Concise Guide Through the Climate Maze

8/2/2019 Concise Guide Through the Climate Maze

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What are the rules of the climate game?How can the Netherlands play its sustainability cards to

its best advantage?

Concise guide through the

CLIMATE MAZEJacco Kroon, Roebyem Anders and Pier Vellinga


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Credits

This book is based on a document that was written on behalf of the Energy Transition

Directorate, an advisory body of the ministries of Housing Spatial Planning and the

Environment (VROM) and Economic Affairs (EZ). This book aims to provide insight

into the possibilities the post-Kyoto regime offers in giving shape to the transition to a

sustainable energy supply in the Netherlands.

Authors: Jacco Kroon, Roebyem Anders and Pier Vellinga

(see page 116)

Illustrations: Bas Khler

Design: Tekst in Vorm, HaarlemPrinting: Drukkerij Wilco, Amersfoort

Uitgeverij MGMC

Wilhelminastraat 18

2018 VM Haarlem

023-5424656

[email protected]

www.mgmc.nl

ISBN/ EAN: 978-90-78171-08-9

This book is printed on FSC paper and has been produced in a climate-neutral fa-

shion. The CO2

that was emitted during the production of this book has been entirely

compensated by a project of the Climate Neutral Group, Utrecht.

Foreword ..............................................................................................................6

Introduction ...........................................................................................................8

1. From the Big Bang in Rio to climate policy in The Hague .............. .......... 10

1.1 UN climate treaty and Kyoto protocol: oldest polluters first ....................11

1.2 The Netherlands and EU climate policy: the long shadow of Brussels .....27

1.3 Voluntary climate markets: modest but fast-growing ...............................39

2 Stalemate or path to a sustainable future? ............ .............. ............. ........ 42

2.1 A new stone in the pond ........................................................................43

2.2 The tarnished climate champion ............................................................56

3. The great leap forward ............ .............. ............. .............. .............. ............ 65

3.1 Mixed feelings .........................................................................................67

3.2 Suggestions for strengthening the influence of climate policy

on the energy transition in the Netherlands .............................................74

3.3 Construction and logistics for offshore wind parks ..................................79

3.4 Production and processing of biobased raw materials ...........................843.5 New gas / the Netherlands as gas roundabout ...................................91

3.6 The Netherlands as a pilot project for thesmart gridand electric cars ....96

4 Conclusions and recommendations ............. ............. .............. .............. .104

5. List of abbreviations and guide to climate jargon ............ .............. ........ 107

6. Categorized background information .............. .............. ............. ............. 113

Individuals who were interviewed and/or provided commentary ........................115

About the authors ..............................................................................................116


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Foreword

Humankind is faced with an unprecedented challenge. Thanks to our scientific exper-

tise which still continues to grow rapidly we know that within a relatively short time

our energy supply must make a transition from fossil to sustainable. If we fail to do

this, or are too late in making the transition, then we will initiate a climate change with

extremely serious consequences worldwide.

The Energy Transition Directorate 1 was established by the Dutch government to

contribute to this transition to a sustainable, reliable and affordable energy supply. The

Directorate develops ideas, designs strategies, stimulates the development of new

concepts and technologies, and brings various parties together who can contribute

to the transition.

The transition we are aiming for is indeed an enormous task, but it is not only

a costly obligation. It also provides a positive challenge to create a solid basis for a

sustainable economy.In recent years there has been a remarkable and encouraging acceleration in the

development of sustainable energy technologies and in the policy that must lead to

the breakthrough of these technologies. This acceleration is partly the result of the in-

creasing awareness that fossil energy sources are finite and that the world population

and therefore the demand for energy will continue to grow.

Consequently, sustainable solutions increasingly require global agreements. After

all, the worlds economy is becoming more and more open. If you want to give an

honest chance to businesses and technologies that can and want to contribute to

this transition, then you must at least ensure alevel playing fieldon which companies

can make an honest contribution to the transition to a healthy and sustainable energy

economy.

Even today, the extraction and consumption of fossil fuels is directly and indirectly

promoted and even subsidized. This must come to an end. Emissions of greenhouse

gases must be capped and reduced as quickly as possible. Moreover, the damage

caused by these emissions must be taxed. And none of this is optional, but is a matter

of the highest possible necessity and urgency.

In December 2009 in Copenhagen, the world will negotiate new agreements to

counteract climate change and to promote a sustainable energy economy. During this

process, many issues will be addressed, including the following. What CO2

reduction

percentages are necessary? Who should deliver which part of this reduction? How

can the costs of this reduction be paid and shared? What are the possibilities for sus-

tainable technologies and sustainability policies? What are the best ways to promote

these technologies and policies?

The technological, societal and political discussion on all these questions has l ed

to a complex climate maze, in which it has become very difficult to even find the road

signs. The Energy Transition Directorate therefore requested Jacco Kroon, Roebyem

Anders and Pier Vellinga to write a document that could serve as a guide to help us

navigate through this maze. The resulting document was so clarifying that it was de-

cided to publish it as a book which is not only intended for insiders who have started

to lose their way in the climate maze. After all, besides governmental bodies and busi-

nesses which have to make every effort in terms of policy and technology, individuals

also have roles and responsibilities with respect climate issues and sustainability. We

therefore hope that this compact book will also help the interested newspaper reader

to better understand and interpret the flood of climate information and terminology.

Moreover, a special aspect of this guide is that the authors call for the Netherlands

to focus clearly on a four-leaf clover of sustainable technologies and systems with

which we have an outstanding starting position. As a result, the Dutch business com-

munity can turn a problem into an economic opportunity. This focus will not only help

our country achieve its ambitious CO2

reduction targets, but it also offers important

economic advantages.

Theo H. Walthie

Chairperson, Energy Transition Directorate

1 RegieOrgaan EnergieTransitie


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Introduction

In December 2009, the world community will make a decision i n Copenhagen about

the sequel to the Kyoto protocol. Negotiators will be present from more than 180

countries. It is uncertain whether or not an agreement will be reached. However, it

is certain that the result in Copenhagen will strongly influence the climate policy in

Europe and the Netherlands for the next 10 to 15 years, and will consequently also

affect the speed with which our country makes the transition from a fossil-based

energy economy to a sustainable one. After all, the Netherlands is not an island.

The international policy context is complex; it is an organism that consists of global

and regional climate agreements, aims and instruments, which are always in motion

and are continually affecting each other. National interests are important ingredients

in this turbulent process, but at the same time the room for national climate policy,

certainly in the Netherlands, is largely determined by the international organism.

This book aims to analyse and explain this organism for a non-specialist public. The authors also attempt to determine how the climate organism influences the

development of sustainable technology in the Netherlands. For the Dutch, the climate

treaties of the United Nations and the European Union are the most important sources

of international climate policy. How exactly are the treaties and instruments of these

two institutions constructed? How are they linked together? What are the constraints

and future scenarios for change? What are the most controversial issues that have to

be resolved in Copenhagen?

Chapter 1 answers these questions and provides a picture of the current international

and European climate frameworks until 2012. It addresses the treaty instruments that

promote flexibility and reduce costs (including the Clean Development Mechanism

and the trade in emission allowances). How do the international treaties affect national

policy, and which supplementary polices and initiatives does the Dutch government

take?

Chapter 2 addresses the expectations concerning the imminent negotiations in

Copenhagen for the period 2013-2020. Copenhagen will also determine the ultimate

result of two years of European negotiations. This is because the EU climate accord of

2008 agreed to two speeds: a high reduction aim if Copenhagen is a success, anda low reduction aim if no accord is achieved. The Netherlands is a strong advocate

of the most ambitious aim, but what will happen if Europe nevertheless chooses the

minimum variant following failure in Copenhagen?

Chapter 3 answers the question of which aims have the most impact on sustainable

innovation in the Netherlands. How can national policy boost this innovation, and

which set of instruments is most effective? A crucial question is, which sustainable

technologies and sectors in the specific situation of the Netherlands can contribute

the most to both the required energy transition and to a robust, sustainable economy?

And how can these specific technologies and sectors be strengthened even further?

The answers to these questions are based on interviews with directly involved

parties and our own research. The process that led to the selection below was not

an exhaustive one. We (the authors) are therefore welcoming other suggestions. We

selected the following four-leaf clover of the most promising sustainable sectors:

offshore wind parks and developing the necessary logistics

biobased economy)

smart gridand electric cars

The specific export opportunities for the Netherlands played an important role in

the selection. As a result, some promising sectors that can make a large contribution

to reducing the emissions of greenhouse gases, but have limited export potential

(such as the solar energy sector), were not selected. Despite its important export

potential for the Netherlands, water management was also not included because the

opportunities in this sector lie primarily in dealing with the consequences of climate

change, and not in reducing emissions.After some consideration, we also decided that the construction sector would not

be part of the four-leaf clover. Although the Netherlands holds a good position in terms

of technological expertise and smart companies, the Dutch construction sector does

not distinguish itself sufficiently from those in other countries to become a promising,

sustainable export sector. However, to do justice to the noteworthy accomplishments

in this area, a separate section will illustrate a number of highly promising examples of

the Netherlands at the leading edge of the built environment and thesmart grid.

In between the main text quotes of people the authors spoke with during

preparation of the book have been added initalic.

The climate organism is fed by continuous interaction between the international, European and nationalpolicies


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1. From the Big Bang in Rio toclimate policy in The Hague

International, European and national climate policy:

the situation through 2012

In the beginning, there was the Big Bang of the UN climate treaty. In 1992, world

leaders met for the first time in Rio de Janeiro to jointly tackle the problem of the

greenhouse gases and they did so successfully. Under the watchful eyes of Cristo

Redentor, the enormous statue of Jesus on Corcovado mountain near the Brazilian

harbour city, virtually all countries in the world signed the United Nations Framework

Convention on Climate Change (UNFCCC), which finally acknowledged the problem

of greenhouse gases. It was agreed to collectively stabilize the emissions at such a

level that the climate system would not be dangerously disrupted.

Rio was the starting point for internationally coordinated climate policy, which

also exerted a strong influence on the European Union and the Netherlands. Although

Europe did think about the environment before 1992, the UN climate treaty gave

European climate policy an enormous impulse, which in turn exerted a major influence

on the climate policy in the individual EU Member States, including the Netherlands.

For these reasons, this book addresses the three tiers of climate policy

international, European and national not in separate chapters, but in parallel.

However, a division in time has been made: first the current national and international

climate policy, which will continue until roughly 2012, followed by the possible policy

scenarios for the period 2013-2020.

The common thread:

look like from now until 2012 and how do they influence each other?

the EU trade in emission allowances) and their corresponding constraints.

supplementary role for the Dutch government

1.1 UN climate treaty and Kyoto protocol: oldest polluters first

Industrialized countries take the lead

The meeting in Rio was the start of a long series of meetings during which thousands of

experts and policymakers pondered how the aims of the climate treaty would be given

shape in practice. The most well-known of these meetings took place in Kyoto in 1997,

where resolutions were transposed into binding targets for the period 2008-2012. The

meeting in Bali in 2007 was another milestone, because agreement was reached on

the Bali Road Map, which laid out the route to a sequel for the Kyoto protocol in 2013.

Ultimately, in December 2009 in Copenhagen, an international agreement must be

signed for the period 2013-2020. The possible scenarios for after 2012 are discussed

in Chapter 2.

The UN climate treaty determined the contours of the Kyoto protocol. For

example, a distinction was made between industrialized countries (Annex B.) and non-

industrialized countries (non-Annex B.). The Annex B countries are members of theOrganization for Economic Cooperation and Development (OECD), which includes the

United States, Australia, Japan and Western Europe, as well as Russia and countries

in Eastern and Central Europe. The non-Annex B group consist primarily of developing

countries.

In the treaty from 1992, these two groups of countries were asked to make

different efforts. The Annex B countries were expected to reduce their greenhouse gas

emissions for 2000 to the level of 1990. The non-Annex B countries only had to keep

track of the growth in CO2 emissions; the idea was that these countries deserved the

same room for economic development as the Annex B. countries previously enjoyed.

However, the demands on the industrialized countries in the Rio Treaty were not

binding. As a result, many observers feared that few actual reductions would be made.

At the conference in Kyoto in 1997, the participants were therefore prepared to take

a subsequent step: the reduction targets would become binding instead of optional.

Europe a fervent proponent of binding agreements had already chosen 1996 as the

policy starting point for a maximum increase in the average global temperature of 2C

(compared to the pre-industrial era).

In the groundbreaking Kyoto protocol, which was signed by the majority of countries

(but not necessarily ratified by them, as the United States painfully demonstrated), it was

agreed that the industrialized countries would reduce greenhouse gas emissions in theperiod 2008-2012 by 5% on average, relative to the level in 1990 (the reference year).

The five gases, besides carbon dioxide, in the protocol are methane (agriculture, landfill

sites), nitrous oxide (agriculture, chemical industry), sulphur hexafluoride (metallurgy),

perfluorocarbons and hydroflourocarbons (refrigeration, chemical industry, insulating

foam). Theoretically, all commercial sectors are subject to the Kyoto protocol, with the

exception of international aviation and ocean shipping, because the greenhouse gas

emissions from these sectors are difficult to allocate to specific countries.

However, the Kyoto obligations are not the same for every Annex B country. The

individual targets for each country depended on various factors, such as the level of

economic development and the extent to which an Annex B country had already taken

measures to counteract emissions. There was no clear leading principle in establishing

the percentages; consequently clever political negotiation became very important for

the results.

By means of the so-called bubble agreement, the European Union acquired the


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right to establish a target as a single region, and then to independently determine how

the reduction burden would be allocated to the individual Member States (burden

sharing). In fact, the Kyoto protocol considers the European Union to be a single

country. The EU is required to reduce its greenhouse gas emissions in 2012 by 8%

relative to 1990. The percentages applying to each Member State are determined by

means of a complex allocation key, which is based among other things on the relative

magnitude of energy intensive sectors. In addition, less prosperous Member States

(at that time), such as Greece and Ireland, were given more scope. The Netherlands

was obligated to reduce its emissions by 6% on average during the period 2008-2012

relative to 1990.

1.1.1 The wheels of the carbon market

Basic architecture for implementing the Kyoto protocol

How is a climate treaty implemented in practice? How do you coordinate the greenhouse

gas reductions of the 183 countries that have embraced the Kyoto protocol? How doyou monitor whether or not the 38 Annex B countries have achieved their targets? How

does the trade in emission allowances work? The explanation below perhaps requires

some persistence from the reader; there are many abbreviations and it is sometimes

rather technical. But later on in this book you will benefit from your efforts!

The starting point is that the industrialized countries are given an emission budget,

which is expressed inAssigned Amount Units (AAUs). Each AAU gives the country the

right to emit one tonne of CO2

equivalent (CO2-eq). This CO

2-eq is the standard unit

which is used to express the harmfulness (Global Warming Potential) of gases other

than CO2 (see Box 1). This is because the environmental damage potential of the

six greenhouse gases covered by the Kyoto protocol varies greatly. For example, the

emission of a single tonne of methane is equivalent to 21 tonnes of CO2. A single tonne

of methane is therefore equivalent to 21 tonnes CO2-eq, and consequently costs 21

AAUs (which is charged against the emission budget of the country concerned).

AAUs are allocated to national governments and must be placed in a National

Registry (which is administered in the Netherlands by the Dutch Emissions Authority).

Every Annex B country is given a AAU budget for five years of greenhouse gas

emissions that is compatible with the countrys Kyoto targets. For example, the AAU

budget of the Netherlands is 5 x 94% of the emissions level in 1990 (during the Kyoto

period 2008-2012, the Netherlands is obligated every year to end up an average of6% below the level in 1990).

The UNFCCC allocates a total budget to the Annex B countries together, which

is 5% below the emissions level in 1990; this is equivalent to the collective Kyoto

target. The Annex B countries cannot independently create new AAUs ; otherwise

the Kyoto target would be exceeded. However, there is the possibility for countries

to trade AAUs with each other (for a detailed explanation, see 1.1.2). To ensure that

the emissions trading proceeds according to Kyoto rules and that no fraud is possible

(for example by selling the same AAU twice), all AAU transactions must be monitored

and approved by the International Transaction Log (ITL). This is an automated system

to which virtually all national registries are connected. The ITL is administered by the

secretariat of the UNFCCC in Bonn.

Besides the National Registries of Annex B countries, the Clean Development

Mechanism (CDM) Registry is also connected to the ITL and is administered by

the secretariat of the UNFCCC. The CDM Registry registers emission allowances

or Certified Emission Reductions (CERs), which are created via CDM projects. In a

CDM project, one party in an Annex B country (government, project developers or

companies) finances a project that reduces greenhouse gas emissions in a country

without a Kyoto target (for a detailed explanation of CDM, see 1.1.2).

Annex B countries are allowed to use the emission reduction, which has been

realized with CDM projects, to attain their Kyoto targets. Every tonne of CO2-eq

emission that is prevented yields one CER. All CDM parties have an account with the

CDM registry, which issues CERs and ensures that they are moved from the account

of the delivering party to the account of the purchasing party. The National Registry of

the corresponding Annex B country is also adjusted in accordance with the transaction

via the link with ITL. During this process, CERs are converted into AAUs. CDM projects

are therefore one way for countries to increase their AAU budget .

To make it even more complicated, the EU holds a separate position in this trading

scheme. In 2005, as part of the preparations for Kyoto, the EU decided to impose

an energy ceiling on energy-intensive industries in Member States (for a detailedexplanation, see 1.2 and 2.2). Large companies subjected to the ceiling are allocated

an individual emission budget, which is expressed in European Allowance Units (EUAs).

Every EUA also gives an allowance for the emission of one tonne CO2-eq.

Companies are allowed to trade this emission budget with each other on the

European Union Emission Trading System (EU ETS), which was established for this

purpose. Moreover, the EU allows the companies to attain part of their target abroad,

for example by means of the CDM projects referred to above. At the end of the year,

every company must hand in a quantity of emission allowances to their National

Registry which is exactly equal to the number of tonnes of CO2-eq that they have

emitted during the year.

The EU ETS became subject to the Kyoto protocol at the beginning of 2008. This

means that from this time forward, a piece of the AAU pie will be converted into EUAs

and will be allocated to ETS companies. The administrator of the National Registry

converts the EUAs that are returned at the end of the year by ETS companies back

into AAUs, which must ultimately be resubmitted to the UNFCCC Secretariat in order

to comply with the national Kyoto obligations.

If this did not happen, the issuance of EUAs would lead to an expansion of the

number of emission allowances for the EU, which would be in violation of the Kyoto

protocol. Because AAUs and EUAs represent the same value (each gives an allowancefor the emission of one tonne of CO

2-eq), EUAs are in fact nothing more than AAUs

with a new label, the only difference being that EUAs are allocated to companies and

AAKs to government.

In order to monitor and approve all transactions within the EU ETS, the European

Commission has its own control system, the Community Independent Transaction

Log (CITL). Beginning in 2008, the first year of the Kyoto period, the CITL was linked

to the ITL. However, it remains essential to verify the transactions conducted by EU

countries, because EU regulations are sometimes more restrictive than than the Kyoto

specifications.

The network of National Registries and the CDM Registry, which are linked to each

other via ITL and CITL, is the backbone of the international carbon market. This network

ensures the issuance, verification and approval of the emission allowances that are

permitted under Kyoto, as well as the proper completion of the trade transactions.

In this context, the term carbon refers to the CO2-eq unit, which is used to express


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all Kyoto greenhouse gases. It does not mean that the trade in emission allowances

concerns only CO2

emissions.

At the end of the Kyoto period, the number of Kyoto emission allowances in all

National Registries of Annex B countries must be exactly equal to the quantity of

greenhouse gases that are actually emitted. If this is not the case, the exceedance

(plus penalty) is charged against the number ofAssigned Amount Units in the following

period, and the country that is in non-compliance is restricted in its use of flexible

instruments. This sanction assumes that there will be a new period following the Kyoto

period, which ends in 2012. But if the negotiations in Copenhagen fail, the punishment

becomes irrelevant.

1.1.2 The flexible toolkit

Structure of Kyoto instruments for emission trading and greenhouse gas

reduction abroad

Many companies and politicians in industrialized countries were (and are) afraid that

a sharp reduction in greenhouse gases will have negative economic consequences

for them. Therefore, Kyoto offers well-considered mechanisms to reduce the costs

of emission reduction measures. This led to three flexible instruments to give AnnexB countries as much room as possible for determining how they attain their targets.

All three instruments are based on the market mechanism: they allow the process of

supply and demand to do the work. As a result, they broke with the tradition of wanting

to achieve environmental aims by means of tax levies or regulation.

The three flexible instruments are the Clean Development Mechanism (CDM),Joint

Implementation (JI) and International Emission Trading. Governments and companies

in Annex B countries are free to use one or all of these instruments together, as long as

they attain their required emission reductions.

However, to ensure that Annex B countries still achieve a substantial part of the

required reduction domestically, a limit was placed on how much Annex B countries

are allowed to compensate abroad. For example, the Netherlands must theoretically

attain half of its emissions reduction domestically. A brief description of the Kyoto

instruments is given below, after which the operation and constraints of the flexible

instruments in practice will be addressed.

Box 1: Sweltering atmosphere

Greenhouse potential of Kyoto gases

Six greenhouse gases are subject to the Kyoto protocol: CO2, CH

4, N

2O, SF

6, PFCs and

HFCs. Their greenhouse potential, or Global Warming Potential (GWP), is expressed in the

number of times that they contribute more to the greenhouse effect than CO2. During this

process, the following multiplication factors are used:

CO2

(carbon dioxide) 1

CH4

(methane) 21 (emission of 1 tonne CH4

is therefore equal to the

emission of 21 tonnes CO2,or 21 tonnes CO

2eq)

N2O (nitrous oxide) 310

SF6

(sulphur hexafluoride) 23,900

PFCs (perfluorocarbons) 6,500 tot 9,200

HFCs (hydroflourocarbons)) 140 tot 11,700

Source: Climate Change: Guide to Kyoto Protocol mechanisms, 2004, French Ministry of Economic Affairs..

Clean Development Mechanism (CDM)

At the present time, CDM is by far the most important flexible Kyoto instrument. The

mechanism is based on a concrete project. The point of departure is that the emission

reduction of an Annex B country, such as Denmark, does not necessarily have to take

place in Denmark itself. If Denmark finances a project in non-Annex B country, such as

Tanzania, and this project l eads to a reduction of greenhouse gases, then the Danish

government can earn additional emission allowances, and in this way increase the

emission budget of its own country.

For every tonne of greenhouse gas reduction that results from a CDM project, a

Certified Emission Reduction (CER) is created that gives an allowance for 1 tonne of

emission reduction for the investing Annex B country. The idea behind CDM is that it is

cheaper to limit emissions in developing countries, because these countries still have

much un-utilized potential to produce more efficiently. This makes it possible for Annex

B Countries to comply with the Kyoto targets at lower cost. An important precondition,

however, is that such projects must be additional: they must lead to a reduction ofgreenhouse gases in the guest country that would not have taken place without the

CDM financing.

CDM projects can be financed by governments, companies or project developers

from Annex B countries. This takes place by agreeing beforehand that the CERs

generated by a CDM project will be purchased. The party from an Annex B country

is the buyer: the counterparty that sets up the CDM project is the seller. This process

takes place in different ways. For example, the buyer can pay for the CERs even before

the project has actually begun (forward transaction). In this case, the buyer purchases

CERs on paper, because the real CER is issued only when the reduction has actually

taken place.

The buyer then runs the risk that the CERs will not be delivered if the CDM project

ultimately results in less emission reduction than expected. To compensate for this

risk, the buyer is given a lower price. The buyer can also agree that the CERs will only

be paid for when they are actually issued. This is more expensive, but then the buyer

avoids the risk of purchasing CERs that cannot be delivered.

For that matter, buyers of CERs are not obligated to use the delivered CERs

themselves, but can also resell them to governments or companies (such as in the EU)

that require more scope to achieve their reduction target. This is called the secondary

market. Many project developers set up CDM projects exclusively with the intentionto resell CERs at a later date on the secondary market, where the price is determined

entirely by supply and demand. Many governments and companies do not participate

directly in CDM projects, but purchase the CERs that they require from a trader or on

an exchange where they are traded. The price on the secondary market also functions

as a guideline for CER prices that are agreed to at the beginning of the CDM project.

However, before a CDM project is completed with the successful delivery of

CERs, a number of hurdles must be overcome. The CDM Executive Boardstrictly

monitors the process and determines the rules. Before a CDM project proposal can be

approved, the first requirement is that the Designated National Authorities (the official

bodies, for example a ministry that decides about the registration of CDM projects)

in both the intended guest country and the Annex B country of the purchasing party

declare that their project can only be developed as a CDM project. At the same time,

the DNA of the guest country must declare that the project is compatible with national

sustainability aims.


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In the next step, a detailed project proposal is submitted to an independent

Designated Operational Entity(an environmental accountant that is accredited by the

CDM Executive Board), which must validate the estimates in the project proposal

and determine the baseline that serves as a starting point for measuring the emission

reductions. This process is linked to a strict methodology, where the CDM Executive

Board prescribes exactly how the baselines must be determined and how claimed

emission reductions must be verified.

Project proposals that have survived the first two steps ultimately land on the

desk of the CDM Executive Board. If the proposal is approved, the project is officially

registered. However, at this point the CERs are still not owned by the buyer. During the

entire course of the CDM project, a Designated Operational Entity (DOE) continuously

verifies the claimed emission reductions, and only certifies reductions that are actually

achieved. The CDM executive Board issues the CERs only after it has been irrefutably

proven that the CDM project has led to reduced emissions in the guest country.

In principle, CERs are issued for a term of no more than 7 years, but can neverexceed the term of a project. The Board can extend this term no more than three

times if the DOE determines that the project is still delivering reductions and that these

reductions could not have been achieved without the involvement of a foreign investor

from an Annex B country. However, if the situation has changed in the meantime (for

example if the environmental legislation in the guest country has been changed to

such an extent that the environmental performance of the CDM project has become

standard), then the term cannot be extended. The parties involved can also decide to

choose a single term of 10 years.

Joint Implementation (JI)

Joint Implementation (JI) follows roughly the same pattern as CDM. The difference

is that it does not concern projects in developing countries without Kyoto targets

(non-Annex B countries), but investments of wealthy Annex B countries in climate

projects in less developed Annex B countries. The latter group consists primarily of

so-called transition countries in Central and Eastern Europe, which are countries that

are undergoing a transition from a state-run economy to a market economy and/or

the transition from a dictatorship to a democracy.

Similar to CDM projects, JI projects assume that there is still much potential in

transition countries (compared to the wealthy Annex B countries) to realize low-cost

emission reductions of greenhouse gases. It is also assumed that the institutional

framework in some transition countries is more capable of independently verifying

and implementing JI projects. Therefore, two procedures are possible for JI projects:

Track 1 and Track 2.

If both the guest country and the investing country meet specific administrativeand institutional criteria for the JI project, the Track 1 procedure can be used. In that

case, both countries can independently establish national guidelines for the validation

of project proposals (which can be initiated by governments, companies and project

developers) and the verification of implementation; they draw up a bilateral contract

specifying how the emission allowances will be transferred if the intended reduction

of the JI project is actually realized and approved.

If one of the countries (in practice usually the guest country) does not meet the

minimum criteria, then JI projects must follow the Track 2 procedure. In this procedure,

the Joint Implementation Supervisory Committee (JISC), which is equivalent to the

CDM Executive Board, prescribes the methodologies for establishing baselines and

for verifying projects. In addition, the JISC-accredited environmental accountant

validates the project proposals and certifies the claimed emission reductions.

As with CDM, the investing party receives the emission reductions that are

realized in the JI projects. Exactly like a CER, every Emission Reduction Unit (ERU)

gives an allowance for 1 tonne of CO2-eq emissions, which can also be traded on the

secondary market after being issued. Differently than CERs, however, ERUs must be

charged to the national emission budget of the guest country: for each ERU that is

issued, an AAU must be relinquished.

Box 2: Bellwether

The Netherlands was one of the first countries to use flexible instruments

The Netherlands has set the pace in the development of flexible i nstruments. It was the first

country to have a purchase programme for CDM and JI projects. In addition, the Netherlands

recently signed a contract with Latvia for the purchase of AAUs (see Box 5).

The ministries of VROM and EZ have reserved approximately 750 million for JI and CDM.

The investments will be made in various ways, for example through CDM and JI projects via

SenterNovem (part of the Ministry of EZ), through the purchase of CERs from national and

international banks, through CDM investment as a component of bilateral contracts (such

as that with Indonesia) and through multilateral climate funds (such as the Prototype Carbon

Fund and the Community Development Fund of the World Bank). The early involvement of

the Netherlands made an important contribution to the current lively trade in emission al-

lowances.

The Netherlands is also active in capacity building, or institutional strengthening for regis-

tration and monitoring, in developing countries (especially Africa) in the area of CDM. Here,

the Ministry of Development Cooperation plays an important role. In addition, the Ministry of

VROM is working together with the Entrepreneurial Development Bank of the Netherlands

(FMO) to develop a purchasing programme for CDM projects in Africa.

The CDM is credible, the process is laborious.

The reason for this is that both parties in a JI project are Annex B countries with a

binding Kyoto target. If the guest country did not relinquish any AAUs for the emission

reduction realized via JI projects, it would retain surplus AAUs, because JI projects

(exactly like CDM projects) must be additional; the reduction therefore is additional to

the efforts that the guest country must make in any case to attain its Kyoto target.

This could result in the guest country making a duplicate sale of emission allowances

resulting from the same reduction in greenhouse gases achieved by a JI project: the

first time they could be sold as ERUs and then as AAUs.


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CDM: successful benefactor or a game for rich countries?

International Emissions Trading

The final flexible instrument offers countries with a Kyoto target the option of trading

their emission budgets, expressed asAssigned Amount Units, with each other. As

stated above, every AAU carries an allowance of 1 tonne of CO2-eq emissions, and

the annual number of AAUs of the country is equal to its Kyoto emissions ceiling.

For example, the AAU budget of the Netherlands is 5 x 94% of the emissions level

in 1990 (based on the fact that average Dutch emissions must be 6% below the

1990 emissions level). The total number of allocated AAUs for all Annex B countries

is fixed: they cannot independently create any new AAUs.

However, every country with a Kyoto obligation is free to sell its AAU surplus to

a country with a deficit. Theoretically, a surplus can only occur if a country reduces

its emissions to such an extent that it has achieved more than its Kyoto target. In

contrast to CERs or ERUs, surplus AAUs can theoretically be traded without there

being any counter-performance (in the form of climate projects). But every Annex B

country is still required to maintain an ironclad AAU reserve to prevent countriesfrom selling AAUs and then being unable to meet their own obligations.

1.1.3 Successful benefactor or a game for the rich?

Operation and constraints of the Clean Development Mechanism (CDM)

The growing pains are over, but have the flexible instruments been successful? Twelve

years after signing the Kyoto protocol, and only six months before a new protocol

must be created in Copenhagen with modified and new flexible instruments, it is

time to take stock of how the Kyoto instruments have performed until now. Did they

have the intended effect? And what have been the most challenging bottlenecks?

It is entirely justified to begin this evaluation with the CDM. This instrument far

surpasses the other two in magnitude; the trade in CERs is now worth billions of

dollars. According to figures from the World Bank, CDM projects worth $59 billion

were started between 2002 and 2007 (therefore before the Kyoto period officially

began in 2008), and in 2012 it is expected that CDM projects will have led to an

emission reduction of 2.8 billion tonnes of CO2-eq.

This success can be largely attributed to European governments, which began

immediately to hoard CERs in order to comply with the reduction obligations in the

Kyoto period 2008-2012. For many EU countries, purchasing emission reductions

abroad is crucial to compliance with their Kyoto obligations. CDM projects, and theCERs that can be earned with these projects, turned out to be the most suitable

instrument for this purpose. For example, the Netherlands depends on emission

reductions achieved outside the EU region (largely CERs) for approximately half of

its reduction obligation.

In addition, companies that fall under the EU ETS (European Emissions

Trading System) import CERs (and ERUs) to expand their emission allowances.

An important reason for the success of CDM is the large number of available

projects. Theoretically, compensation through JI projects would be just as suitable

for achieving a Kyoto target, but in practice governments in developing countries

are more eager to acquire climate projects than governments in tr ansition countries

(see also 1.1.4).

However, the relative success of CDM does not mean that there is no criticism;

there is a great deal of criticism, which is expressed in thousands of reports,

pamphlets and scientific studies. This criticism ranges from complaints about the


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red tape of CDM procedures to the accusation that CDM projects only exacerbate

the climate problem. The most important bottlenecks are listed below.

Concerns about environmental integrity (additionality)

Additionality is the biggest bone of contention with respect to CDM. In order to

earn CERs, project owners must prove that a project, and the achieved emission

reduction, could not have occurred without CDM financing (for example because the

environmental performance of the CDM project surpasses the statutory requirements

in the guest country). This additionality criterion i s very important because every CER

that is acquired by a country with a Kyoto obligation provides exemption for one

tonne of domestic CO2- reduction. If an Annex B country were to acquire CERs for

financing a non-additional project that the guest country was planning to implement

anyway, CDM would actually lead to increased net emissions of greenhouse gases.

In order to safeguard additionality, the CDM Executive Board restricted the use

of CDM projects with regulations, precisely defined methodologies and independentverification. Nevertheless, in practice it turned out to be difficult to define what

additionality is. For example, project owners in CDM countries must demonstrate

that the CDM financing has enabled them to do something that they would not

have done otherwise, such as purchasing a more costly technology, or deciding

against another investment with a higher return but which has no positive effect on

the climate.

The definition of additionality remains difficult, and critics believe that the many

assumptions, which are required to determine the additionality of the CDM project,

provide plenty of space to direct or manipulate the outcome. In this context, the

critics point to the many specialized consultants who are hired by project developers,

governments and companies with the task of steering project proposals through the

complex approval process. But other critics believe that the CDM Executive Board is

overly strict in its verification of additionality, and see the resulting long procedures as

the most important restriction on the growth in the number of CDM projects.

strong environmental policy themselves: the stronger the policy, the more potential

projects would no longer qualify in principle because they are already covered by

existing regulations.

Small projects are unprofitable

The long route to the registration of a CDM project as described above, combined with

the verification during a project to certify emission reductions, leads to high transaction

costs; as a result, smaller CDM projects are hardly profitable. This primarily affects

potential projects in poorer developing countries. In order to address this problem,

during the UN climate summit in Marrakech (2001) it was agreed that less strict

regulations would apply to smaller projects (such as a sustainable power plant with a

capacity of less than 15 MW), so that the transaction costs would be more bearable.

In the meantime, nearly half of all CDM projects are small-scale, and according to

expectations will generate approximately 10% of the CERs in 2010.3 Nevertheless,

CDM turns out to be unprofitable for a large number of smaller projects with reductionpotential, such as high-efficiency incandescent lamps or biogas installations for

farmers. To address this problem some stakeholders are now piloting with clustering

small projects of similar types into a single programme, so that each project does not

have to be evaluated separately (see 2.1.2).

It can take one or two years to have a project

registered, not including the six-month waiting period

for booking an environmental accountant.

Excessive emphasis of CDM on fast-growing developing countries

Another bottleneck is that fast-growing and relatively prosperous developing countries

acquire the majority of the CDM projects. More than three-fourths of the projects are

taking place in Brazil, India or China. Only 2% of the projects take place in Africa4. The

most important cause of this imbalance is that many African countries have inadequate

governance capacity to develop CDM projects, especially due to the absence of a

strong Designated National Authority, the national body that initi ally gives its blessing

to the CDM project proposals.

In contrast, soon after the Kyoto protocol went into force, countries such as Brazil

China and India quickly rigged up an administrative framework to identify and approve

the CDM projects. Moreover, these large countries can offer more CDM projects with

relatively lower transaction costs, which makes them interesting for investors with a

great hunger for CERs.

This illustrates the importance of a well-equipped, proactive Designated National

Authorityto the success of guest countries on the CDM market. DNAs are not only

crucial for aligning CDM projects to the needs of developing countries, but they can

also in principle formulate sustainability criteria themselves and apply them to

the evaluation of CDM project proposals (although the proposal then still has to be

submitted to an environmental accountant, and the CDM Executive Board still has

the last word on additionality).

3 A Reformed CDM, perspective of Unep Risoe, 2008.4 CDM/JI pipeline database on the website of UNEP Risoe.

2 Figures from the CDM/JI pipeline on the website of UNEP Risoe, May 2009.

The process of registering a CDM project proposal, so that it can actually begin,

often takes several years. This leads to high transaction costs and great uncertainty

about whether the project will ever get off the ground. Of the total number of CDM

project proposals that have been submitted (nearly 5000), approximately one-third

have been officially registered and the CDM Executive Board has rejected more than

100. In addition, 3200 project proposals are waiting for the approval of an accredited

environmental accountant or the CDM Executive Board.2

It is unclear how many of the registered projects are not additional and were

improperly approved. According to the CDM Executive Board, this happens only

incidentally. But according to some critics, the majority of CDM projects are at best

only partially additional (which is known as leakage). Moreover, financing the projects

through CDM could lead to CDM countries not having an incentive to implement a

Existing knowledge in the Netherlands is only used

incidentally for CDM and JI. Companies believe that the

benefits of JI/CDM credits are marginal, and that the red

tape for getting a project off the ground is excessive.


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The vision that CDM must be more widely distributed, especially towards

Africa, is broadly supported. For example, a number of United Nations bureaus and

development banks, with the support of countries such as the Netherlands, have been

working together since 2006 as part of the Nairobi Framework, which has the aim of

helping developing countries acquire the administrative competence that is necessary

to better utilize the CDM instrument. In view of the still lamentable participation of

Africa, this has not been a complete success.

Critics believe that the attention of investors would possibly be drawn more to

the poorer developing countries if specific projects in rapidly growing developingcountries, which cost relatively little but yield many CERs, would be excluded from

the CDM. The most controversial CDM projects in this category are those, largely

in China, which destroy the hydrofluorocarbon HFC-23, a greenhouse gas that is

released during the production of the coolant HFC-22 and is 11,700 times more

potent than CO2. HFC-23 destruction is a relatively simple process, but the elimination

of each tonne of HFC-23 therefore yields 11,700 CERs. In this way, countries such as

China and India benefit from billions of dollars worth of CERs, even though the costs

of implementation are low. According to critics, the HFC-23 projects consequently

absorb CDM money that could have been invested in Africa. Moreover, the fact that

these projects are covered by CDM also results in the continued production of HFC-

22 a coolant which is becoming obsolete because these countries do not want to

give up a lucrative source of income.

Limited contribution to sustainable development and technology transfer

A final point of criticism is that CDM projects contribute little to the sustainable

development of the guest countries; according to some critics, the HFC-23 projects

are a striking example of this problem. They believe that the CDM instrument was

primarily developed to allow wealthy industrialized countries to attain their Kyoto

targets at a low cost, and that the tone on the CDM market is largely set by participants

from wealthy industrialized countries.

Other critics assert that although promoting sustainable development in guest

countries is one of the objectives of CDM, the mechanism was never developed

specifically to influence sustainable policy in developing countries. In the future,

separate instruments will perhaps be established for this purpose (see 2.1.1). This

does not take away from the fact that CDM projects are advantageous for all involved

parties: wealthy buyers pay less than they would in their own country, and the guest

country (thanks to the extra income from the sale of CERs) can purchase technology

that it could not otherwise afford.Nevertheless, the criticism appears to be having some effect. For instance, for

several years the CDM Executive Boardhas been allowing so-called unilateral CDM

projects, with the purpose of strengthening the position of developing countries. In

such a unilateral CDM project, the initiative can be taken entirely by the guest country,

and only requires the approval of the Designated National Authority (DNA) in that

country (instead of the approval of DNAs from both the guest country and the country

of the purchasing party, which is the case with bilateral CDM projects) in order to start

the process of moving towards official registration.

Because only a project owner from the guest country is involved in the creation of

the project, the transaction costs are much lower. Unilateral CDM also offers project

owners the possibility to wait with the sale of CERs until the market prices are high.

This is because project owners from the guest countries do not have to sell the CERs

beforehand to their counterparty by means of a forward transaction, which is the

case with bilateral projects. The project owner can wait until the CERs are actually

delivered, and the project risks no longer depress the price of potential CERs.

Box 3: The climate fruit basket

CDM projects in all sorts and sizes

What Is the most popular CDM category? Wind power? Solar power? No, hydropower pro-

jects (26% of the total) are the most popular, and three-fourths of these projects are implemen-

ted in China. The second place is held by biomass projects (15%), of which the majority are

located in Asia and Latin America. Of the 160 biomass projects in Latin America, more than

100 projects are located in Brazil. Nearly all wind power projects (at number three with 14%)

and energy efficiency projects (9%) are being implemented in China and India.

However, looking at the type of greenhouse gas reduction realized by CDM projects, a

different picture emerges. For example, there are 22 projects for the reduction of the hydroflu-

orocarbon HFC-23 (a greenhouse gas that is released during the production of the refrigerant

HFC-22), which is only 1% of the total number of CDM projects. Nevertheless, these projects

represent 17% of the emission reductions until 2012. This is because the so-called Global

Warming Potential of HFC is much greater than that for CO2; every tonne of HFC-23 reduction

in a CDM project generates 11,700 CERs. These projects are especially popular in China.Some projects perform better than others. For example, in some CDM projects that cap-

ture methane (CH4) from waste processing, only 10% of the expected emission reductions are

actually realized and rewarded with a CER. for these projects, it turned out to be more difficult

to calculate exactly how much methane was built up through the years. In addition, CDM pro-

jects in geothermal energy, agriculture and transport achieve fewer than half of the expected

CERs on average. Projects for reducing the greenhouse gases HFC and N2O appear to deliver

the most predictable emission reductions.

Source: State and Trends of the Carbon M arket 2008, World Bank, 2008.

In Kyoto, Northern Europe and the developing

countries made every effort to ensure that the CDM isas complicated as possible .

However, it is questionable whether unilateral CDM facilitates technology transfer,

an aspect that is closely linked with sustainable development. In order to reduce

project risks, which can no longer be shared with a purchasing counterparty, the

project owners from developing countries possibly tend to choose technologies with

which they are familiar, instead of advanced technologies. A frequently recurring

complaint about CDM, whether unilateral, bilateral or multilateral, is that the instrument

contributes little if anything to the dissemination ofhigh tech in developing countries.

The requirement that the technology transfer that creates the CDM must be the

most advanced technology would appear to be unrealistic. Companies from wealthy

industrialized countries only sell their most advanced technology if they can get full

price. However, the additional money that developing countries receive from the sale


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of CERs is not sufficient to close the gap with the higher price for the latest technology.

CDM can only help to a certain extent by making existing technology affordable,

which would otherwise fall outside the budget of developing countries.

Nevertheless, according to the UNFCCC, technology transfer is involved in more

than one-third of the CDM projects, including both technical expertise and hardware

(such as Danish wind turbines). The probability of technology transfer is greatest

with large-scale projects and projects where technology suppliers from industrialized

countries are involved.

Nevertheless, it can still be profitable to choose the more expensivestate-of-the-

art technology. CDM projects that not only reduce emissions, but also demonstrably

contribute to sustainable development in the guest country, are very popular among

buyers in wealthy industrialized countries. The Swiss non-profit Gold Standard

Foundation has developed a Gold Standard for CDM projects that are able to

demonstrate this contribution. Compared to the more common CERs, these Gold

Standard CERs are traded at a premium on the market.

1.1.4 Snowed-under instrument

Operation and constraints of Joint Implementation (JI))

The list of JI projects is much less impressive than the CDM list. According to the

website of UNEP Risoe, 200 JI projects are in the pipeline. These projects are officially

registered or are waiting for approval. In comparison, nearly 5000 CDM projects are in

the pipeline. Moreover, virtually no ERUs have been issued for JI projects, in contrast

with the CERs, which means there is no secondary market for ERUs. All in all, there

is broad acknowledgment that JI has been less successful than CDM. What are the

causes of these meagre results? In practice, there are two main stumbling blocks:

the expansion of the European Union into Eastern Europe and the rigid attitude of

governments and some potential test countries.

The failure to gain approval of the guest country (host country risk)

Regardless of whether it is a Track 1 or Track 2 project, approval by the guest country

government is the first important hurdle that the JI project must overcome. Depending

on the administrative capacity of the guest country to evaluate a project proposal, this

can be a smooth process or a chaotic one. The more chaotic the process, the greater

the host country risk; in other words, the investing party becomes increasingly

uncertain about whether the long administrative road to approval of a JI project will

ever lead to a result.

In a number of guest countries with excellent potential for JI projects, especially

Russia and the Ukraine, many parties who were interested to act as investors in JI

projects (governments, companies and project developers from wealthy industrialized

countries) severely underestimated thehost country risk. This also happened to the

Dutch government. Russia has been working for years to get its institutions in order,

and there is much political instability in the Ukraine. As a result, a number of Dutch JI

projects became stranded.In addition, not all countries are equally motivated to jump through all the hoops

that are required for JI project approval. During the Kyoto negotiations, both Russia and

the Ukraine were allocated large budgets of AAUs due to a combination of shrinking

population, disappointing economic growth and poli tical ingenuity. Theoretically, they

can sell these surplus AAUs without having to take any measures to reduce emissions

(see 1.1.5), although in that case many purchasing parties still require that something

green is done with the proceeds.

1.1.5 Taming the hot air

Operation and constraints of international emissions trading (the trade in

AAUs)

The third and final flexible mechanism, the trade in Assigned Amount Units

between countries with a Kyoto obligation, has been relatively dormant until now.

But the expectation is that the trade in AAUs will increase as the final date of 2012

approaches.

The first signs are apparent: the value of AAU deals is expected to rise to $150

million this year, according to the Socit Gnrale bank. The bank also estimates

that the AAU trade during the entire Kyoto period of 2008-2012 will average $260

The Netherlands began early, but many of the first

JI projects perished in the bureaucracy.

Stricter European environmental standards

In recent decades, many Central European and East European countries have joined

the European Union, and a number of countries are waiting in the wings. Many of

these countries are also the most important candidates for becoming guest countries

for a JI project. However, admission to the EU radically alters the chances of a

project meeting the additionality criterion. As soon as a country enters the Union,

all the European common environmental regulations automatically go into force (a

mechanism that is known asacquis communautaire).

These European environmental standards are generally much stricter than the

environmental regulations in the potential guest country before admission to the EU.

As a result, the acceptance threshold for a project such as a JI project becomes

significantly higher. Like a CDM project, the requirement for a JI project is that the

environmental performance of a project must surpass the statutory requirements.

Box 4: Speculation or green investment?

Dutch AAU deal with Latvia

At the end of March 2009, the Netherlands signed a deal with Latvia to purchase 3 million

AAUs (which provides allowances for emitting 3 million tonnes of CO2-eq) from the emission

budget of this country. As part of the deal, however, the Netherlands demanded that the pro-

ceeds be invested in sustainable projects: the Green Investment Scheme. Latvia promised to

use the money only for projects in sustainable energy and energy savings. The money for the

projects was only allocated after the Netherlands assessed them.

According to the Ministry of Economic Affairs, this agreement accomplishes two ob-

jectives simultaneously: the Netherlands complies with its Kyoto obligations and Latvia sti-

mulates its economy in a sustainable fashion. No Dutch trade interests are involved in this

agreement.


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million per year. Whats more, the Netherlands recently signed its first AAU deal (see

Box 4). However, compared to the magnitude of the CDM market, the AAU trade will

remain modest.

Theoretically, the trade in AAUs is based on the fact that Annex B countries that

are doing their best to reduce greenhouse gas emissions, and therefore have a surplus

in their emission budgets, are rewarded by giving them the opportunity to sell this

surplus to countries that are worried that they will be unable to balance their emission

books. As stated previously, however, the reality is that countries such as Russia and

the Ukraine, which were allocated very generous emission budgets, are able to sell

their surplus of AAUs without having to make any efforts to reduce emissions. In this

context, critics refer to the hot air in the AAU market.

The concept ofGreen Investment Schemes (GIS) developed in this context. As

part of these schemes, buyers of AAUs require that the money from their sale is

used to improve the environment in the selling country. Two types of GIS routes are

distinguished. The first route requires that the proceeds from the sale of AAUs areused to finance tangible projects (such as wind turbine parks) that lead to a reduction

in greenhouse gases; this route is known as hard greening.

In the second route, the proceeds from the sale of AAUs are used for investments

with a much less direct connection to emission reduction, such as strengthening the

governmental capacity for environmental policy or promoting education about and

development of sustainable technology; this is known as soft greening. Especially

with respect to the latter route, there is a great deal of scepticism because the

environmental effects are difficult to measure, and it is difficult to verify whether the

guest country is doing what it has agreed to.

In addition, critics believe that the GIS measure is weak because buyers of AAUs

are not required to participate in the scheme and establish conditions for the sale.

There is great concern that the buying countries, which now feel the political pressure

to demand that the AAU income will be used for green investments, will become

much less demanding as 2012 approaches, and it becomes increasingly urgent for

them to attain their Kyoto targets.

1.2 The Netherlands and EU climate policy: the long shadow of

Brussels

European objectives are important, but do not dominate the flavour of

Dutch policy

Europe (and the Netherlands) was a prime mover behind the UN Climate Treaty. But

after the treaty was signed with good intentions, it was time to start transposing the

beautiful rhetoric about climate into actual deeds with actual costs. During the first

years after 1992, this happened only sporadically, and Europe again became one of

the driving forces behind the hard objectives that were agreed to in 1997 in the Kyoto

protocol

The Kyoto protocol gave the European Union and its Member States a strong

impulse to work on a joint European policy, which had a major effect on the policy

freedom of the individual countries. In this section, we will first address the birth of a

coherent European climate policy and its interaction with the national climate policy ofthe Netherlands. During this analysis, we will look at the decisions that were made as

part of EU Climate Change Conference in December 2008, which will be addressed

in Chapter 2.

In this section we will also go more deeply into the structure, operation and

constraints of the European emissions trading system (EU ETS), which is central to

the European Unions activities on reducing the greenhouse gas emissions of energy

intensive industries. For the sectors that are not subject to the EU ETS, the climate

policy of EU Member States consists of national policy combined with the European

standards and directives. The structure, operation and constraints of these aspects

will also be extensively addressed. The potential changes in the structure national

policy and European standards after 2012 will be addressed in Chapter 2.

1.2.1 The European climate kick-off

EU climate guidelines and objectives until 2008

After several years of exploration, in 2000 an important foundation was laid for

common European climate policy. In that year, the European Commission initiated the

European Climate Change Programme (ECCP I), with the aim of helping the former

EU-15 attain their Kyoto targets. The objective of the collection of working groups

(consisting of civil servants, experts and representatives of the industries and NGOs)in areas such as transport, energy efficiency and emissions trading was to arrive

at recommendations for a cost-effective policy to reduce environmental load and

greenhouse gas emissions.

Previously, a number of important policy measures had already been taken, such

as promoting stricter standards for the CO2

emissions of new cars. Moreover, the

Waste Directive (which stipulated that organic waste in landfills, an important source

of methane gas, would have to be reduced to 35% of the level in 1995 by 2016) was

also on the rails at the beginning of the 1990s. But the ECCP I turned out to be the

driving force behind a series of new plans and directives that have shaped European

climate policy to this day.

Perhaps the greatest accomplishment was the proposal for a European emissions

trading system (EU ETS). In 2005, ECCP I was followed by ECCP II. Besides having

the aim of reducing greenhouse gases, ECCP II was also given the task of finding

adaptation measures for climate effects that could no longer be prevented. In 2007,

The reason that countries such as the Ukraine and

Russia have so many AAUs is that they were given avery generous budget to persuade them to participate

in Kyoto.


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the European Commission published a Green Book that was the kick-off for an official

discussion on this topic.

In March of that year, the basis was also established for a subsequent, even bigger

step. During a summit of government leaders in Brussels, it was decided in principle

that 20% of the total energy requirement of the EU must be obtained from sustainable

sources by 2020; that total greenhouse gas emissions must be reduced to 20% below

the level of 1990 and that energy efficiency in 2020 must have increased by 20%

relative to 2005.

In addition, in anticipation of Copenhagen, it was decided that the EU was prepared

to raise its reduction target to 30% if other industrialized countries also committed

themselves to comparable reduction targets. The difficult tasks of implementing the

new targets, and determining the consequences for the EU ETS, were postponed until

2008 (see Chapter 2).

1.2.2 Teachers pet or biggest braggart?

Transposition of European policy into Dutch climate policy

Several months after the summit in Brussels, the Dutch government stepped forward

and decided that the Netherlands, regardless of the actions of other industrializedcountries, would obligate itself to a 30% reduction in the emissions of greenhouse

gas in 2020 (relative to 1990). In addition, the Netherlands raised the national bar

for improving energy efficiency to 2% per year, which was higher than the European

requirement. And in biofuels, the Netherlands set a target of 20% of the total quantity

of fuels in 2020, double the European obligation.

For implementing the ambitious plans, the programme Schoon en Zuinig (clean

and efficient) was created (see Boxes 6 and 7). This programme established a plan of

approach for five sectors: the built environment (houses and offices), energy/industry,

transport, agriculture and other greenhouse gases. This sector-based approach

focused especially on the reduction of CO2

emissions, whether this took place

directly by setting emissions ceilings, or indirectly by promoting energy efficiency or

sustainable energy. With the other greenhouse gases, the approach was aligned to

the specific sources, such as methane emissions from manure or fluorocarbons from

refrigerators.

To ensure compliance with the sector-based action plans which would be

implemented by various ministries, the programme bureau Schoon en Zuinig was

established, which would compel the ministries to stay on schedule where necessary.

The programme bureau relied heavily on Europe, estimating that the Netherlands

depended on European policy for approximately three-quarters of the portion of

the national reduction target that had to be achieved domestically known as the

domestic reduction target.

Box 5: Greetings from Brussels

European climate directives

Since the Kyoto protocol, and especially since the ECCP 1, Europe has been fashioning a

steady stream of climate directives, to which the EU Member States must adapt their national

legislation. Here is a brief anthology of the most important directives:

1999 reducing organic waste (to 30% of the 1995 level in 2016)

2001 promoting electricity generation from sustainable sources (21% sustainable in

2010)

2002 binding energy performance/efficiency of buildings

2003 the EU emissions trading system (EU ETS)

2003 promoting biofuels (5.75% of all fuels in 2010; 10% in 2020)

2004 promoting cogeneration of heat and electricity

2005 binding environmental performance of energy-consuming products (Ecodesign)

2008 renewable energy (20% of total energy consumption in 2020).

The fact that the Netherlands had already committed

itself in 2007 to a reduction target of 30% is ridiculous

However, it is important to keep in mind that the domestic reduction target only

concerns a portion of the total Dutch emissions of greenhouse gases. For example,

the Netherlands has to achieve only half of the 6% reduction (relative to 1990) to whichit is obligated during the Kyoto period by means of domestic measures. The Dutch

government is allowed to compensate the other half by means of projects abroad and

through the purchase of CERs/ERUs.

In addition, companies that are subject to the EU ETS can use CERs/ERUs to

partially meet their obligations, and they can trade with ETS companies in other EU

Member States (see 2.2.5). This makes the term domestic reduction target somewhat

relative. The extent to which countries and companies after 2012 will be able to attain

their reduction targets outside their own country is still being discussed, but the

expectation is that it will still be substantial after Kyoto.

For energy intensive industries (see 1.2.3) the most important European instrument

for the implementation of the domestic task ofSchoon en Zuinig is emissions trading

(EU ETS). For sectors that do not fall under the EU ETS, such as transport and the

built environment (see 1.2.6), the most important instruments are specific European

standards for energy consumption, such as those applying to cars or appliances.

This share of Dutch national policy in the total picture varies. Regarding the intended

total emission reduction of 30%, a distinction has been made between sectors that fall

under the EU ETS and those that do not. The Dutch government plays a limited role

in the emissions trading via EU ETS, which regulates 45% of the CO2 emissions in the

Netherlands. This concerns large companies in sectors such as steel, cement andenergy. Small companies in these sectors do not have to participate.

Supplementary national policy is more important with respect to non-ETS companies.

For example, the Dutch government has obligated small industrial companies that fall

outside the EU ETS to implement all energy saving measures that have a payback period

of up to 5 years. The distinction between ETS and non-ETS is primarily determined by

the extent to which the emissions are easily monitored by the government and can be

kept up to date by the source company without incurring high costs.

Regarding the national targets for energy efficiency and the proportion of sustainable

energy, there is a national policy for both ETS and non-ETS sectors. This policy usually

takes the form of voluntary agreements (convenanten), for example the agreement with

industry about increasing the energy efficiency of the entire chain by 30% by 2020, or

the agreement with the housing cooperatives and construction companies that in 2011,

500,000 housing units will be energy efficient. These measures can be additionally

supported by European and national standards, and financial or fiscal incentive policy.


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There has been discussion about how big of a role national policy can play relative

to European policy. Critics believe that it is an exaggeration to say that three-fourths

of Dutch policy is determined in Brussels. They refer to countries such as Germany

and Denmark within the EU and the state of California in the USA which, due to their

own national or regional policy, have moved far ahead. Overestimating the influence of

European policy on the space that is available to national policy despite the ambitious

national targets could lead to a wait-and-see approach to the design of national

policy in the Netherlands.

1.2.3 The biggest polluters do it on the market

Aim and structure of the current European emissions trading system (EU

ETS)

Two years after the Emissions Trading Directive was approved, the EU ETS actually

began operation on 1 January 2005. To deal with the initial growing pains, it was decided

to begin with a trial period of three years. In 2008, simultaneously with the beginningof the Kyoto period, the second trading phase began the actual work. The second

trading phase, like the Kyoto period, will continue until the end of 2012. Although the

current phase is still in full operation, in December of last year the EU decided that a

number of aspects in the situation described below will change significantly after 2013,

when the third trading phase begins. This is discussed in Chapter 2.

In the current situation, the scope of the EU ETS is limited to the CO2

emissions of

only a handful of energy intensive industries. The industries that fall under this system

are the electricity sector, iron/steel, cement, refineries, paper/pulp and ceramics/bricks.

Small companies in these sectors are exempt. The criterion for exemption differs; in

many cases a thermal input capacity of 20 MW is the lower limit for installations that

generate heat or electricity.

However, for some industries there are specific standards, such as the cement

industry, where ovens with a capacity below 50 tonnes per day are exempt from

emissions trading. In addition, installations in non-industrial sectors, but which do have

a thermal input capacity above 20MW, are also obligated to participate in emissions

trading. In total, the EU ETS system involves approximately 11,000 installations, which

together are responsible for half of the CO2

emissions in the EU.

How does the EU ETS system work? Companies that fall under the EU ETS areassigned an emissions budget, comparable to the AAU budget of individual countries.

Theoretically, the budget is lower than the emissions of the company at the time of

allocation, so that it is compelled to cut emissions. Until now, participating companies

have been allocated virtually all their European Allowance Units (EAUs) by their

national governments for free. Each EUA provides an allowance for 1 tonne of CO2-eq

emissions.

The total quantity of the European emission allowances was determined at the

beginning of the trading period. Until now, every Member State has created its own

National Allocation Plan (NAP), which must be approved by the European Commission.

As part of the approval process, the Commission has the right to lower the national

ETS emission ceiling if they believe that the Member State has proposed an overly

generous allocation. The NAPs of 27 Member States, added together, form the EU-

wide emissions ceiling for ETS sectors.

Box 6: Three waves of sustainability

The structure of the Schoon en Zuinig programme

The Schoon en Zuinig programme stipulates how the current cabinet is to take significant

and tangible steps to reverse the trend of increasing greenhouse gas emissions. The pro-

gramme contains a coherent package of measures and policy instruments with the intention

of reducing estimated greenhouse gas emissions by 96Mt (from 246Mt to 150Mt in 2020).

The latter figure is in accordance with the national target to reduce greenhouse gas emis-

sions by 30%. The programme was launched in 2007 and focused initially on a package of

policy measures that was already present. During the second wave, Schoon en Zuinig will

focus on options that cannot be implemented for several years, for example in cases where

the technology is still at the demonstration phase. Finally, the programme has established an

innovation agenda for the middle to long term.

At the present time, 1.3 billion is being structurally budgeted every year for sustainability

policy, which the current government has supplemented with temporary additional funding,

which will rise from 140 million in 2008 to 500 million in 2011. The measures cover a broadspectrum, including fiscal measures such as an energy investment credit and lower sales

tax on low-emission cars, as well as funding for research and pilot projects. As part of the

economic stimulus package that was announced in March 2009, an additional 1.2 billion

will become available in 2009 and 2010.

The implementation of the SDE (incentive scheme for sustainable energy production)

is one of the most important policy contributions of the current government. This incentive

scheme promotes the production of various types of green electricity and green gas by

means of a feed-in rate (a relatively high, fixed payment per kilowatt hour of electricity or per

cubic meter of gas for a period of 10 to 15 years). For each type of energy, a maximum was

established. The total budget for 2007-2011 is 326 million. After this, the budget becomes

unclear, although the government (and a majority of Parliament) decided in March 2009 that

the SDE scheme will be continued after 2011 (in modified form), and that beginning in 2014,

an additional 160 million per year will be budgeted for wind energy at sea.

Source: Werkprogramma Schoon & Zuinig, VROM, 2007 and Aanvullend beleidskader 25 March, Ministry of Economic

Affairs, 2009.

When you first devise a system, you make it more

complicated than necessary. Over the years, it can be

streamlined.

At the end of every year, each ETS company must return emission allowances

that equal the number of tonnes of CO2-eq emitted. A company can compensate

excessive emissions by purchasing surplus allowances from another ETS company. If

the price is high enough, then companies will be encouraged to invest in technology

that reduces their emissions, instead of purchasing additional allowances.

However, reduced emissions are not obligatory. Companies do not have individual

emission ceilings and can continue to emit unlimited quantities as long as they can

return the required number of emission allowances at the end of the year to their

national emissions authority. Moreover, ETS companies can increase their scope to

emit CO2by purchasing emission allowances from outside the EU ETS; these external

allowances can also be used within the trading system (see Box 8).

Strict monitoring ensures that no cheating takes place and that the emissions

bookkeeping, which is used to determine that the number of allowances the

companies must return, is correct. For example, in order to obtain an emissions


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permit, companies in the Netherlands must submit a monitoring plan to the Dutch

Emissions Authority (NEa), and they must have their annual CO2 report reviewed andapproved by an independent environmental accountant. Operation without a permit or

approved bookkeeping is penalized. Inspectors from the NEa also perform inspections

year-round. However, the enforcement procedures within the EU have not yet been

harmonized; every Member State does what it pleases.

1.2.4 Rock bottom prices for rock bottom demands

Operation and constraints of the current EU ETS

The newly created EU ETS made a flying start. A lively trade in European Allowance

Units (EUAs) developed relatively quickly, not only between ETS companies

themselves, but also as a new investment category on various exchanges. This led to

a transparent unit price for the costs of CO2

emissions. The price of a the EUA, which

provides an emission allowance for 1 tonne of CO2-eq, also rose more quickly than

expected from 8 at the beginning of the trading in 2005 to 30 a year later. However,

the honeymoon was over when it was an

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Concise Guide Through the Climate Maze