Comments on Proposal for
a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/…/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol’s project mechanisms

November 14, 2003
The Government of Japan

On July 22nd, the EU Council made a final decision on the EU emission trading Directive, and on the next day, July 23rd, the Commission announced a proposal for a directive of the European Parliament and the Council amending the Directive establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol's project mechanisms.  This "linking directive" will certainly affect development of JI projects in the Central and Eastern European states and the Baltic states, i.e., the future member states of the European Union included in Annex I of UNFCCC.

In this regard, the Japanese government would like to make comments on the proposal for the linking directive as follows:

1. The Japanese government has a strong concern over the proposal for the linking directive because it will significantly restrict development of JI in the Central and Eastern European states and the Baltic states.

2. The Japanese government has concluded the Kyoto Protocol on the pre-condition that Japan can implement JI with countries that are undergoing the process of transition to a market economy including Russia as well as the Central and Eastern European states and the Baltic states for achieving our commitment. However, the linking directive, which is a EU local rule, will drastically change this pre-condition of the international agreement and thus is inconsistent with the sprits of the Kyoto Protocol and Marrakech Accords. Therefore, the Japanese government can hardly accept the Commission's proposal.

3. The article 11 (ter) paragraph 2 articulates that "no ERUs are issued for reductions or limitations of greenhouse gas emissions from installations covered by this Directive". We believe that the logical interpretation of this article should be that ERUs can be issued from installations not covered by the Directive since no article to prohibit the issuance of ERUs from installations not covered by the Directive is found in the proposal itself. Though the Commission explained that the reason for prohibiting issuances of JI credits (Emission Reduction Unit (ERU)) in the EU emission trading scheme is to avoid double counting, this reason is far from persuasive because there is no counter-measures for avoiding double counting between covered and uncovered facilities, and covered upstream/supply side facilities and downstream/demand side consumers. For example, JI projects of less than 20MW renewable power-generation facilities such as hydro power or biomass may cause double counting with existing power-generating facilities. Moreover, demand side management projects may also have the same double counting effects with energy supply facilities. It should be noted that, even if the EU emission trading scheme allows issuances of ERUs from covered facilities, double counting can be easily avoided by deducting the amount of ERU from the EU allowances allocated to the JI targeted facilities.

4. We also would like to have clarification as to whether the article 11 (ter) paragraph 2 could mean that no ERUs are issued from any projects that might have double counting risk, which is, in our view, extremely illogical interpretation of the proposed text. In any event, such double counting could also be avoided if the amount of ERU is deducted from the EU allowances of the relevant facilities or if the amount of EU allowances equivalent to that of ERU which is expected to be issued from JI projects is set aside without being issued.

5. Many of the Central and Eastern European countries have expressed their positive interests in adopting Japanese environmental technologies and know-how through JI. Thus they believe that JI has great incentive for attracting investments from Japan and prefer JI to the emission trading. They also expect that such foreign investment will significantly help them comply with the EU regulations and further improve their environmental performance. The Japanese government is afraid that these stakeholders’ comments on this issue were not taken into account in the process of drafting and discussing the linking directive.

6. The article 11 (ter) paragraph 1 articulates that baselines for project activities, undertaken in countries acceding to the EU, fully comply with the acquis communataire. In our view, this provision seems inappropriate for the following reasons. First, in the case of the first track of JI scheme, both parties can decide baselines by themselves, and this rule of the Marrakech Accords should be respected. Second, in the discussions on additionality, the CDM Executive Board provided a guidance that the regional regulation does not necessarily determine baseline if the project proponents can explain that a barrier(s) in adopting or complying with the regulation exists.

7. The Commission suggested that Japanese companies can obtain the EU allowances through private agreements with local firms and thereby earn profits by trading such allowances. This does not solve our problems, however, because Japanese companies basically develop and implement JI projects not for profits but for complying their own voluntary targets. Therefore it is crucial for them to acquire Kyoto compatible credits rather than EU local allowances.

8. In conclusion, we have a serious concern that this linking directive could undermine possibilities for the Central and Eastern European states and Baltic states to realize larger emissions reduction and thus contradict environmental integrity.

9. The Japanese government would like to have a bilateral meeting with the Commission on this issue in the margin of the COP9 in Milan, Italy and look for satisfactory solutions for both sides.