purpose of uniformity.61

Credits under this mechanism are

issued only when the aggregated emissions from all activities included in the sector boundary are

58 See http://www.imo.org/Conventions/contents.asp?doc_id=678&topic_id=258#6; See also Annex I, Prevention of pollution of Oil.59 See Akihiro, supra note 25.60 „No-lose‟ means that there is no penalty for not meeting the target, but there positive incentives for exceeding it.See supra note 44 at 49661 See supra note 44.



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below a sector crediting baseline.62 SCM has its limitations in addressing carbon leakage63 due

to international competition in energy sectors and the need for voluntary participation of the

parties. Sectoral approach addresses competitiveness when a state can shield a sector producing

globally traded goods from emission reduction requirements by concentrating its mitigation

efforts in other sectors, giving the protected sector a competitive advantage over its international

competitors.64 IETA, in its report65 seeks “investment security” for projects registered in host

countries or sectors, in the event of a sectoral crediting mechanisms (SCM)66

coming into

operation, declaring eligibility for full-crediting post-2012 in order to avoid double-counting of

emission reductions.

67

Governments committing themselves to mitigation actions involving a

particular sector can execute multilateral sectoral agreements making these agreements a part of

their Kyoto commitments.68

Sectoral agreements between governments could temporarily

replace the urgent need for a Kyoto-type agreement and yet show sufficient progress in

mitigation actions. Industries within a sector like the aluminum and cement industry enter into

sectoral agreements and are some working examples of a sectoral approach.69 Governments

which prescribe sectoral approach falter on achieving cost-effectiveness and gathering

information from private sectors which own most of the technologies and intellectual property

62 See supra note 25.63 Leakage is defined as the net change of anthropogenic emissions by sources of greenhouse gases which occursoutside the project boundary, and which is measurable and attributable to the CDM project activity (3/CMP.1,Annex, paragraph 51) see also http://cdmrulebook.org/330. 64 Daniel Bodansky International Sectoral Agreements in a Post-2012 Climate Framework, Pew Center on GlobalClimate Change at 6.65 See supra note 2566

Sectoral crediting mechanisms, introduced by Bosi and Ellis, could be designed as either a) Policy-basedcrediting, where credits would be generated by adopting and implementing friendly GHG policies in particularsectors; b) Rate-based (indexed) crediting where GHG emissions below a certain intensity level would generateemission credits; and c) Fixed sectoral emission limits where emissions “credits” could be generated if a sector or

company emits at a lower level than an agreed, fixed, limit: Exploring Options for “Sectoral Crediting Mechanisms”

by Martina Bosi, International Energy Agency and Jane Ellis, Organization for Economic Co-operation andDevelopment (OECD)67 See supra note 2568 See Bodansky, supra note 64 at 3.69 See Bodansky, supra note 64 at 4

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rights. Global pooling of updated technologies collected industry-wise and sector-wise can help

participating countries attain uniformity in diffusion of technologies within least developed

countries.

Countries where common measurement, reporting and verification methods have been

stipulated within a single sector will force governments to ensure compliance in Annex I

countries.70

Following this, it might become essential to conceive an international emissions

trading market to achieve sectoral agreements with minimal costs.71

AWG-KP has been

contemplating improvements to GHG emissions trading for the period after 2012 by introducing

crediting on the basis of NAMAs and sectoral targets and multiplication factors to increase or

decrease the CERs issued for specific project activity types.72

V. CONSTRUCTION INDUSTRY AND S-CDM.

Building industry is one sector that is ideal for a sectoral approach, since it is responsible

for more than one-third of global energy use

73

. Energy is consumed during the use stage of

buildings, for insulation, air-conditioning, ventilation and lighting. Manufacture of building

materials, their usage in construction activities and subsequent demolition of old buildings

add to energy consumption. Older buildings often lack energy efficiency. IPCC in its fourth

assessment report74

highlighted the fact that building sector has a greater potential for

significantly reducing GHG emissions. Coordination and exchange of information between

70 See Akihiro, supra note 55, at 3171 See Akihiro, supra note 55 at 31.72 Deborah Murphy, John Drexage and Peter Wooders, International Carbon Market Mechanisms in a Post-2012Climate Change Agreement, May 2009 for International Institute for Sustainable Development.73 Cheng, C., Pouffary, S., Svenningsen, N., Callaway, M., The Kyoto Protocol, The Clean Development Mechanism and the Building

and Construction Sector – A Report for the UNEP Sustainable Buildings and Construction Initiative, United Nations EnvironmentProgramme, Paris, France , 200874 See http://www.ipcc.ch/ipccreports/ar4-wg1.htm;



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various departments of a building industry, like architectural, engineering etc, considerations

relating to purpose of the building and its energy efficiency will help the industry attain

international standards.

As the second most populous country, India is emerging as an important political leader

among developing nations in climate change negotiations. Home to over one billion people

living in different climatic zone, India, ranks sixth among nations, in terms of energy demand

and energy use which is the major source of GHG emissions.

Countries like India need energy as the prime resource to improve living standards of

those below poverty line. The buildings in India consume more energy for heating and cooling

compared to those in temperate climates. The Energy Conservation Act, 2001 provided a

framework for promoting energy efficiency and established Bureau of Energy Efficiency

(BEE)75 to “institutionalize” energy efficiency services and facilitates implementation of the

Act. The BEE action plan, 2002, mandated all government organizations reduce their energy

consumption by 30% and the private organizations by 20% over a period of 5 years. CDM

opened up possibilities of international investments and technology transfer to improve upon the

energy policy of India.

Construction industry per se has a huge share of responsibility in the fight against global

warming and making buildings more sustainable. Increasing population and the surging need for

newer buildings account for a third of world‟s energy consumption, attributed exclusively to a

nation‟s construction activities and operations. The concept of sustainable development

encompasses green buildings which use limited resources for the purpose of construction making

75 http://www.bee-india.nic.in/index.php



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the buildings more durable. The resultant effect of a green building is to mitigate the adverse

effects it might have on natural habitats and bio-diversity. Older buildings that have been rebuilt

or retrofitted with an aim to reduce energy consumption and pollution fit into the category of

green buildings. Building designs under this concept tend to be more adaptable as they can be re-

arranged, re-used for multifarious activities. The science of construction extends to assembly of

building materials targeting adaptability and minimizing transportation costs for the resident. A

building plan module for “green buildings” normally includes photovoltaic, wind or solar power

electricity generation to meet its energy requirements and render them more energy efficient.

Many of the CDM methodologies have been used in the construction of green buildings to

improve demand side and supply side energy efficiencies. ITC Hotel Sonar Bangla, Kolkata,

India and Technopolis, Kolkata, India, are two green buildings which have been refused

registration as CDM projects by UNFCCC reiterating the need for reforms in CDM.

It is important that DNAs develop common baselines that are essential to facilitate CDM

projects in new and existing buildings simplifying the demonstration of additionality.76

Common baselines based on performances could be established at the regional and provincial

levels based on building types, primary energy used and climate zones. These baselines are

expected to promote sustainable development among poor communities.77

Low-income families

consume less energy and their GHG emissions could be reduced substantially by improving the

energy efficiency of their residences. SCM will achieve optimal emission reduction results if

host countries mandated clear energy efficiency standards and regulations for the building

76 The Kyoto Protocol, The Clean Development Mechanism, and the Building and Construction Sector, a UNEPreport at 4977 Id.; see at 50



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sector.78 The sectoral approach may be regulated by way of performance standards, a standard

based on energy consumed per square meter. Reductions achieved by implementing the

performance standards and by exceeding the crediting baselines shall be eligible for CERs.79

Adopting a sectoral approach with energy performance standards and common baselines would

ensure consistency and effective implementation of the Bali Action plan.80 Performance based

standards are cost-effective if governments “specify, measure and monitor performances.”81

India has been providing housing for the poor in rural and urban areas rehabilitating them

from shanty towns and slum dwellings to better living conditions. It is very important that these

newer buildings are in keeping with the updated energy policy and awareness created among

citizens on the impact of lifestyle on energy efficiency and climate change. The downside of

using CDM as a tool in the building industry is the high transaction costs increasing the costs in

making buildings more energy efficient. International certification and practices for energy

efficient and green buildings, such as Leadership in Energy and Environmental Design (LEED) 82

have been adopted by developing countries, yet these countries lack access to advanced

technologies to improve their energy efficiencies.

VI. TRANSPORTATION INDUSTRY AND S-CDM.

Air quality in India has reached alarmingly levels. Most cities in India have exceeded the

National Ambient Air Quality standards (NAAQS), while particulate matter has exceeded World

Health Organization standards. About 900 million vehicles, excluding two-wheelers, are seen

78 See supra note 76, at 5179 See supra note 76, at 5180 See supra note 76, at 5281 See supra note76, at 53.82 http://www.leed.net/



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plying the roads of India emitting more than 26 percent of its GHG emissions.83 The emission

models to estimate vehicular emissions such as LEAP (Long-Range Energy Alternative

Planning) VAPIS (Vehicle Air Pollution Information System) are not suited for local

environments such as driving patterns and traffic conditions and incompatible with the traffic

management system existing in India.

In the case of transport, projects that aim at emission reductions are developed by the

public sector and local governments encompassing passenger or freight transport, road or rail

transport. International agreements on fuel economy standards make commitments to eliminate

fuel subsidies and approve funding for improvements in the transport sector. These agreements

go a long way in promoting NAMAs like mitigation actions in developing countries.

The estimated cost of health damage on account of vehicular emissions has crossed the

US$175 billion mark. The impact of automobile emissions is visible in the damage caused to the

health of those living in the metropolitan cities. Therefore, it is imperative that India adopts

advanced technology for vehicle manufacturing and fuel programs to improve its transport

system management. There must be a perceptible shift from personal transportation to public

transportation to reduce vehicle kilometer traveled, a task which can be achieved by developing

requisite infrastructure to serve the purpose. India needs expanded network of mass

transportation like the Mass Rapid Transit System (MRTS) to promote usage of public transit

among commuters. With the introduction of advanced technology in the manufacture of

automobiles, it is essential that fuel efficiency standards witness improvement in keeping with

international standards on technology. India recently implemented Bharat IV standards for its

83 K.Nesamani, Estimation of Automobile Emissions and Control Strategies in India, 2009.



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four-wheeled vehicles in 13 cities, a step that is likely to halve the particulate matter and nitrous

oxide emissions. The inspection and maintenance program to check the functioning of emission

control systems in a vehicle, although mandatory, faces lax enforcement in India. As the

percentage of dirty vehicles increased with age, the high emitting vehicles are not taken off roads

due to lack of stringent regulations and enforcement. India is therefore burdened with a lot of

unfit vehicles increasing air pollution in major cities. Tolls and increased parking tariff could

deter private vehicle usage but if public transportation modes are not modernized to suit the

corporate traveler it would remain a half-hearted attempt. In countries like India with no reliable

monitoring systems, vehicular emissions remain a major cause for disdain in urban areas. The

standards for vehicle maintenance and issuance of fitness certificates for vehicles do not meet

international standards with no means to estimate the road-worthiness of a vehicle. The ill-effects

of vehicular emissions can be witnessed in the pollution levels of major cities like Delhi,

Mumbai, Kolkata and Chennai where the number of victims of asthma and other respiratory

diseases increased manifold.

The need for a sectoral approach by automobile industry for the Indian market can help

set international standards for vehicle inspection, maintenance, manufacturing, performance and

fuel efficiency improving overall efficiency of vehicles. Sectoral agreements help put in place

harmonized standards for fuel economy ensuring uniform compliance of fuel efficiency

standards. These agreements under automobile industry can harmonize import tariffs to help

developing nations introduce advanced technology vehicles reducing vehicular emissions within

a shorter span of time.



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India needs to reduce its sales tax and import duties to encourage assimilation of

advanced technologies into its automobile industry. It has to improve its fuel quality by reducing

the sulfur and benzene content in its diesel to gain from after-treatment technologies such as

catalytic converters. India needs to create a reliable GHG accounting system to render S-CDM as

a credible mechanism. In all future scenarios, the metropolitan cities are expected to show

increase in population leading to increased consumption of energy and carbon dioxide emissions

in the transportation, industrial and residential sectors. S-CDM in the transportation sector can

help India strengthen its domestic policies and establish international standards of regulation into

its system. India has to envision retirement of old vehicles by offering a subsidy per vehicle to

bring in new energy efficient vehicles using alternative fuel and introducing hybrid vehicles.

Organization for Economic Cooperation and Development (OECD) defined a subsidy as

“any measure that keeps prices for consumers below market levels, or for producers above

market levels or that reduces costs for consumers and producers.” IEA defines energy subsidies

as “any government action that concerns primarily the energy sector that lowers the cost of

energy production, raises the price received by energy producers or lowers the price paid by

energy consumers”. A per-unit cash payment to producers or consumers is the simplest form of

cash subsidy and could play out well in situations where an owner of a vehicle is expected to

phase out an older vehicle which is functioning well enough. Subsidies aim at producers through

a grant paid for each unit of production or for every hybrid vehicle produced.

A policy based approach employs a complex set of mechanisms including targets,

performances and technology standards, pricing reforms, subsidies, taxes and other incentives.

This approach endeavors to promote energy efficiency through introduction of low-carbon fuels,



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renewable energy technologies, carbon capture, storage and sequestration. Sectoral approach can

make easier the compliance of climate regime norms and render it binding on parties to sectoral

agreements. The guidelines84on compliance with and enforcement of multilateral environmental

agreements (MEAs) were adopted by the UNEP Governing Council. These guidelines which are

advisory strengthen the process of implementation of MEAs through relevant laws, regulations,

policies and other measures at the national, sub-regional, regional and international levels.

VII.

ROLE OF INDUSTRIES IN SECTORAL APPROACHES

In sectoral approaches, industries and industry organizations play the role of collecting

information and data about the status of a sector, setting sector boundaries, documenting current

industry performances on agreed metrics or key performance indicators, identifying best

practices, comparing performances of equipment, plants or countries; sharing and diffusing best

practices within companies to increase operational efficiency, including diffusion of technology

within the sector, engaging governments and large installations in emerging economies where

the highest emission growth has been observed and where largest potential for emission

reductions lie.85

International industry organizations provide a forum to identify appropriate best-available

technologies negotiated on behalf of the industry as a whole at national or regional level; to

receive GHG credits on behalf of its non-Annex I members based on overall performance against

the baseline, and apportion them among participants under the jurisdiction of the organization.

84 http://www.unep.org/DEC/docs/UNEP.Guidelines.on.Compliance.MEA.pdf 85 Noriko Fujiwara, Sectoral Approaches to Climate Change – What can industry contribute? May, 2010.



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Industry organizations could reach an agreement to run a negotiation forum and to monitor,

report GHG emissions reductions while contributing to capacity-building.86

Appointment of a

consultative body based on public-private partnership can operationalise sectoral approaches by

proposing effective tools and systems to deliver agreed goals.87

These steps could help

governments make use of business expertise in sectoral approaches.

VIII. SECTORAL AGREEMENTS

Sectoral agreements avoid lock-in of carbon intensive investments and address

international competitiveness by adopting a transnational approach removing trade barriers

within a particular sector diffusing technology and efficient practices. This understanding could

manifest itself in voluntary industry initiatives and government to government agreements. These

agreements “tend to break the political deadlock between developed and developing countries by

recognizing the need for international cooperation on technology and capacity building to fight

climate change effects”.88 Although private sector takes the initiative to enter into sectoral

agreements it needs government intervention when it comes to establishing necessary regulatory

framework and institutional strengthening. A sectoral agreement on transportation would

obligate participating country to develop modern public transport systems and advanced traffic

management systems. Aviation and shipping are two other sectors that are ideal for sectoral

climate agreements implementing international regulation. These agreements commit funding for

joint research and development in advanced technologies and help resolve intellectual property

rights for effective technology transfer. Trade exposed energy-intensive industries are ideal for

transnational sectoral agreements. Sectoral agreements in construction industry will change the

86 Id.; see at 6.87 See Fujiwara supra note 85, at 8.88 Michel Colombier and Emmanuel Guerin for The Climate Group, Sectoral Agreements.



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way buildings are designed and constructed to reduce energy related carbon dioxide emissions.

The possibility of entering into multi-sectoral agreements under a comprehensive agreement

tends to cover more sectors and can address higher volume of emissions. It is imperative that

transnational sectoral agreements take into consideration the crucial role played by industries and

international industry organizations in the negotiations. Sectoral agreements can compensate for

the absence of a comprehensive post-Kyoto climate agreement and gain political acceptance

among nations. They can work effectively within the UNFCCC till such time parties agreed upon

a post-2012 climate agreement.

IX. CONCLUSIONS

Future international climate negotiations carry a lot of stake for the global society and it is

crucial that every nation rises to meet this challenge. With so many solutions on the table, steps

have to be taken with immediacy to reform the existing framework. A timely agreement to

stabilize the global warming threat by garnering enough funding to support mitigation and

adaptation activities and meeting the objectives of UNFCCC and Kyoto Protocol. An important

suggestion by some of the authors is that the CoP/MoP agrees to a two-thirds majority vote

rather than reaching an absolute majority consensus to finalize an agreement. The international

community needs specific commitments on emission reductions from individual countries

including funding to be made available to poorer nations. The International Union for

Conservation of Nature (IUCN), in its paper presented at CoP14, recommended that parties

conclude climate negotiations to avert a gap between the first and second commitment period of



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the Protocol.89 The United Nations Environment Program (UNEP) predicts that more than eight

thousand CDM projects will either be operational or in the pipeline by 2012, making $25-30

billion USD available to developing countries.90 The sense of urgency among nations to

conclude an equitable climate change regime by implementing domestic policies and measures to

enhance mitigation actions needs to be reinforced. Nations must permit a third-party review of

their domestic policies and address pollution from transportation, land use, forestry and

agricultural sectors through S-CDM increasing projects in renewable energy sector.

In a post-2012 regime S-CDM should be accompanied by measures to eliminate perverse

incentives and increase the data available for review of projects to confirm additionality

requirements. Reforming energy subsidies could reduce emissions and provide new funding for

low-carbon energy investments in developed and developing countries. Subsidies to fossil fuels

act as a negative tax on carbon emissions, encouraging carbon-intensive energy production

eliminating some of the energy subsidies which might render diffusion of clean technologies

easier and cheaper. S-CDM and Sectoral no-lose targets are viable means to improve CDM

eliminating the additionality requirement. Sectoral no-lose targets are negotiated where overall

quantitative outcomes are pre-determined to circumvent the additionality issue at the sectoral

level. This could reduce the transaction costs per unit by spreading them over large volume of

emission reductions. CDM must be re-designed to act as a vehicle for technology transfer and its

advantages over JI enhanced to improve its success rate. S-CDM must be viewed as a

mechanism to improve energy efficiency, increase mitigation activities and as a tool to achieve

sustainable development. Developing common baselines for individual sectors ensures

consistency and transparency across the regulatory framework of S-CDM. Nations must

89 http://cmsdata.iucn.org/downloads/unfccc_cop14_mitigation_pp_19_nov_08_final.pdf 90 http://cdmpipeline.org/overview.htm#3



endeavor to design domestic policies that are in keeping with the internal policies of the

participating countries to ensure broader and uniform applicability of international standards. S-

CDM could be a better working model of CDM and is capable of implementing the Bali Action

Plan. Sectoral agreements should eventually lead to an overarching comprehensive MEA

supporting broader environmental goals and garnering international support for domestic

policies. 91

91 See Colombier, supra note 88 at 3.

S-CDM in a Post -2012 Scenario.

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