Non-Paper on Elements of an Emissions Trading Regime

(Submitted by Australia, Canada, Iceland, Japan, New Zealand,

Norway, Russian Federation, Ukraine, United States of America)

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This paper sets forth preliminary views concerning elements that should be included in the emissions trading regime to be elaborated under Article 17 of the Kyoto Protocol. The paper first describes the elements, then illustrates how such elements might be reflected in a COP decision.

The paper seeks to take into account, among other things:

The inclusion of a particular element in this paper is without prejudice to whether that element is ultimately reflected in the emissions trading decision or elsewhere; it will need to be considered, for example, whether a reporting requirement related to emissions trading should be in the trading decision or among the other reporting requirements under Article 7.

Elements of the Emissions Trading Regime

Purpose of the COP Decision

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Elements of the Regime Set Forth in the Protocol

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Relevant Principles for the Regime

-- The principle in Article 3.3 that g[e]fforts to address climate change may be carried out cooperatively by interested Partiesh has been reflected in several articles of the Protocol (including Articles 4, 6, 12, and 17) that permit cooperative action between and among Parties.

-- The principle in Article 3.1 that g[t]he Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibility and respective capabilitiesh has been reflected to some extent in differentiated obligations both between Annex I and non-Annex I Parties and among Annex I Parties; it has also been reflected in the chapeau to Article 10 of the Protocol.

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Status of the Regime

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The Tradable Unit

(See paragraph 3 of Annex to attached decision.)

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Participation

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-- bolster the credibility of the emissions trading regime itself; and

-- promote compliance with other key elements of the Protocol.

-- not to be maintaining a national registry meeting specific criteria (see below); or

-- not to be in compliance with its obligations under Articles 5 and 7 of the Protocol. (See paragraph 4 of Annex to attached decision.)

-- Who can call into question a Partyfs consistency with the requirements for participation? The expert review process under Article 8 can raise questions about a Partyfs implementation; also under Article 8, Parties can bring questions about implementation to the COP/moPfs attention.

-- What procedure will be used to decide whether a challenged Party is not meeting the eligibility requirements for participation? Expert review teams are not authorized under Article 8 to make determinations concerning compliance or non-compliance. Therefore, a procedure would be necessary to make such determinations and, as appropriate, identify necessary steps for a Party to restore its eligibility. The procedure might be the same procedure applicable to the rest of the Protocol or a specialized procedure (perhaps even a subset of the more general procedure). It would appear that, in any event, the procedure would need to be expeditious.

-- We will need to assess whether de minimus inconsistencies with the requirements for participation need to be addressed.

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Partiesf Registries

(See paragraphs 8 - 12 of Annex to attached decision.)

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As noted above, a participating Party would be required to maintain a national registry containing records on all holdings, transfers, and acquisitions of units of assigned amount by that Party and any legal entities authorized by it.

Information held by a registry should be publicly accessible.

Transfers and acquisitions of units of assigned amount would be made by removing units (identified by serial number) from the registry of the transferring Party and adding them to the registry of the acquiring Party.

If a Party uses a unit of assigned amount towards meeting its quantified emission limitation and reduction commitment, it would retire that unit, in which case such unit would not be able to be further used or transferred; a record of all retired units of assigned amount would be kept by the Party in its registry.

To simplify international transactions, two or more Parties would be able to voluntarily maintain their registries within a consolidated system.

To simplify tracking and reporting requirements of various Kyoto mechanisms, a Party might choose to use one registry for more than one mechanism.

National registries should be based on compatible systems for electronic record-keeping and reporting. Development of guidelines on this matter should be further considered.

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Reporting

(See paragraph 13 of Annex to attached decision.)

A Party participating in emissions trading would be required to include in its annual submission to the Secretariat under Article 7 information, in a standard electronic format, on:

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-- transfers and acquisitions of units of assigned amount during that year, including, for each unit, the serial number and the Partyfs registry to which it was transferred or from which it was acquired; and

-- any units of assigned amount (identified by serial number) that have been retired.

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International Synthesis

(See paragraph 14 of Annex to attached decision.)

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There would be an annual international synthesis of the Partiesf annual reports concerning emissions trading. Such syntheses would serve a number of functions, including:

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-- at the end of a commitment period, they would be relevant to the assessment of compliance with target obligations;

-- during a commitment period, they would assist in tracking units of assigned amount traded between Partiesf registries or retired; and

-- in general, they would help reveal discrepancies in the recording of transfers of assigned amount by cross-checking Partiesf submissions (a verification function). In the event of discrepancies in the reports submitted by Parties, the relevant Parties would have the opportunity to investigate and correct such discrepancies.

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Relationship of Article 17 to Article 4

(See paragraph 15 of Annex to attached decision.)

End-of-Commitment-Period Issues

(See paragraphs 16 and 17 of Annex to attached decision.)

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-- It should be noted, in this regard, that Article 4 incorporates the so-called gseller liabilityh approach. Specifically, under an Article 4 allocation agreement, Party X in effect gives a certain portion of its assigned amount to Party Y. Assuming the Parties exceed their aggregate emission level, Article 4.5 provides that each Party is responsible for its own level of emissions set out in the allocation agreement. If Party X exceeds its individual reallocated level (i.e., it gave to Party Y some of the assigned amount that it needed to cover its own emissions), only Party X would face whatever consequence applies generally to Parties that exceed their targets; Party Y would not have to return the assigned amount that it received under the allocation agreement in order to bring Party X back into compliance.

Other Issues

(See paragraph 18 of Annex to attached decision.)

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Attachment:

Decision Language Accompanying Description of Emissions Trading Regime

The Conference of the Parties,

Recalling, in particular, Articles 3 and 17 of the Kyoto Protocol,

Noting that the Conference of the Parties, pursuant to Article 17 of the Protocol, is to define the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountability, for emissions trading,

Recognizing that the basis for emissions trading will be the quantified emission reduction and limitation commitments established under Article 3 of the Protocol and further recognizing that emissions trading does not change the combined assigned amount of Annex B Parties,

Mindful that Article 17 provides that emissions trading shall be gsupplemental to domestic actions for the purpose of meeting quantified emission limitation and reduction commitmentsh under Article 3;

1. Decides to adopt the principles, modalities, rules and guidelines for emissions trading in the attached Annex.

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Annex

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Definitions

1. References in this Annex to gthe Protocolh are references to the

Kyoto Protocol to the United Nations Framework Convention on Climate Change.

2. References in this Annex to Articles are references to Articles of the Kyoto Protocol, unless otherwise indicated.

The Tradable Unit

3. Transfers and acquisitions of assigned amount (derived from initial assigned amounts under Article 3.7, as adjusted under other provisions of Article 3) shall be made in units of assigned amount of one metric tonne of CO2 equivalent (calculated using the global warming potentials defined by decision 2/CP.3 or as subsequently revised in accordance with Article 5) issued by a Party and identified by a unique serial number that includes the Party of origin and the commitment period for which the units are issued. (Units of assigned amount may be banked for use in future commitment periods pursuant to Article 3.13.).

Participation

4. A Party may not participate in emissions trading under Article 17

if it is found either:

(a) not to be in compliance with its obligations under Articles 5 and 7; or

(b) not to be maintaining a national registry, in accordance with the provisions of this Annex.

[Need to assess whether de minimus inconsistencies with these requirements need to be addressed]

5. If a Partyfs consistency with the requirements in subparagraph (a) or (b) above is called into question [by the review process under Article 8?][other?], the issue will be expeditiously resolved [through a general procedure applicable to the Protocol][through a specialized procedure].

6. A Party that authorizes its legal entities (e.g., private firms, non-governmental organizations, individuals) to transfer or acquire units of assigned amount shall ensure that such participation is consistent with this Annex. Further, such Party shall remain responsible for fulfilment of its obligations under the Protocol.

Partiesf Registries

8. A Party participating in emissions trading under Article 17 shall

maintain a registry containing records on all holdings, transfers, and acquisitions of units of assigned amount by the Party and any legal entities authorized by it.

9. Information held by the registry shall be publicly accessible.

10. Any two or more Parties may voluntarily maintain their registries in a consolidated system, within which each registry would remain legally distinct.

11. Transfers and acquisitions of units of assigned amount shall be made by removing units (identified by serial number) from the registry of the transferring Party and adding them to the registry of the acquiring Party.

12. A unit of assigned amount used by a Party toward meeting its obligation under Article 3.1 shall be retired by that Party, in which case such unit may not be further used or traded; a record of all retired units of assigned amount shall be kept by the Party in its registry.

Reporting

13. Each Party participating in emissions trading shall include in its annual submission

to the Secretariat under Article 7, inter alia, information, in a standard electronic format, on:

-- transfers and acquisitions of units of assigned amount during that year, including, for each unit, the serial number and the Partyfs registry to which it was transferred or from which it was acquired;

-- any units of assigned amount (identified by serial number) that have been retired.

International Synthesis

14. The Secretariat, as part of the annual compilation and accounting of emissions inventories and assigned amounts under Article 8, shall present a publicly-available synthesis of the reports by Parties on transfers and acquisitions of units of assigned amount during such year, including which units have been used by a Party for purposes of compliance with Article 3.1. It shall provide Parties the opportunity to investigate and correct any discrepancies in the recording of transfers of assigned amount. The synthesis shall reflect any remaining discrepancies.

Relationship of Article 17 to Article 4

15. [Need to address issues regarding the relationship between Article 17 and Article 4]

End-of-Commitment-Period Issues

16. At the end of each commitment period, there shall be a [short time period] during which Parties have the opportunity to cure any emissions overage, e.g., through acquiring units of assigned amount. [Need to address issue of whether a Party whose emissions (after the short period) exceeded its assigned amount for the previous commitment period should retain its eligibility to participate in emissions trading under Article 17 in the subsequent commitment period.]

17. [Issue of gallocation of riskh.]

Other Issues

18. [There may be a need to address additional issues, such as competition.]

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