Lima, Peru from May 12 to 13, 1999

Introduction

The Eleventh Meeting of Environment Ministers of Latin America and the Caribbean, held in Lima, Peru, from 10 to 13 March 1998, agreed in Decision 6 to "urge the countries Parties to the Convention on Climate Change to sign and ratify the Kyoto Protocol to ensure that it enters into force as soon as possible". The same Decision also calls for the establishment of a working group to "continue analysing, improving and designing proposals regarding the implementation of the clean development mechanism, and to identify and enhance the experience gained by the countries. The final objective is to formulate an initiative that will help to establish a regional position and regional negotiating capacity.

In its capacity as President of the Forum of Environment Ministers of Latin America and the Caribbean, the National Environment Council of Peru convened a meeting of the Working Group to Implement the Clean Development Mechanism, held on 12 and 13 May 1998 in Lima, Peru. Preparatory to that meeting, the Inter-Agency Committee, formed by UNEP, UNDP and IDB, convened a previous session of an Ad hoc Group on 14 and 15 April 1998 in Costa Rica to identify possible items that should make up the provisional agenda for the Working Group meeting in Lima.

This document presents a summary of the main ideas discussed by the Working Group to identify possible areas of common interest to the region in relation to the clean development mechanism without compromising the official position of each of the countries Parties to the United Nations Framework Convention on Climate Change, which is the appropriate negotiating forum to deal substantively with this issue.

This document will be sent by the President of the Forum of Environment Ministers of Latin America and the Caribbean to its members with the support of the Inter-Agency Technical Committee.

The Working Group thanked the Government of the Republic of Peru and the National Environment Council, in particular, for the excellent organization of the event, and UNEP, UNDP and IDB, who form the Inter-Agency Technical Committee, for their support in holding this meeting of the Working Group.

Objectives of the Clean Development Mechanism

In accordance with Article 12 of the Kyoto Protocol to the United National Framework Convention on Climate Change, the clean development mechanism (CDM) has two objectives:

• "To assist Parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the Convention "; and

• "To assist Parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3 ".

Article 12 stipulates that emission reductions resulting from each project activity shall be certified on the basis of: voluntary participation approved by each party involved; real, measurable, and long-term benefits; and reductions in emissions that are additional to any that would occur in the absence of the certified project activity. The same Article also states that "certified emission reductions obtained during the period from the year 2000 up to the beginning of the commitment period can be used to assist in achieving compliance in the first commitment period".

Additionally, Article 12 mentions the function of assisting "in arranging funding of certified project activities as necessary ".

Other than these specifications, the vast majority of aspects regarding the design and operation of the clean development mechanism are yet to be defined. Consequently the Forum of Environment Ministers of Latin America and the Caribbean is offering an opportunity for pertinent discussion-

The Principal Functions of the Clean Development Mechanism

The principal functions of the CDM shall consist of:

A. Ensuring that the emissions reduction projects proposed fulfil the following eligibility criteria:

• That they should contribute to the sustainable development of the developing countries under criteria designed independently by each country as a sovereign nation.

• That they should be conducive to the mitigation of climate change.

• That the reduction should be measurable and certifiable over time.

• That the environmental benefits should be of a permanent nature and additional to any that would occur in the absence of the project.

The Working Group agreed that the structure of the CDM should be defined in accordance with the functions assigned to it, but without developing greater bureaucracy and by basing it-o-n. existing entities. In that regard, they made the following observations:

Executive Board

Article 12 provides for the establishment of an executive board to supervise the CDM. It also indicates that the Conference of the Parties serving as the meeting of the Parties to this Protocol shall designate operational entities whose functions will include certification.

The executive board should unite the legitimate interests of the Parties to the Protocol and it should be formed in a manner that provides balance between the Parties included in Annex I and the Parties not included in Annex 1. The functions of the executive board should include:

• Promotion of the market and its transparency.

• Ultimate responsibility for the certification and verification of reductions.

• Registration and validation of certification agencies.

National Authorities

In the developing countries, the CDM needs to be supported by a national authority, either existing or to be established, that is designated for purposes of the clean development mechanism. These designated national authorities could assume functions, such as those listed below:

• To determine whether projects will contribute to sustainable development and are compatible with the country's priorities, and to assess projects under this criterion.

• To establish criteria and define mechanisms for project assessment and approval, in accordance with the international procedures and methodologies established for the CDM

• To establish criteria to ensure that the projects presented will provide equitable distribution among project participants of the economic benefits resulting from the emission reductions.

• To certify emission reductions at the national level, based on approved project activities, confirming the reductions achieved.

• To channel and promote broad participation of public and private entities, as well as all social actors, in emission reduction activities.

• To work in coordination with international CDM bodies, including the certification operational entities provided for in Article 12, paragraph 5.

Other Actors

The Working Group noted the importance of defining the complementary roles of agencies with experience in the field of climate change, such as UNEP in supporting certification and in linkage with other international treaties; UNDP in capacity building, in the development of viable national CDM projects and in the exchange of experience among countries; and IDB in the analysis and development of operational approaches for putting the CDM into operation in the region.

Article 12 refers to "project activities resulting in certified emission reductions". In that regard, the Working Group agreed that:

• Each country should specify the priority sectors of interest to it, so as to provide guidance for the formulation of project activities to be included in the CDM.

• It would be advisable to ensure that the criteria for accepting projects of different sectors under the CDM (Article 12) should be the same as those in Article 3 used for compliance with reduction commitments assumed by the countries included in Annex 1.

• Emission reductions should be determined on a project-by-project basis. Clarification of the baseline concept is needed, as is the establishment of transparent criteria and methodologies, as well as a system of guarantees to ensure permanence of the benefits of certified emission reductions.

• Certified emission should be consistent with those obtained through other mechanisms of flexibility provided for in the Protocol, and should be subject to control procedures and methodologies that do not discriminate against activities undertaken in countries not included in Annex 1.
  

Emissions Reduction Trading

The Working Group recognized that the development of a global emissions reduction trading system is foreseen. The Group agreed that the CDM should be able to form part of that future system, based on the certification and guarantee of projects that would produce certified emission reductions.

Some of the cost projection models that have been used internationally foresee a certain percentage of reductions that could be achieved at a low cost through energy efficiency measures in the industrialized countries. Beyond that percentage, all additional reduction could only be achieved at a high marginal cost in the industrialized countries. There is also a margin of difference between the cost of these reductions and those that could be achieved in the developing countries. That margin of difference is precisely what offers an opportunity to lower the cost of global reduction. And reducing the cost on that basis should be compatible with the interests and needs of the developing countries.

It was also considered recommendable:

• To explore the possibilities that the adaptation component offers particularly vulnerable developing countries, as provided for in article 12.8, to improve the general conditions for equitable distribution of the cost differential through the creation of a fund to be administered by an entity other than the CDM, but subject to the guidelines issued by the executive board.

• To examine options for setting prices through the use of collective supply criteria that will control and ensure suitable profitability in the sale of emission reductions.

• To create a mutual benefit scheme establishing base criteria for the equitable distribution of any possible benefits among the participating countries, as well as provisions for the administrative costs and the adaptation component.

• To work towards keeping supply and demand separate from the projects themselves through a mechanism for trading international certificates that use a standard unit of measure and are backed by emission reductions certified at the national level in the countries not included in Annex 1. This mechanism could adopt the modus operandi attached to this document.

The Working Group recognized the importance of continuing dialogue within the Latin American and Caribbean Group in order to develop common positions.

It considered it equally necessary to maintain dialogue within the Group of 77 and with China as a means of asserting those positions. During the third session of the Conference of the Parties, negotiating power depended on being united with the Group of 77 and China. As negotiations progress, it is once again necessary to strengthen this bloc, with special consideration for Mexico, a Latin American country, but not a member of the Group of 77.

The designated national authorities could endorse emission reductions resulting from project activities in order to submit them to the clean development mechanism. National accreditation would be granted on the basis of compliance with the criteria established by the Convention, the Protocol and the CDM, as well as additional criteria adopted by each country. Nationally accredited reductions should be sent by the designated national authorities to the CDM operational entities for certification.

Once they are certified, the CDM would accredit national reductions to provide backing for their international emission certificates with a standard unit of measure. In such accreditation, the CDM could, when pertinent, apply a safety margin which could include different degrees of risk implicit in the projects. These international certificates would be managed by the CDM on consignment for sale to the end user. The only way of obtaining international certificates would be to purchase them on the capital markets where the CDM places them on consignment.

The proceeds obtained from trading emission reductions through the CDM would be sent to the designated national authorities, who would be in charge of national distribution of the proceeds obtained in this manner.