Under the Kyoto Protocol, the total GHG emissions of each industrialised country would be limited according to their emission targets. Countries subject to these targets would be allocated a specified number of emission units. JI promotes investments by industrialised countries and economies in transition (Annex I countries), in projects undertaken in other Annex I countries. The investor coun-try or private legal entity is then able use the resulting Emission Reduction Units (ERUs) from projects towards their own emission commitments under the Kyoto Protocol or may sell the ERUs to allow another company or country to meet its own target. The received ERUs from a JI-Project are equal to the emission reduction achieved in the host country.

A JI-project requires the approval of the countries involved and must result in emission reductions that would not have otherwise occurred in its absence

Benefits of JI-projects

JI projects provide several benefits to the different parties involved:

• The benefit to the host country and local partners is that investment funds are provided for sustainable economic growth that might not otherwise be available;
• The benefit to the investor country or company is that emission reductions are met at a lower cost than would be possible at home;
• An investor company may benefit from an additional source of revenue provided by selling the credits that are assigned to the project.

Emission Reduction Units (ERUs)

ERUs are standardised GHG reduction credits that are becoming a commodity which can be bought and sold on the global market. Under the JI mechanism emission reductions can be claimed for the first Kyoto commitment period 2008 – 2012. However, it may be possible to make arrangements in advance for transfer of the JI rights to a third party, in return for upfront capital, or payment on delivery of the ERUs. Even though the approval processes for JI projects have still to be established, some early trades of ERUs are already occurring.

JI two track approach

The international climate change agreements provide two sets of JI procedures commonly referred to as the ‘Two Track’ approach. The Two Tracks refer to alternative procedures and project cycles for JI projects that are open to project development depending on the status of the host Country in meeting the eligibility requirements.

Under both tracks the Countries are required to establish a Designated Focal Point for approving projects and have in place national guidelines and procedures for approving JI projects.

JI First Track

The First Track procedures for JI apply when the host country meets all the eligibility requirements related to the transfer and acquisition of ERUs. In this situation, Annex I host countries are allowed to apply their own procedures for assessing JI project emissions additionality.

The eligibility requirements that allow an Annex I host country to participate in JI First Track are stricter than the requirements applying to the Second Track. The relevant eligibility requirements for countries to undertake First Track projects include having in place a national system for emissions estimation, having submitted an annual inventory of these emissions and having established the nation’s assigned amount of Kyoto emission allowance units.

The host country is then able to issue and transfer ERUs to the investing party, without recourse to any international body for approval. The process for First Track will depend on the host country’s own procedures.

Since there are no specific requirements for verification of ERUs under the First Track JI, the JI project cycle under the First Track could vary from host country to host country, and could differ from Second Track JI procedures. It is likely that the First Track project procedures adopted will be more straightforward and simple than those established for the JI Second Track. It should be noted that a Party meeting the First Track JI requirements may at any time opt for using the JI Second Track procedure. Project developers that want to establish a JI project under the First Track should contact the host Party’s JI or climate change authorities for advice on how to proceed.

JI Second Track

Second Track procedures, which are likely to be quite similar to those for a CDM project, apply when the host country does not meet the eligibility requirements for First Track JI. Under Second Track, projects are assessed according to procedures administered by an international regulatory body called the ‘JI Supervisory Committee’. The project developer has to prepare a Project Design Document (PDD) and have this approved by an Accredited Independent Entity accredited by the Supervisory Committee. After projects are approved under this process, the host countries will be able to issue and transfer ERUs to the investing party.

Host countries for JI-projects

The countries that can potentially act as host countries are those with their own Kyoto targets. The most likely host countries are those whose emissions saving potential exceed their Kyoto target i.e. Central & Eastern Europe and Former Soviet Union countries. Less promising host countries are those that will need to employ all cost-effective domestic project opportunities to meet their Kyoto target. However, there is an increasing recognition that these countries are able to support JI outside sectors covered by national policies and measures, as a method to encourage industry to reduce emissions in all economic sectors. Likely investors include those who will have difficulty meeting their targets, or find it relatively expensive to do so. For example, the Netherlands Government has decided to meet approximately half of its emission reductions target through JI and CDM projects, and has put in place the necessary funding to achieve this. The Austrian and Danish governments, amongst others, are also establishing funds to buy credits from JI and CDM projects.

Annex I countries and non-Annex I countries

The UNFCCC divides countries in two main groups: Annex I countries that include the industrialised countries and countries with “economies in transition”, EITs (the Russian Federation, the Baltic States and several other Central and Eastern European countries). All the others are called non-Annex I countries.

The Kyoto Protocol strengthens the Convention by committing Annex I countries to individual, legally binding targets to limit or reduce their GHG emissions. The individual targets for Annex I Par-ties are listed in the Kyoto Protocol’s Annex B. In practice, Annex I of the Convention and Annex B of the Kyoto Protocol are used almost interchangeably. However, strictly speaking, it is the Annex I countries which can invest in CDM projects and non-Annex I countries can host CDM projects.