the First Commitment Period of the Kyoto Protocol

The role of forests in absorbing atmospheric carbon has been recognized under the Kyoto Protocol, which allows signatory countries to use forests as a mitigation option. Although several studies have estimated carbon stock changes in Japanese forests, most only estimate changes through 1995 or ignore carbon stock changes in natural forests. This study is the first attempt to estimate carbon stock changes in Japanese forests from 1966 to 2012, the final year of the Kyoto Protocol’s first commitment period. Forest land use and growing stock data were analyzed. Then, two models of forest land use change and growing stock were developed. Analytical results showed that most natural forest loss resulted from conversion to plantation forestland, while a minor portion was converted to other forms of land use. Carbon stock in Japanese forests increased from 857.3 TgC in 1966 to 1594.2 TgC in 2012, representing an increase of 16.0 TgC year over the same period. During the first commitment period of the Kyoto Protocol, annual carbon sequestration was estimated at 15.3 TgC, of which about 77.1% was sequestered in plantation forests. Only carbon sequestration in specially managed forests is credited under the Marrakesh Accord; thus, eligible carbon is expected to be lower. When data of specially managed forests become available, further study of eligible carbon sequestration is necessary because it could provide a baseline for decision making about the use of carbon sinks for carbon emission mitigation.


Introduction
Emission trading was first introduced in the US during the mid 1970s.It was applied in several ways (e.g.lead-free petrol, ozone depleting chemicals) among which the acid rain programme may have the closest similarity with potential national CO 2 trading schemes (UN 1995 pp. 19-23).In the context of the UN Framework Convention on Climate Change it first seemed that national taxes could be the instruments of choice for countries to control the GHG emissions (NRP 1995 p.1).However, emission trading on country level was finally formally introduced with the Kyoto-Protocol agreed on in 1997.As Parties to the Protocol do, however, lack information on abatement options and costs the theoretical efficiency gains may never be realised by nation to nation trading.This might be one reason why the discussion on national trading schemes, i.e. involving sub-national entities, has remarkably intensified since then: Numerous reports by "industry/governmental" working groups have been published throughout the industrialised world.With national schemes emerging, the question of linkage evolves.
We analyse this aspect for technical feasibility, environmental integrity and economic impacts.The latter aspect will be investigated focussing on the interaction of linking national schemes in the context of the Kyoto-provisions only: There is a general agreement that the linking of different schemes itself increases overall cost-efficiency.

The concept of emission trading
Compared to other economic instruments like taxation, emission trading has the advantage that the total quantity of emissions can be determined prior to the introduction of the instrument by the quantity of emission rights/permits issued by authorities.(In the following the terms emission right and permit are used equivalently).Furthermore, emission trading allows for a cost efficient meeting of emission targets as long as the market functioning is assured.Initially, each participant has to be assigned a certain number of emission rights.At the end of the period every participant must hold at least a quantity of emission rights equivalent to the emissions released into the atmosphere.Any surplus permits can be sold on the market (or possibly be banked).
Buyers are those emitters whose marginal abatement costs are higher than the permit price on the market.In the long run abatement costs are to be equal.
However, before national schemes can start operation in real economies, several design features need to be decided on.

Design of national ET-schemes
When implementing national trading schemes, many characteristics affecting economic efficiency, environmental integrity and acceptability 1 have to be taken into consideration (see for example AGE (2002), AGO (1999), CCAP (1999) , Haites, E, Aslam, M. E. (2000), IEA (1999), Kerr (1998), MIES (2000), NZME (1998)) Even though there is an intensive discussion on the implementation of GHG emission trading schemes on entity level, only two public 2 systems currently exist in Europe: in Denmark and the United Kingdom. 3

Linking schemes
As long as the abatement costs in separate trading schemes are different, the linkage of two schemes can result in increased overall cost-efficiency.However, given that on the balance one country is either a net importer or a net exporter, the permit price will go down in the former and go up in the latter.Consequently, selling entities in the importing countries will loose whereas buyers will win.The contrary applies for the exporting country.This in turn may prompt the loosing participants to turn down the linking to schemes in advance (Haites & Mullins 2001 p. viii).
Different approaches in designing national schemes generally lead to different effects with regard to the criteria mentioned above.They are, however, a general concern in the design of a national system.Differences may either prevent linkage for technical reasons or effect environmental integrity when schemes are linked.Table 1 shows in which way these two points are affected.4 Linking national schemes in the context of the Kyoto-Protocol After having discussed the linkage of national schemes from a technical and an environmental perspective, we analyse in following section the economic impact in the context of the Kyoto-provisions.

The Kyoto-Provisions
The Kyoto-Protocol -agreed on during the 3 rd Conference of Parties to the UNFCCC in Kyoto in 1997 -defines absolute emission targets (so-called Assigned Amount) for countries listed in Annex B for the first commitment period from 2008-2012.The targets are defined as a percentage figure compared to 1990's GHG emissions.In order to enable a cost-efficient meeting of these targets some so-called flexible mechanisms have been introduced, among which emission trading: Parties listed in Annex B to the Protocol are under certain conditions allowed to trade the underlying emission rights, the so-called Assigned Amount Units (AAUs).Emissions without any flexible mechanisms would have to decline sooner or later in all countries according to the national targets.With trading, the emission path will change -maybe even before 2008 1 (see Fig. 2).

Figure 1 Change of emission path considering emissions trading under the Kyoto provisions for a simple 2 country case
1 The Netherlands represent a good example.Since they acknowledged that meeting the Kyoto target at home would be quite expensive, they prepared the purchase of emission rights under the Kyotoprovisions.This allows for increased emissions according to the no-Kyoto-trading case even before 2008 (see www.carbencredits.nlfor further information However, as the system starts in 2008 only, one has to ask how international pre-2008 trading interacts with the Kyoto provisions. It is interesting to note that there are no concrete mandatory emissions paths for reaching the Kyoto-targets: Article 3 (2) of the Kyoto-Protocol says that "Each Party included in Annex I shall, by 2005, have made demonstrable progress in achieving its commitments under this Protocol" but it will be interesting to see how the term demonstrable progress will be interpreted in 2005.As there is furthermore no penalty mentioned in case a Party does not show any demonstrable progress, the emission path can be assumed to be completely undetermined.

International trading prior to the first commitment period
The intuitive approach for international emissions trading prior 2008 might be the mutual acceptance of the national "currencies".We refer to these as pre-Kyoto units (PKUs).As mentioned above, linking trading schemes can result in increased overall cost-efficiency on the international scale.However, apart from efficiency on a global scale, the incidence of costs has to be discussed.Keeping the latter aspect in mind, a government may be reluctant to link schemes as the PKUs purchased would be "worthless" with regard to the Kyoto-target at the end of 2007.A similar situation can currently be observed in The Netherlands: The Dutch government had introduced tax reductions for green electricity.As national capacities were to small to satisfy demand, green energy was imported.As the Dutch government realised that this was not helpful with regard to an remarkable increase of domestic production of green energy, it chose to stop the tax reductions (Anonymous 2002).
Thus, potential buyers may either reject early linkage or insist on the exchange of AAUs along with PKUs.This latter point becomes more obvious as investments in CDMprojects prior to 2008 offer another source for cheap reductions and as generated CERs are eligible for the Kyoto target in the first commitment period (see Fig. 3) Again the Dutch activities within the CERUPT programme (Senter ( 2002)) may serve as example.
With regard to the CERs generated before 2008 one has to discuss how the are delt with.They could generally be used two times.First, within the national trading scheme prior to the first commitment period where they would be withdrawn by national authorities without becoming invalid with regard to the obligations under the Protocol.
Second within the Kyoto scheme starting 2008.
For analysing the different schemes we consider a two country, two period model and analyse at first the situation without any international trading prior to the first commitment period.

Kyoto-trading only
We assume that -with regard to the Kyoto target -one country will be a net buyer whereas the other will be a net seller.(Note that the model discussed below has been rigidly simplified for illustrative purposes.A general version is presented in Annex 1.) Both countries have the same reduction obligation in each period (that changes, however, over time).Banking is not allowed.The cost functions for the two schemes are quadratic.(They are the aggregated abatement cost functions of the participants in the two schemes.
We follow two different approaches with regard to the abatement options.In the first one the lifetime of an investment in emission reductions is one period.In the second it lasts for both periods without inducing costs in second period.The second approach has been put in the Annex 6 to remain clarity.Both approaches will, however, be discussed together at the end.
Without loss of generality, let a denote the buying and b the selling country.Indices 1 and 2 denote the two periods.The two countries face the optimisation problem: (1) where, C = Costs, α = parameter, R = emissions reduced internally, π = permit price (assuming a perfect market where each participants faces the same price), P = quantity of permits bought or sold, T = reduction obligation Whereas 2 T should be based on the Kyoto-target there is more freedom when defining 1 T (see next chapter for a more detailed discussion).
First order conditions are given in Annex 2. (1) solves as: (2) We can see, that by introducing trading in the second period, marginal abatement costs ( 2 i λ ) become the same for both countries.

Non AAU-based international emission trading before 2008
In case that no AAUs are used in the linked schemes another "commodity"1 has to be transferred.Let us denote the commodity as Pre-Kyoto-Unit (PKU) as mentioned above.Generally, a government can issue as much as PKUs as desired.The selling country actually has an incentive to increase the number of permits as it is beneficial to its industry.Since this is at the expense of the environment, a pro-environmental buying country may look for instruments to reduce import of "worthless" permits.Rehdanz and Tol (2002) analyse the different impacts of a discount factor, a tariff and a quantity limit.In the following analysis we assume, however, that the PKU allocation prior to the first commitment period is based on the Assigned Amount and that arbitrarily flooding of the market does not occur.For a linear compliance path the situation can be as depicted in Figure 2: "Kyoto Units"

PKUs
Extending (1) with trading in both periods gives: (3) First order conditions are given in annex 3. (3) solves as: It is striking that the result is completely symmetric.This is simply because the schemes in the two periods are not linked and we thus have to separate the systems.(PKUs traded in the first period do not occur after this period has be ended.)Remember that discounting has been neglected for simplicity reasons.
As we can furthermore see, the quantity of PKU purchased by country a depends on the reduction obligation and the abatements costs in the two countries.Even though being in compliance with the pre Kyoto-target, emissions are less reduced in the buying country in the pre-Kyoto period than without any linkage of the trading schemes.As permits are bought, country a ultimately finances the emission reductions in country b without getting anything in return.It could not even state that it has made demonstrable progress in emission reductions.Consequently, government a may argue for weak reduction obligations in the pre-Kyoto period or insist on a transfer of AAU in order to benefit in some way.This point is analysed in the next section.Note, however, that this system would be cost-efficient from a global climate policy perspective.

AAU-based international emission trading before 2008
We still assume, that the national total budgets are consistent with the Kyoto target.
As a consequence of the aforementioned "subsidy effect" we now assume that the buying country demands a transfer of an equal quantity of AAUs with each PKU bought from the other country.As emissions must only be "backed-up" by AAUs from 2008 on, they can be used for any trading scheme prior to the start of the Kyoto scheme.They do not have to be redeemed, let us say at the end of 2007.Thus, the total quantity of AAUs will not change due to their use in early trading schemes.However, ownership will change.
We consider the aforementioned by changing the budget constraint in (2).Any permit bought (sold) in period 1 is added (subtracted) in the second period.(Note that this is no banking in the traditional sense): (5) See annex 4 for first order conditions.(5) solves as: 6) with (4) we can see that the quantity traded in period 2 ( 2 by (a is the buying country) the second addend becomes negative and thus less permits are traded.Thus, with all other unknowns being unchanged, the transfer of AAUs along with PKUs reduces the total costs in the buying country (see next chapter for detailed discussion).The latter should argue for strong reduction obligations in the pre-Kyoto period (second addend for P 2 in ( 6)) .On the other hand, total costs are increasing for the selling country which in turn should prefer the approach presented first (no-AAU-transfer).

Discussion and Conclusion
If we take the results in (2), ( 4) and ( 6) and substitute them in the cost functions we get the compliance costs for both countries (see annex 5 and 7; equations for the long living investments approach are marked by "*").
Investment lifetime one period: We find that the buying country prefers the AAU-transfer to the no-AAU-transfer scenario.It prefers, however, both approaches to the "Kyoto-trading only" case as long as we assume that the government is interested in cost-efficient international climate policy instruments prior to the start of the first commitment period.It may, however, be reluctant to "subsidise" reductions in other countries without getting anything in return.
The situation is, however, different for the selling country: It prefers the no-AAUtransfer scenario to all other options.Furthermore, it favours the Kyoto-only approach over the AAU-transfer one because additional costs from foregoing benefits from trading in the first period are overcompensated by reduced costs in the second period (see Annex 5).
Apart from this, both countries do have different interests with regard to the stringency of the reduction obligation in period 1 (see Table 2).
Investment lifetime two periods: As for the "one period lifetime" approach, the net buying countries prefers the AAUtransfer to all other schemes as costs are lowest.However, the situation has changed with regard to the comparison between the Kyoto-trading-only and the no-AAU-transfer case: Due to the "unlimited" lifetime of investments in abatement options, costs are lower in the second period when emissions are reduced "at home" during the first period.
Expenses for buying permits in the second period amount to Kyoto-Trading only: Thus, costs in the second period are reduced in the Kyoto-trading-only case compared to no-AAU-transfer case by On the other hand the buying country would realise higher costs in the first period due to foregone benefits from trading if it realises the Kyoto-only approach (see in Annex 7).These costs amount to depends on the stringency of the reduction obligation in period 1 (see figure 3).As one can see in Fig. 3 expenses for permits in the second period are lower than additional costs in the first period as long as the reduction obligation is "weak" and as there is no trading in the first period.Consequently, country a would prefer the no Kyoto-only system to a no-AAU-transfer approach.One can see that there is an inherent conflict of interests between seller and buyer with regard to the transfer of AAUs in international emissions trading prior to 2008.Against this background one may question whether governments will voluntarily decide to link their trading schemes prior to the first commitment period.

Summary
Before greenhouse gas emission trading can start on entity level, several design features have to be decided on.Linking of these national schemes can result in increase costefficiency.But as in sovereign nation states these decisions may differ, the linkage may be prevented for technical reasons or affect environmental integrity.
The analysis reveals that potential technical obstacles can likely be overcome inducing additional costs (this goes for example for differences in registry structures).
Environmental integrity may be affected easily.If this is to be avoided, systems would have to be adapted or linkage has to be abstained from.

Country b (net seller):
Kyoto-trading-only: Cost functions in equilibrium (Investments in emission reductions only induce costs once (in the period when implemented): One can see that the lifetime of the investment obviously influences the outcome.As can be seen in (2*) the permit price, the quantity traded 1 and the quantity abated in the second period decrease.
as by definition abatement costs are higher in country a.
Figure 2 Permit budget prior and during the first commitment period

Figure 3
Figure 3Implication of renouncing international trading in the first period compared to international trading without transfer of AAU in the first period with long living abatement options

1
Including compatibility with existing regulation, equity and competitiveness issues.2 Private systems exist within the companies BP and Shell.
3 The Dutch Erupt/Cerupt programme (see: www.carboncredits.nl)and the Hamburg CO 2 competition (see: www.hwwa.de/Projects/Res_Programmes/RP/Klimapolitik/CO2%20competition.htm)cannot be considered as a trading scheme on entity level even though they have been successfully implemented with business being involved.

Table 1 Linking national trading schemes: Technical feasibility and environmental integrity
increased.In case that allocation of permits is generous ("hot air") in the system where prices go up, a greater number may volunteer due to linkage and thus env.Integrity can be weakened.Participants Linkage technically feasible; env.integrity may be endangered especially if systems with direct and indirect emissions from the same product are linked Coverage of gases Technical feasibility and environmental integrity are unproblematic with regard to linking schemes with different coverage of gases as long as reasonable conversion factors are applied in both systems.*) ).

Table 2 Preferences for different approaches and stringency of reduction obligation under different design options for international emissions trading
**) As long as there are no strong reduction obligations in period 1 Directive of the European Parliament of and the Council establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, Working document ENV/02/08, Council of the European Union, Brussels The allocation of Liability in International GHG Emissions Trading and the Clean Development Mechanism [Internet Edition], Resources for the Future, www.rrf.org