"Compliance and Emissions Trading under the Kyoto Protocol: Rules for Uncertain Inventories (p. 539-540)

Zbigniew Nahorski · Joanna Horabik ·Matthias Jonas

Abstract A solution is proposed for proving compliance with emission targets and for emissions trading in the event of uncertainties in reported emission inventories. The solution is based on the undershooting concept, from which the mathematical conditions for both proving compliance with a risk α and calculating effective emissions for trading are derived. Based on the reported emission units, the number of permits granted is reduced in proportion to the uncertainty in the inventory. A country whose inventory has higher uncertainty is thereby allotted fewer permits than a country with the same inventory but smaller uncertainty.

Keywords greenhouse gas inventory uncertainty · compliance with Kyoto Protocol · risk of noncompliance · undershooting · emissions trading · effective tradable permits

1 Introduction

Uncertainty in greenhouse gas (GHG) inventories has been estimated to be in the 5–20% range, depending on the methodology used and its scope (Monni, Syri, Pipatti & Savolainen, 2004a; Rypdal & Winiwarter, 2001). Even if the assumptions of some of the computations need to be uni?ed and possibly recalculated, uncertainty is still believed to be about 10–12% or more for most countries (Winiwarter, 2007) and is therefore typically larger than countries’ reduction commitments.

Thus, uncertainty seems to be a major problem both in proving compliance and in implementing the ?exible mechanisms introduced in the Kyoto Protocol: emissions trading (Article 16[b]); joint implementation (Article 6); and the clean development mechanism (Article 12). In this paper we deal with tradable permits, but the ideas presented can be extended to other mechanisms. Uncertainty varies among the Parties to the Kyoto Protocol and according to different emissions activities.

For example, there are better- or poorer-quality inventories and there are moreor less-credible GHG emission reductions. Thus, under the ?exible mechanisms, better- or poorerquality “goods” are offered for sale or exchange. Should these be treated on an equal basis? In the absence of explicit rules for governing this problem, the market itself is unlikely to resolve it; and leaving it unresolved may undermine the credibility of the whole emission reduction process.

The problem of uncertainty in inventories is covered somewhat inadequately in the literature. Assessments of uncertainty have been carried out and compared for several countries; see, for example, Charles, Jones, Salway, Eggleston and Milne (1998); Lim et al. (1999); Gawin (2002); Jonas and Nilsson (2001); Monni, Syri and Savolainen (2004b); Nilsson et al. (2000); Rypdal and Winiwarter (2001); Rypdal and Zhang (2000); van Amstel, Oliver and Ruyssenaars (2000); Salway et al. (2002) see also a compendium in Gugele, Huttunen and Ritter (2005).

There have been a number of rather vague references to excluding the most uncertain activities from emissions trading (Monni et al., 2004a; Victor, 1991). In Godal (2000) and Godal, Ermolev, Klaassen and Obersteiner (2003) undershooting as the basis for proving compliance is proposed. Similar ideas have been formulated in Gupta, Oltshoorn and Rotenberg (2003) and Gillenwater, Sussman and Cohen (2007). The latter especially presents a solution close to that contained in this paper. A review of other methods, in particular, those related to detectability of changes in emissions, can be found in Jonas et al. (2004a; 2004b)."