Before JI projects can be given final approval by the UN, which is called ‘determination’ in official jargon, projects need the green light from both the host and investor country.
However, major JI host countries are slow to issue letters of approval (LoAs). Ukraine has officially backed 10 projects, Bulgaria 17 – but only two in the course of 2007 – while Russia has yet to begin its approval process.
In comparison, China and India – the two largest host countries under the other project-based mechanism of Kyoto, the clean development mechanism (CDM) – have approved more than one thousand projects between them.
"There are a lot of good JI projects that have come far in the development process, but they lack letters of approvals. The 2008-2012 window of opportunity is quite small, and it is difficult for investors to always wait," said Marcel Hanakam of 3C Group, a company purchasing carbon credits from JI and CDM projects.
Hanakam identified Russia as one area of concern. "When the JI procedures were published end of May we thought everything would start, but there are still things that need specification, such as efficiency targets and the interagency commission. That creates uncertainty," Hanakam told Point Carbon.
He pointed out that the flipside of the coin is that prolonged uncertainty over JI provides opportunity for buyers to purchase credits at a lower price, but noted that "the process has been on hold for quite some time now."
"We are hoping for some positive signals on post-2012 from the Bali conference that can improve the investment situation," he said.
Maurits Henkemans at the Dutch ministry of economic affairs, who buys of CDM and JI credits, told Point Carbon that it is his impression, too, that the main bottle-neck for JI now is the lack of host country approvals.
“Russia has not published its approval procedures yet and has not issued any LoAs. Ukraine is improving, while the process is not very speedy in Bulgaria,” he said. Henkemans is also a member of the JI supervisory committee (JISC), the UN body overseeing the mechanism.
CDM ahead
Comparing the CDM and JI does not provide an entirely correct picture of the situation, as some CDM projects, based in developing countries, have been in operation for several years, while JI's crediting period only begins in 2008. But while 781 CDM projects have been registered at UN level, only one JI project has achieved final determination. The second, a hydro power project in Bulgaria, began the 45-day process this week.
"The market participants feel that the CDM is a proven mechanism with the first credits entering the market. While issuing credits is not possible yet in JI, buyers see that the amount of registered JI projects does not increase, which keeps interest down,” said Jelmer Hoogzaad with Dutch company Climate Focus, a CDM and JI service provider.
"There are a number of companies very active on the investment side, developing large-scale projects. These investors take the host country approval and registration risk. If they succeed in bringing the large volumes of ERUs from these projects to the market, buyers’ will soon gain confidence in JI. In theory, host countries can wait with approving JI projects up to the end of 2012 but the question is whether buyers are willing to wait that long," he argued.
"Many market participants consider the host country risk too high. Apart from the difficulties with approvals, they feel uncertainty whether the host country will actually transfer the ERUs," Hoogzaad said.
Werner Betzenbichler with verification company Tuev Sued argued that it is not a major disadvantage that projects aren't yet determined, and said that "emissions reductions cannot be verified for the purpose of issuing ERUs until after the projects start in 2008."
Determination is also only valid when verifiers, called independent entities (IEs) in the JI language, have achieved final accreditation by the JISC. All verifiers active in the CDM market were given provisional accreditation last year, but only to keep the JI project development process moving. All IEs must be awarded a renewed JISC approval. Betzenbichler expected this to be in place early 2008 at the latest.
"Another reason why projects haven't been submitted for determination is that determination reports cannot published until the host country's JI approval rules have been published by the JISC," he said.
Russia, widely expected to be the main supplier of JI credits, has not had its rules published by the supervisory committee. Betzenbichler expected a range of projects to be published as soon as the Russian rules are in place. Tuev Sued alone will be able to publish "more than 10" determination reports when this happens, according to Betzenbichler.
Since the JISC started accepting project design documents from JI projects in October 2005, 75 projects have been submitted for review, with the total potential to cut greenhouse gas emissions by 158.3 million tonnes of carbon dioxide equivalent. Most of the credits would be generated in Russia.
The 75 projects have all been submitted under JI’s Track-2, the slow, CDM-like version of the mechanism. Host countries that comply with certain UN criteria, such as functioning registries and working greenhouse gas inventory, qualify for Track-1, a faster procedure that leaves determination to the host country. At the time being, no countries qualify for Track-1, though a number of projects are said to be destined for this procedure.
Oslo
