Fig. 1. Activity starting date.
the UNFCCC in Buenos Aires opened the door to prolong the pilot phase beyond 1999 for a yet
undetermined period Decision 6CP.4. Given this schedule, one might expect that AIJ would be
mainly pursued during the five-year period 1995 – 1999. As Fig. 1 reveals, a great number of projects
do not conform to this expectation. Looking at the project starting date, we find that 29 projects
were initiated before the program was introduced in 1995, and 16 projects have not been imple-
mented by now which implies that they will start on a date later than 1999. Only 98 projects or
69 were taken up during the AIJ period of the Berlin Mandate.
7
This picture becomes even more pronounced if we look at the project ending date. Here we find
that virtually all projects have a lifetime exceeding 1999. In fact, the average duration of projects is
31 years. Thus, the true effects of AIJ are largely realized outside the stipulated AIJ program pe-
riod. This evidence suggests that AIJ projects have been undertaken to a great extent indepen-
dent of the AIJ program and largely with the expectation that the pilot phase would be pro-
longed beyond 2000 or transferred into a program with crediting.
8
3
.
2
. Regional distribution of AIJ The 1998-report on AIJ by the UNFCCC UN-
FCCC, 1998 points out that ‘the geographical distribution of activities... shows a marked imbal-
ance’. This analysis confirms this view see Fig. 2:
3. The results
Based on the analysis of these data I have been able to identify six major issues on AIJ:
the timing of AIJ,
the regional distribution of AIJ,
the distribution of activity types,
the private sector participation in AIJ,
the baseline issue,
the cost of AIJ. The results will be presented in this order.
3
.
1
. The timing of AIJ Decision SCP.1 stipulates that the pilot phase
for AIJ begins in 1995 and ends at the latest in 1999. It was only in late 1998 that the parties to
Fig. 2. Regional distribution.
7
There is some confusion in the current DNA reports with respect to the meaning of the activity starting date. Several
projects 25 were reported with a starting date but actually have not started in a technical sense, e.g. because lack of
funding. According to the UNFCCC classification they are ‘mutually agreed’ but not ‘in progress’. Omitting these projects
would, however, not change the general results presented in this study.
8
The crediting of emission reductions to investor countries is specifically excluded during the pilot phase created by the
Berlin Mandate Decision SCP. 1, but it is possible under Article 6 and Article 12 of the Kyoto protocol CDM and JI,
which could become effective as early as 2000 and 2008, respectively.
Out of 139 projects
9
, 95 projects 68 were lo- cated in Economies in Transition. Only 32 of
the projects were located elsewhere, mainly in Latin America 19. Considering the amount of
GHG reduced, however, a more balanced picture emerges. The greatest effect of GHG reduction
will be achieved in Latin American countries with 44 of all GHG reduced or sequestered located
there as compared to only 30 in Economies in Transition.
This contradicting evidence on the regional dis- tribution of AIJ can be traced back to a general
inhomogeneity of AIJ projects: the average amount of GHG reduced by project is five times
larger in Latin America than in Central and East- ern Europe.
10
This is due to the fact that some European investor countries e.g. Sweden with a
large number of investments in EITs e.g. 50 projects have stipulated in their national pro-
grams that ALT shall be ‘small to allow for quick implementation’
www.unfccc.defcccccinfo aijprogaij –pswe.htm.
11
Looking at the share of projects in Fig. 2, we can also confirm the view of the UNFCCC that
‘the bulk of current AIJ is between Annex I Parties’’
12
UNFCCC, 1997a, 4, reaffirmed in UNFCCC 1998, 4. Since only KIT hosts and all
investor countries are in Annex I, we can easily figure out that 68 of all projects i.e. the KIT
share has been between Annex I-Parties. Only 32 the remaining share has taken place be-
tween Annex I- and the Non-Annex I-Countries of Latin America, Africa and the Asia Pacific
region. There is one plausible explanation for this pattern of cooperation. Most projects were ini-
tiated before the Kyoto-Conference in 1997 which implies that they were done under the reasonable
expectation that AIJ projects would if at all be incorporated after 2000 into a program of joint
implementation between Annex I-Countries only. Before
the Clean
Development Mechanism
CDM was introduced in Kyoto it was rather unsure whether AIJ with Non-Annex I-Countries
could ever be used to support Annex I-Countries fulfill their emission reduction commitments. Thus
it was much more attractive for Annex I-Coun- tries to invest in the Annex I-Countries of Central
and Eastern Europe rather than in Non-Annex I-Countries elsewhere in the world. However, this
is only one explanation for the observed pattern of co-operation in AIJ. Looking at the regional
investment portfolios in Fig. 3, another reason emerges, which I will call the ‘neighbourhood
trading’ hypothesis.
Reviewing the investment portfolio of Asia- Pacific investor countries APC, i.e. Australia
and Japan, we find that all projects take place within neighbouring Asian-Pacific economies, pre-
dominantly in China. In the case of Europe EUR, projects in EITs dominate the AIJ portfo-
lio by almost 90 89 of 99 projects. In the U.S. NAC 23 of a total of 35 projects 66 are
located in Latin American Countries LAC. This
9
Four projects in EITs criusa07a. Ituswe09-98. Ivandl0I-98 and estswe17-98 were omitted from this comparison because
the emission reductions of these projects were not available on the UNFCCC’s website as of April 30, 1999.
10
The respective values of the average project size are 3.2 Mt CO
2
for Latin America and 0.6 Mt CO2 for Economies in Transition.
11
A detailed list of national AIJ programs can be found in UNFCCC 1997b. An example of a national AIJ program is
the United
States Initiative
on Joint
Implementation U.S.I.J.I., 1998.
12
The term Annex I-Countries refers to Annex I of the United Nations Framework Convention on Climate Change.
This list of countries includes the 24 original OECD member countries and 11 former states of the Soviet bloc as well as the
European Community as a regional economic integration or- ganization.
Fig. 3. Regional specific investment portfolios number and share of projects.
Fig. 4. Regional specific investment portfolios amount in mill. and share of investor funding.
Americas,
14
and the Baltic Sea Region Initiative of the Nordic States and the EU.
15
In the case of Australia and Japan, the focus on neighbouring
Asia-Pacific economies is a stated, trade and devel- opment policy-related objective of the national AIJ
programs.
16
This result becomes even more pronounced if we look at the flows of AIJ investment in Fig. 4. Based
on a study of 117 projects with a declared compo- sition of funding, we find that US 77 million 89
of the total European AIJ funding went to neigh- bouring EITs. US 47 million of a total US funding
of US 49 million went to LACs. Stemming from their regional focus on the Asia-Pacific region, the
AIJ investment of Japan and Australia US 27 million remained entirely within that region.
3
.
3
. Distribution of acti6ity types According to the International Panel on Climate
Change IPCC, climate change mitigation ac- tivities can be classified as related to energy
efficiency EEF, renewables REN, fuel switch- ing FUE, fugitive gas capture FGC, land use
change and forestry LIUCF,
17
agriculture, in- pattern of intra-Asian, intra-European and intra-
American cooperation ‘neighbourhood trading’ is significant according to contingency analysis indi-
cators.
13
It can be explained by reference to the established institutional links of development co-
operation. Examples are the hemisphere partner- ship for development of the 1994 Summit of the
Fig. 5. Activity type.
14
See US Department of State, Summit of the Americas Action Plan 1995.
15
See Baltic Sea States Summit 1996, Presidency Declara- tion, Visby 3 – 4 May 1996, and Commission of the European
Communities, Final Communication from the Commission Baltic Sea Region Initiative. Brussels, 10.04.1996, SEC 96
608 Commission of the European Communities, 1996.
16
The Australian International Greenhouse Partnerships Office 1997 states as one main objective of AIJ ‘to enhance
Australian trade and investment links in environmental tech- nology and services..., particularly in the Asia-Pacific region’
reaffirmed in an interview with Hugh Withycombe, project officer of the AIJ Australia offiice, in JIQ 31, 1997 Withy-
combe, 1997. The Government of Japan is cited in JIQ 22, 1996, to believe ‘that the role of Japan is to share technologies
with other countries, especially with Asian economies’ Mat- suo, 1996. Recentlv the Government of Japan initiated an
effort to co-operate with Russia to broaden its regional scope of AIJ Matsuo, 1998. but this effort has not yet led to actual
projects between these countries.
17
The IPCC actually distinguishes between three different LUCF activities. i.e. afforestation, reforestation and deforesta-
tion. Experience in the pilot phase, however, shows that this systematically important distinction is not very useful to clas-
sify AIJ projects in this field, since most of these projects combine measures to protect existing forest and activities to
reforest non-forest lands e.g. abandoned pasture. Following this. U.S.I.J.I. has classified its latest projects in this sector as
‘LUCF’ see e.g. criusaO9-9S.
13
Throughout this study we applied contingency analysis to test the existence Pearson’s x
2
, the strength Contingency Coefficient and the direction Goodman and Kruskal’s t of
the claimed contingencies. Values of these parameters with an asterisk are significant, which implies that the Null-hypothesis
of nonexistence, weak or opposite contingencies must be re- jected at a 2 level.
Fig. 6. Average GHG reduction by activity types Mt CO
2
.
It is of some interest to look at the regional distribution of investment on different activities
Fig. 7. Europe, Japan and Australia focus on technological mitigation activities EEF, FUE,
FGC, and REN while the United States displays a much greater involvement in forestry projects
LUCF. These regional specific investment port- folios can be traced back to the provisions from
national AIJ programs. Several European na- tional AIJ programs exhibit preferences for fuel
switching and energy efficiency related projects e.g. in Germany and Switzerland or for quickly
implementable small investments in Sweden, whereas in the United States no particular focus
on project type and size can be found in the national AIJ program. In the case of Japan and
Australia again, we find a consistent priority of ‘sharing of environmental technology and ser-
vices’ in both national AIJ programs see above footnote 16.
Another influence on the observed distribution of activity types stems from national AIJ priori-
ties of host countries. For example, the govern- ment of Poland, who is host of 21 projects of
coal-to-gas conversion and four projects of energy efficiency enhancement, selected this portfolio
with the aim ‘to achieve technological develop- ment and upgrade equipment in activities that
directly reduce the generation of GHG in produc- dustrial processes, solvents, waste disposal and
bunker fuels. Only the first five indicated activity types have been implemented in AIJ see Fig. 5.
18
The majority of projects 83 have been techni- cal by nature in energy-related activities EEF,
FU1S, REN or FGC. Only 17 of the projects have been related to LUCF activities forest
preservation,
reforestation and
afforestation. Looking at the share of GHG reduced or se-
questered, a rather different picture emerges. LUCF-projects account for more than 38 of the
GHG reductions as compared to a remainder of 62 for all other emission mitigation activities.
This result is largely due to the fact that LUCF projects exhibit a much longer lifetime 39 years
on average than average AIJs 21 years.
Again, this contradicting evidence can be traced back to the great inhomogeneity of the projects.
As can be seen in Fig. 6, the average GHG reduction per project is much greater in LUCF-re-
lated activities compared to fossil fuel-related ac- tivities. A very notable exception to this is fugitive
gas capture, which shows the largest GHG reduc- tion per project.
Fig. 7. Regional specific activity portfolios number and share of projects.
18
Arguably, two projects of fugitive gas capture nldrusOI could also be classified as related to waste disposal because
they are on sanitary landfilling with energy recovery. In this study. however. I follow the classification of these projects as
FGC by the UNFCCC.
Fig. 8. Share of GHG reduced by gas type.
19 to CH
4
. The share of these gases is still remarkably high because it results from very few
projects. The share of CH
4
comes from only six projects of fugitive gas capture with an average
GHG reduction per project of 5.5 Mt CO
2
equiv- alents see Fig. 5. The N
2
O reductions are virtu- ally all from one Integrated Agricultural Demand
Side Management project in India indnorO1-98. The higher global warming potentials
20
of these gases largely contribute to the high efficiency of
projects in this field on the per project basis Fig. 6 and on the per dollar basis Fig. 12.
3
.
4
. Pri6ate sector participation in AIJ AIJ is conceptually a program of bilateral co-
operation between countries. Private sector in- volvement is not a formal part of the program. It
has been delegated to the Parties to the Conven- tion to induce private sector participation and
funding, e.g. by crediting emission reductions from AIJ against national CO
2
tax duties or voluntary commitments by national industrial sec-
tors. However, such incentives are not existing in any national program. On the contrary, most
countries have explicitly foreclosed the opportu- tion of goods and services’. On the other hand,
the government of Costa Rica promoted projects in the forestry sector ‘to claim the cost of environ-
mental services executed by private forest owners at international level’. Costa Rica hosts 15 AIJ
projects, 11 of which are LUCF-related, i.e. in sustainable
forestry, reforestation
and forest
preservation.
19
There is a suggestive link between the observed regional pattern of AIJ ‘neighbourhood trading’
and the sectoral pattern of AIJ. Private US in- vestors, looking for AIJ in their neighbourhood,
find hosts who favor forestry projects, which confirm to the U.S.I.J.I-criteria of project diver-
sity and cost-effectiveness. Public or publicly cofi- nanced private investors in Europe and Japan find
hosts in their neighbourhood EITs and China, who share the goals of energy efficiency and fuel
substitution. Of course, the actual reasoning for each AIJ project may have been quite different
but this is the typical reasoning that the aggregate data suggest.
Another general result is the dominance of CO
2
-related projects see Fig. 8: 77 of all GHG reductions from AIJ are occurring as CO
2
reduc- tions. Of the remainder 4 is going to N
2
O and
Fig. 9. Private sector funding share.
20
The global warming potential GWP measures the CO
2
equivalent contribution to global warming of other greenhouse gases e.g. CH
4
and N
2
O. It is established by reference to the IPCC model on global warming Houghton et al., 1996, Tab.
3, and is conventionally based on a 100-year time horizon. The pertinent GWPs of CH
4
and N
2
O are 24.5 and 310, respectively.
19
The mentioned host country priorities in thc AIJ pilot- phase are drawn from www.unfccc defcccccinfoaij –np htm
Poland and www unfccc defcccccinfoaij –pcri.htm Costa Rica.
Fig. 10. Regional specific funding portfolios number and share of projects.
can be related to the fact that the US Initiative on Joint Implementation explicitly encourages pri-
vately initiated projects see U.S.I.J.I., 1998. We may halt at this point to establish an in-
terim result: AIJ investment exhibits regional spe- cificity. It greatly differs between the US, Asian
and European investor countries. US projects are typically i large in cost and effects; ii not
particularly focused on technologies; and iii pri- vately initiated. They are overwhelmingly imple-
mented in Latin American countries. European projects, on the other hand, are typically small,
publicly funded and related to energy efficiency and fuel substitution. They are predominantly
located in EITs. Asian projects are somewhat similar to European projects, i.e. they are small
and publicly co-financed
21
, however, they are ex- clusively focused on the AsiaPacific region.
3
.
5
. The baseline issue The determination of a reference case of emis-
sions ‘baseline’ to be compared to the projected or actual emissions of an activity is a crucial issue
in emission reductions crediting. While AIJ is formally not a crediting approach, it still calls for
a comparison of a reference case and a projected or actual emission scenario to establish the
amount of GHG reductions from a project to be reported to the UNFCCC. Experience with AIJ
can thus help to identify a practicable and accept- able method for baseline determination.
Several methods and procedures for baseline determination have been proposed in the litera-
ture on joint implementation see Chomitz, 1998, Michaelowa, 1998 or, for a brief overview, Jepma,
1997. For the purpose of this study, I have nity to credit AIJs at the national level see
FCCCSBSTA199712Add.1. Thus, we should expect that private investment in AIJ is insignifi-
cant. Looking at the share of private funding in Fig. 9, however, we find a surprisingly large
amount of private investment of 140 million, which compares to 47 million of public investor
AIJ funds. There is also a remarkably large share of public non-AIJ related funding, e.g. from the
Global Environmental Facility of the World Bank or bilateral direct aid. This result is based on a
study of the investor country funding in 131 projects, for which funding data were available.
Extending our analysis to the reports with non- available investor funding, we can identify an
even larger degree of private sector participation in AIJ. Of the missing 12 projects with total cost
of 96 million, at least 50 will be privately financed because these projects are initiated exclu-
sively by private sector entities.
Most of the private funding is from US in- vestors as can be seen in Fig. 10. In this figure,
AIJ projects were classified as private, public or mixed according to their funding composition. In
the case of non-available funding data, projects were classified according to an exclusive private,
public or a mixed institutional participation in the financing of the projects. Looking at the share of
private projects, we find that private US investors funded 29 out of the 33 private projects, whereas
only six private European projects and one pri- vate Australian project were reported. This result
21
The public funding of AIJ projects is much smaller in Japan than in Europe. In Japan, we find government support
for five projects in an amount of US 0.9 million. This compares to government support tor AIJ projects of US 42
million in the Netherlands FY 1996 – 1999, 12 projects, US 40 million in Sweden FY 1993 – 1997, 42 projects or US 18
million in Norway FY 1995-1999, 32 projects. These figures are
taken from
www.northsea.nljiqjapan.htm, www.
northsea.nljiqnether.htm,www.unfccc.defcccccinfoaijprog aij –pswe.htm, and an email-communication with M. Gerhard-
sen of the Ministry of Foreign Affairs of Norway.
developed a simplified scheme of four indicators taken from the designated national authorities’
reports to characterize observed patterns of base- line assessment. The first two of these indicators
are related to the method of defining the reference scenario, where I distinguish between a static and
a dynamic baseline SD on the one hand, and between a fixed and an adjustable baseline FA
on the other. In a stylized way we may define a static baseline as resulting from an extrapolation
of the status quo over the entire lifetime of a project, whereas a dynamic baseline is established
by considering changing trends of technology, economic policy, behavior, etc. The keywords to
identify a static approach in the DNA-reports is ‘unchanged over lifetime of the project’ which
may apply to deforestation rates, energy efficiency or energy demand. A dynamic approach, on the
other hand, can be identified in the DNA-reports either by models on future energy and environ-
mental trends or simply by a reference to new domestic technologies common in the host coun-
try instead of existing technology.
A fixed baseline can be defined in a stylized way as a ‘once and for all’ approach: Once defined, the
baseline will be valid over the entire project dura- tion. It will not be adjusted according to new
information arising in the course of project imple- mentation. An adjustable baseline, on the other
hand, will account for unforeseen outside devel- opments that affect the reference scenario. Under
an adjustable baseline such developments would lead to re-accounting of emission reductions. A
re-accounting of emission reductions during the implementation of a project may either result
from a changed reference scenario, e.g. due to a decreasing energy demand, or from a changing
project scenario, e.g. from unexpected technical problems and thus increasing emissions of the
project. The reader should be aware that adjusta- bility as defined above is applying to a changed
reference scenario.
Another important characteristic of determin- ing emission reductions from projects is the choice
of the scope of the project or system boundary. Two methods of accounting can be distinguished
in this respect: an accounting of direct or primary effects Di, and an accounting of indirect or
secondary effects Id. Typical secondary effects of AIJ are leakage from shifting deforestation, or
an increased energy demand in the course of an increased efficiency of usage-the so-called ‘snap-
back effect’.
A final characteristic of baseline assessment is the verification procedure, which can either be,
performed internally I or externally E by third parties, e.g. Non Governmental Organizations.
22
Fig. 11 depicts a dominating S-F-Di-E-pattern of baseline assessment, i.e. a predominant static,
once-and-for-all-approach in
determining the
baseline, which is concentrated on direct effects and verified externally. Compared to possible al-
ternative approaches this is a rather simple and straightforward approach, which is only compli-
cated by the involvement of third parties in the process of verification. This pattern is plausible
since AIJ are not eligible for real credits. The wide use of expensive external verification, on the other
hand, can be attributed to the strong support given to this procedure in several national AIJ
programs, e.g. in the US or Costa Rica see Tab. 3 of UNFCCC, 1997b.
Fig. 11. Baseline.
22
External verification of the baseline by an independent third party has been widely recommended for joint implemen-
tation because of a supposed incentive to ‘inflate’ the baseline in order to increase the amount of emissions reductions from
a joint project which can be favorable to both parties of a contract. See Wirl et al., 1998.
Fig. 12. Gross average reduction cost by activity-type t CO
2
.
revenues from fuel saving the amount of which can not be extracted from the available data of the DNA
reports, these ALl options are clearly ‘no regrets’, i.e. options with negative cost. Only renewables and
fuel substitution may have positive cost. They are at least much more expensive on average than the
options mentioned before. This result is compatible with the results of previous studies on the relative
cost-effectiveness of the different mitigation activi- ties e.g. Halsnaes et al., 1996, Ridley, 1998.
4. AIJ-What can we learn from the facts?
