Opponents of JI argue that JI reduces the willingness of developed countries to "take the lead" in mitigating climate change, compromises the national sovereignty of host countries, and is too costly. By allowing Annex I countries to offset their commitment to reduce GHG emissions with investments in non-Annex I countries, JI decreases the imperative for developed countries to invest in GHG abatement projects within their own borders. The validity of these claims will depend on the implementation and final structure of JI agreements in addition to the future commitments of all parties under the FCCC. Any JI project involving international emissions abatement measures will require reaching an agreement between two parties. There are costs and benefits associated with negotiating agreements, and it is important to weigh both the potential costs and environmental opportunities when evaluating any JI project.

Joint Implementation has been criticized for directly undermining the objectives of the FCCC. It is feared that enabling Annex I countries to offset their emissions reduction commitments could result in uncontrolled global emissions growth (Jackson, 1995). This implies that JI projects will not be monitored to ensure that they are achieving the reductions claimed or that the emissions offsets gained through JI will not be equivalent to the Annex I countries' reduction commitments. Initially, JI is unlikely to occur at a large enough scale for this criticism to hold, and the number of allowable JI projects available to each country can always be limited. Additionally, it is improbable that Annex I countries will invest in JI projects that cannot be monitored or that result in a greater amount of emissions due to emissions allocation or accounting differences between the two nations. As long as there are credible certification and enforcement measures, it will be difficult for parties to cheat or violate their commitment to reduce GHG emissions.

Politically, JI is criticized for threatening the national interests and sovereignty of the host country (Parikh, 1995). This argument overlooks the fact that JI projects are voluntary and that JI provides developing countries with direct access to financial and technological resources. The amount of financial and technological resources available, however, will depend on how JI investment affects and interacts with other international monetary flows. Many critics of JI fear that the level of international aid dedicated to other development issues will decline as a result of increased JI investment. Although host countries may not always be in a strong position to negotiate for JI projects that suit their development needs, JI offers an opportunity for developing countries to attract additional international assistance. By designing appropriate JI criteria and approval processes, the sovereignty of the host countries can be better protected.

The attractiveness of JI is that it achieves GHG emissions reductions at a minimum global cost. This argument assumes that the marginal cost of abating emissions in developing countries and countries with economies in transition is lower than the marginal cost in developed nations. It is unclear whether this is true or whether the transaction costs associated with implementing JI, particularly monitoring costs, cause international projects to be more costly than initially assumed. Opponents of JI argue that transaction costs reduce the number of relatively low-cost JI projects and diminish the potential contribution of JI to mitigating climate change. Allowing JI may cause parties to overlook economical energy saving projects available in developed nations (Jackson, 1995).

2.3 International Support for Joint Implementation and Tradeable Entitlements | Contents |

In October 1993, President Clinton announced the U.S. Climate Change Action Plan for stabilizing GHG emissions at 1990 levels by the year 2000. Although the plan relied entirely on domestic actions, the Administration recognized the potential for low-cost abatement activities in other countries. In June 1994, the U.S. Government established the U.S. Initiative on Joint Implementation (USIJI). The USIJI aims to 1) encourage rapid development and implementation of mutually voluntary, cost-effective projects, particularly in developing countries and countries with economies in transition; 2) promote a broad range of projects to test and evaluate methodologies for measuring, tracking, and verifying JI projects; 3) establish an empirical basis for developing international criteria for JI; and 4) encourage private sector investment and innovation in technologies for reducing or sequestering GHG emissions (U.S. Initiative on Joint Implementation, 1996).

Any U.S. private sector firm, non-governmental organization (NGO), government agency, or individual is eligible for participating in the USIJI program, and as of April 1996, the USIJI had reviewed fifty-one JI proposals (U.S. Initiative on Joint Implementation, 1996). Of these, fifteen were accepted, eighteen were placed "in development," ten were rejected, and eight were withdrawn. The projects placed "in development" were not accepted because they lacked host country acceptance, raised financial and emissions additionality questions, or contained insufficient monitoring and verification information. Table 3 lists the projects accepted into the USIJI program. The USIJI is one of the first JI pilot programs worldwide and is designed to build a core of experience and knowledge for post-pilot phase JI programs.

International criteria for JI were initially discussed at the first meeting of the FCCC Conference of the Parties (COP-1) in Berlin in April of 1995. At COP-1, the Parties agreed to implement an initial pilot phase of JI referred to as "Activities Implemented Jointly" (AIJ). The initial AIJ phase will end no later than the year 2000, and during AIJ, no credits will be awarded to any party for achieving GHG emissions reductions (U.S. Initiative on Joint Implementation, 1996). In addition, the COP-1 resulted in the Berlin Mandate, an agreement to set quantified GHG reduction targets for specific years (such as 2005, 2010, or 2020). By initiating the discussion of JI and quantifiable emissions reduction targets, AIJ and the Berlin Mandate provide a basis for analyzing the feasibility of JI and likelihood that nations will accept a verifiable emissions cap. An emissions cap is necessary for establishing a tradeable emissions entitlement system and useful for crediting international JI projects.

At the second meeting of the Conference of Parties (COP-2) in July of 1996, the U.S. voiced its support of JI and the use of tradeable entitlements as a least-cost method for mitigating climate change (Affairs, 1996). Recognizing that most developed countries will not achieve the goal of reducing emissions to 1990 levels by the year 2000, the U.S. advocated the adoption of medium term reduction targets, after 2010, that are both binding and achievable. Individual nations should be allowed maximum flexibility in achieving these reduction targets and mitigation measures should be implemented through national programs. Additionally, the U.S. stressed the need for all nations, including developing nations, to take actions to limit GHGs. The COP-2 meeting provided a blueprint for action that was widely endorsed but failed to define specific provisions or requirements for JI. Instead, it instructed the Parties "to accelerate negotiations on the text of a legally binding protocol or another legal instrument to be completed in due time for adoption at the third session of the Conference of the Parties"[4] in December 1997.

Table 3. USIJI Projects

Project Title	U.S. Participants	Host Country Participants	Emissions Reductionsa
Belize			(mt C)
Rio Bravo Carbon Sequestration Pilot Project	Nature Conservancy; Pacificorp; Cinergy; Wisconsin Electric Power Co.; Detroit Edison	Programme for Belize	1,300,000
Costa Rica
Aeroenergia S.A. Wind Facility	Power Systems, Inc.; Bluefields, International; EnergyWorks	Aeroenergia, SA	9,800
BioDiversifix: Forest Restoration	The Nature Conservancy	Guanacaste Conservation Area; National System of Conservation Areas; National Institute of Biodiversity	5,040,000
CARFIX: Sustainable Forest Management	Wachovia Timberland Investment Management	Foundation for the Development of Central Volcanic Mountain Range; MINAE	5,939,000
Dona Julia Hydroelectric Project	New World Power Corporation	MINAE; Compania Hidroelectrica Dona Julia	57,400
ECOLAND: Esquinas National Park	Tenaska, Inc.; Trexler and Associates, Inc.; National Fish and Wildlife Foundation	COMBOS Foundation; MINAE; Council of the Osa Conservation Area	345,500
Klinki Forestry Project	Reforest the Tropics, Inc.	Cantonal Agricultural Center of Turrialba	1,968,000
Plantas Eolicas Wind Facility	Merrill International, Inc.; Charter Oak Energy, Inc.; Northeast Utilities; KENETECH Windpower, Inc.	Plantas Eolicas S.A.	71,800
Tierras Morenas Windfarm	New World Power Corporation	MINAE; Energia del Nuevo Mundo S.A.; Moilnos de Viento del Arenal S.A.	51,000
The Czech Republic
City of Decin: Fuel-Switching for District Heating	Center for Clean Air Policy; Wisconsin Electric Power Co.; Commonwealth Edison Co.; NIPSCO Development Co., Inc.	City of Decin	165,600
Honduras
Bio-Gen Biomass Power Generation Project	Nations Energy Corporation; Add-on Energy 1; International Utility Efficiency Partnership	Biomasa-Generacion	647,400
Solar-Based Rural Electrification	Enersol Associates, Inc.	COMARCA; AHDEJUMAR; AHDE	4,700
Nicaragua
El Hoyo - Monte Galan Geothermal Project	Trans-Pacific Geothermal Corporation	C and R, Inc.	5,391,000
Russian Federation
RUSAFOR: Saratov Afforestation Project	Oregon State University; U.S. EPA	Saratov Forest Management District, Russian Federal Forest Service; International Forestry Institute	35,000
RUSAGAS: Fugitive Gas Capture Project	Oregon State Univ.; U.S. EPA; Sealweld Corporation; Sustainable Development Technology Corpation	GAZPROM; Center for Energy Efficiency	8,182,000
a Cumulative projected project greenhouse gas emissions reductions in metric tons (mt C) of carbon equivalent. A metric ton of carbon equivalent is one metric ton of carbon or any quantity of one or more other GHGs determined as equivalent by the global warming potentials defined in the U.S. Draft Protocol Framework.

The U.S. Draft Protocol Framework is the U.S. proposal of a climate change policy architecture. The January 1997 Draft allows carbon equivalent[5] emissions trading among Parties and credits JI projects with non-participating countries.[6] Additionally, it requires the development of national measurement and reporting systems for tracking anthropogenic emissions as well as compliance and enforcement programs. The Protocol provides a flexible architecture that allows future policy changes, but it lacks a clear mechanism for moving from short-term to long-term goals. According to Schmalensee, "the Report pays insufficient attention to the long-term consequences of possible near-term choices and fails to develop analytical points of which policy-makers should be aware."[7] Despite its short-term view, the U.S. Draft Protocol Framework is a clear commitment in support of JI and tradeable emissions entitlements as necessary instruments in the climate change policy architecture.

2.4 A Comprehensive Process for Achieving GHG Emissions Reductions| Contents |

Tom Tietenberg and David Victor have proposed a comprehensive structure for limiting GHG emissions that incorporates voluntary JI projects and culminates in an international tradeable emissions entitlement market (Tietenberg and Victor, 1994). As compared to the architecture proposed in the U.S. Draft Protocol Framework, Tietenberg and Victor's proposal provides a framework for developing JI and a tradeable emissions entitlement market from an initial to a final phase. The framework accounts for short and long-term economic and environmental concerns and allows flexibility in adapting to new scientific data or incorporating additional parties.

According to Tietenberg and Victor, an effective trading system relies on two types of institutions and procedures. The first involves the market institutions that specify the conditions under which entitlements can be exchanged and provide information on the entitlement trades as well as financial transfers. These market institutions must be complemented by administrative institutions. Administrative procedures ensure that the market process operates efficiently and produces the environmentally desirable outcome. Tietenberg and Victor highlight the issues associated with designing the administrative structure, including the role of certification, monitoring, and enforcement, and recommend a system that evolves through three stages.

The first stage has been established by the FCCC and involves only those countries that have accepted the goal of stabilizing GHG emissions at 1990 levels by the year 2000. The stabilization goal is not a requirement and only applies to a limited number of countries. According to Tietenberg and Victor, countries have two choices for meeting this goal. They can either seek reductions within their own borders or through international abatement projects. The transborder approach closely resembles the AIJ pilot phase. However, the AIJ phase and Tietenberg and Victor's first stage differ in that AIJ projects do not receive credit for achieving emissions reductions. Although the first stage bears little resemblance to a market in tradeable emissions entitlements, it enables participants to learn about the comparative costs of monitoring and measuring emissions as well as the costs of different types of JI projects.

In the second stage of Tietenberg and Victor's JI process, the stabilization goal is replaced by specific emissions requirements for each of the participating countries. The COP-1 and COP-2 meetings as well as the U.S. Draft Protocol Framework have begun the international discussion of emissions reduction targets, but strict requirements have not yet been set. Once reduction requirements are defined, they will provide a basis for allocating actual emissions entitlements that are freely transferable among participating countries. Although Tietenberg and Victor limit emissions entitlements to CO₂ during this stage, trades in other GHGs are possible subject to certification procedures. The informal trading system of the first stage is replaced by an organized exchange as well as a reporting network designed to minimize transaction costs and provide a public means of accountability. The second stage does not presume any particular domestic strategy for achieving emissions reductions.

During the second stage, non-participating countries can enter the trading process in two ways. First, non-participating countries can negotiate a country-specific limit on CO₂ emissions with the COP and thereby receive a certified number of national emissions entitlements. By accepting a country-specific limit, the non-participating country would become a full participant in the FCCC agreement and gain complete access to the tradeable entitlement market. This transition is comparable to an Annex B country, as defined by the U.S. Draft Protocol Framework, accepting an aggregate emissions cap similar to, but less constraining than, the cap for an Annex A or Annex I country. The U.S. Draft Protocol Framework's differentiation between Annex A and Annex B countries corresponds to Tietenberg and Victor's distinction between participating and non-participating nations. A second means for non-participating nations to join the tradeable entitlement market is by creating and selling offset reductions through individual JI projects. The second method is much more limited than the first, but it allows increased participation by countries that are not yet prepared to fully agree to the FCCC's restrictions.

The final stage of Tietenberg and Victor's process expands entitlement trading to include more participants, a greater number of trades, and all GHGs. More governments will implement domestic markets that parallel the international trading market and a much larger number of trades conducted privately between sources will be expected. Developing the market in these dimensions will result in a denser trading market and greater potential cost savings and flexibility. Each of these developments is a matter of degree and three administrative procedures, certification, monitoring, and enforcement, are necessary for a smooth evolution from the first to final stage.

2.5 Essential Administrative Procedures

2.5.1 Certification | Contents |

The certification requirements for created entitlements differ from the requirements for allocated entitlements. Allocated entitlements are certified once a country accepts an emissions reduction target. Created entitlements are certified on a case-by-case basis. As opposed to allocated entitlements, created entitlements must satisfy the following three conditions: 1) created entitlements must demonstrate emissions reductions below an established baseline, 2) created emissions reductions must be quantifiable and feasible, and 3) created emissions reductions must be enforceable (U.S. Initiative on Joint Implementation, 1996).

2.5.2 Monitoring and Enforcement | Contents |

Two classes of sources must be monitored in the climate change policy architecture. First, emissions sources in participating countries require monitoring to ensure that emissions levels are at or below target levels. Under the FCCC, participating countries have agreed to report national GHG emissions, and most of these nations are already technically prepared to provide accurate emissions data.[8] The second class of sources that demands monitoring are sources in non-participating countries that have earned created entitlements through JI projects. Monitoring requirements for these sources include establishing baseline data, verifying that offset reductions are achieved, and ensuring that total emissions do not exceed the target emissions level minus any traded credits.

While monitoring provides the information for judging claims of non-compliance, enforcement is the process for imposing penalties. The challenge to a tradeable entitlement system is that as the price of the entitlements rises, incentives to defect will increase and as the JI system evolves, the number of actors in the market will grow. Traditional international enforcement instruments are not suited to handle a global entitlement market that results in large financial transfers and involves many parties. Therefore, Tietenberg and Victor argue that JI and the tradeable emissions entitlement market will have to rely on domestic enforcement, international standards and accepted penalties, as well as a clear dispute resolution process.

2.5.3 Implementation Issues | Contents |

The definition of the emissions baseline level and allocation of entitlements is relatively straightforward for the countries that have accepted country-specific emissions reduction targets. Once the FCCC's stabilization goal is replaced by a specific reduction target, each country will receive entitlements based on a combination of their historical emissions levels and an allocation rule. These countries have accepted the responsibility of mitigating climate change through emissions reductions. Therefore, they are likely to agree to a mutually acceptable allocation rule through international negotiations. The difficulty in assigning entitlements arises in the case of created entitlements.

The certification of created entitlements raises the issue of "additionality." Created entitlements are intended to reflect "additional" emissions reductions, not reductions that would have occurred regardless of whether the JI project was undertaken or not. Currently, USIJI proposals are required to demonstrate additionality by presenting a "reference case," showing the emissions that would have occurred without the JI project, as well as a "project case," demonstrating the emissions reduction projections over the life of the project (U.S. Initiative on Joint Implementation, 1996). The calculation of the reference and project cases is a technical issue and requires some form of verification if parties are to accept JI as a legitimate tool for mitigating climate change. Proving that JI emissions reductions are real and additional is necessary both for effectively crediting created entitlements and for ensuring the integrity of the international tradeable emissions entitlement market. These concerns can be partially alleviated by utilizing appropriate monitoring procedures as well as international guidance for standardizing the created entitlements certification procedures.

The relationship between the created entitlements emissions reductions and the eventual emissions cap for the host country influences the incentives for non-participating countries to accept JI projects and to limit their current emissions. An eventual emissions cap based solely on historical emissions creates an incentive to defer abatement actions and to reject JI investment now in order to elevate the future established cap. Additionally, a historical emissions rule does not account for developing countries' desire to continue to industrialize. It is generally agreed that developing countries will be given entitlements according to an allocation rule that accounts for future development, and this rule may be calculated on a population or GDP basis (Shah, 1994). To the extent that the eventual emissions cap is determined independently of historical emissions, the incentive to pollute more now is decreased. The issue of "additionality" affects the certification of individual JI projects, while the determination of the eventual emissions cap influences the incentive for host countries to accept JI investment.

The AIJ program highlights the importance of establishing an acceptable crediting system for created entitlements whether it is based on historical emissions or allows for additional industrial growth. According to a 1995 U.S. Department of Energy (DOE) study on the benefits and obstacles of JI projects, a primary obstacle to participation in the AIJ program is the lack of GHG offsets crediting (Vetleseter, 1995). At the COP-1, the parties agreed that an investor conducting JI projects under the AIJ pilot phase would not receive credit for any GHG emissions reductions. Essentially, this decision removed a major benefit from investing in JI projects and has acted to discourage broad participation in the AIJ program.

3. The United States Acid Rain Program | Contents |

To achieve its SO₂ emissions reduction, the Acid Rain Program requires a two-phase tightening of the emissions restrictions placed on fossil fuel-fired power plants. Phase I begins in 1995 and affects 263 units[9] at 110 mostly coal-burning electric utility plants located in the Eastern and Mid-Western States. These units must reduce emissions to a level equivalent to 2.5 pounds of SO₂ per million Btu (lbs SO₂/mmBtu) times the average of their 1985 through 1987 fuel use or "baseline." Phase II, which becomes effective in 2000, tightens the annual emissions limits placed on the Phase I units, sets restrictions on about 2000 smaller units fired by coal, oil, and gas, and imposes a permanent annual emissions cap of 8.95 million tons. All existing generation units with an output capacity greater than 25 megawatts (MW) as well as all new utility units must comply with the Title IV provisions. The two-phased approach is designed to achieve early reductions by the largest, highest polluting plants that are thought to contribute most to the acid rain problem in the Eastern half of the U.S. and Canada.

Title IV also calls for a 2 million ton reduction in nitrogen oxide (NO_x) emissions from 1980 levels. Similar to the SO₂ emissions reduction requirements, the NO_x program is implemented in two phases, in the years 1996 and 2000. However, the NO_x program does not permanently cap NO_x emissions nor does it utilize an allowance trading system. All of the NO_x emissions reductions will be achieved by coal-fired utility boilers that are required to install low NO_x burner technologies and to meet stricter emissions standards.

3.1 Key Elements of the Tradeable Permit Market | Contents |

The owner or operator of any source subject to the Acid Rain Provisions is required to install, certify, and operate a Continuous Emissions Monitoring System (CEMS) on each affected unit at the source. The CEMS tracks hourly emissions which are reported to the U.S. Environmental Protection Agency (EPA) each quarter. Accurate, complete, and consistent emissions measurement data are essential for ensuring the integrity of the market-based allowance system and the achievement of the emissions reduction goals. According to EPA's 1995 Compliance Results, 98 percent of the installed and tested monitors passed the required 10 percent relative accuracy test, and these monitors were successfully operating over 95 percent of the time.

Allowance transactions and the status of allowance accounts are tracked by EPA's Allowance Tracking System (ATS), an electronic record-keeping and notification system. The ATS provides EPA with the necessary data for determining compliance with the emissions limitations. Any party can open an ATS account, and each account contains the serial number of traded allowances, the individual unit's account balance, and the name of the account representative. The ATS is intended to expedite the flow of data between EPA and the utilities and to promote the development of an efficient permit trading system.

In addition to the private sales and purchases of allowances that continuously occur through the tradeable permit market, EPA holds an annual auction and a direct sale. The auctions are intended to send a price signal to the allowance market as well as to provide utilities and other parties with an additional avenue for purchasing permits. The direct sale offers allowances at a fixed price of $1,500 (adjusted for inflation) and guarantees Independent Power Producers (IPPs) first priority in purchasing the allowances. This guarantee enables IPPs to access the necessary allowances for building or operating any new units.

Electric utilities can choose how to dispatch electricity, and the two-phased nature of the Acid Rain Program creates an incentive for utilities to shift generation and emissions from Phase I to Phase II units. In order to account for possible shifts in emissions through the reduced utilization of a Phase I unit,[10] Title IV requires the submission of a Reduced Utilization Plan for any Phase I unit that will be used below its baseline as a method of compliance. The plan must either 1) designate a Phase II unit (compensating unit) to which generation was shifted; 2) account for the reduced utilization through energy conservation or improved unit efficiency measures; or 3) designate sulfur-free generators (such as hydroelectric or nuclear generators). A Reduced Utilization Plan is not required if the underutilized Phase I unit surrenders allowances in proportion to the reduced utilization, if over-utilization occurs at other Phase I units in the same dispatch system, or if there is a decrease in the total dispatch system load.

The Acid Rain Program allows for a number of compliance options. Utilities can reduce emissions by burning cleaner fuel, by reassigning some of its energy production capacity to lower emitting units, or by utilizing energy conservation measures to reduce total electrical demand. Because of the wide variety of utility plant types, ages, and fuel use, there are large variations in the costs per ton of SO₂ removed. This cost differential provides utilities with a substantial opportunity to take advantage of an emissions trading scheme. Generating units with high marginal costs of abatement can achieve emissions reductions by supplementing emissions abatement actions with the purchase of emissions permits. By reducing emissions below the target level, units with lower marginal costs of control can generate additional revenue through the sale of excess permits.

3.2 Compliance Results of the Acid Rain Program | Contents |

Figure 1. 1995 SO₂ Emissions Reductions by Phase I Affected Utility Units

The allowance trading market increasingly resembles a more established commodities market. At the time Title IV was passed, the projected price for Phase I allowances was about $250 to $350 per ton of SO₂ and the price for Phase II allowances was $500 to $700 per ton. Actual allowance prices have been much lower than expected, and the price of a Phase I allowance has dropped to as low as $63 per ton. In addition, the total volume of permit trading has been much larger than the minimum amount of trading required for all units to meet compliance in 1995 (Ellerman et al., 1996). Table 4 shows the level of private trading as well as annual EPA auction sales and demonstrates the large increase in trading since 1994 (Bailey et al., 1996). The number of allowances sold in the private market is a low estimate because it only reflects those trades that the electric utilities chose to report to the ATS. Both the evolution of the allowance price and the volume of trading reflect an allowance trading market that is increasingly becoming more efficient and highlight the fact that electric utilities are taking advantage of the tradeable permit market in order to meet the 1990 CAAA emissions limitations.

Table 4. Allowances Sold in the EPA Auction and in the Private Market

	Number of Allowances Sold in EPA Auctions	Number of Allowances Sold in the Private Market	Total Allowances Sold
Through March 1993a	150,010	130,000	280,010
April 1993-March 1994	176,200	226,384	402,584
April 1994-March 1995	176,400	1,466,966	1,643,396
April 1995-March 1996	275,000	4,917,560	5,292,560
Total	777,610	6,740,940	7,518,550

^aAllowance trading began in 1992.