Frank Jotzo, Agus P. Sari, and Olivia Tanujaya
The expected devastating impacts of climate change have pushed countries around the world to negotiate the 1997 Kyoto Protocol, an international treaty to limit greenhouse gas (GHG) emissions. The Kyoto Protocol requires industrialized countries to limit their GHG emissions as well as to enhance the “sinks” of these gases. One of the unique characteristics of the Kyoto Protocol is the provision for carbon emissions offset mechanisms, where countries can “trade” their emissions permits internationally. The Clean Development Mechanism (CDM) is the only mechanism that can include developing countries. Basic rules and procedures on CDM were agreed at the Seventh Conference of the Parties (COP7) to the United Nations Framework Convention on Climate Change (FCCC). Rules regarding the use of sinks in CDM remain part of a major debate, and decisions on them have been deferred until COP9 in 2003.
Using a quantitative model developed specifically for policy issues in the implementation of the Kyoto Protocol - the Pelangi Emissions Trading (PET) model - in this chapter we analyze the implications of including sinks projects under the CDM. We find that including sink projects in order to increase the volume of the CDM may be a fallacy. This is because the increase in low-cost sinks projects can lead to a fall in the price paid for emission credits, which can outweigh the quantity gains, and lead to lower revenue and lower financial gains for developing countries. However, equity between countries and regions within countries may be enhanced by the inclusion of sinks. These findings are exemplified in the case of Indonesia. We also analyze the potential impacts of emerging “parallel markets” for emission offset credits driven by demand from outside the Kyoto Protocol framework, as well as the possibility of restricting the supply of offset credits from CDM projects.
Developing countries are especially vulnerable to climate change for many reasons (see Chapter 2). Indonesia, as a tropical archipelagic country with one of the world’s longest coastlines, could expect to suffer a significant amount of damage as a result of rising sea levels and changes in weather patterns that result from global warming. These are potential threats to the majority of the Indonesian population. Furthermore, changing climate patterns are expected to disturb the