The Cases of Colombia and Zimbabwe

B y   T h o m a s   B l a c k - A r b e l á e z

" The imposition of limits on ''supplementarity'' for wealthier countries would curtail the transfer of technological and financial benefits to the developing world "

BOGOTA - How would ''supplementarity'' - a key issue of the Kyoto Protocol - affect the countries of the developing South? Would setting limits on supplementarity for the industrialised world encourage or hinder the transfer of technology and economic benefits to developing nations?

An analysis of case studies involving two representative countries - Zimbabwe and Colombia - leads us to conclude that supplementarity would curb the options for development in the nations not included in Annex I of the Kyoto Protocol, and thus would reduce their contribution to climate change abatement efforts.

Still under discussion, the concept of supplementarity establishes that the Protocol's ''flexible mechanisms'' - joint implementation, clean development and emissions trading - are supplemental to the domestic actions of industrialised countries to curb greenhouse gas emissions. But supplementarity also means that, under certain conditions, developing countries could be limited in their implementation of such mechanisms.

From a scientific perspective, the global climatic benefits from reducing a million tons of carbon dioxide in Zimbabwe or Colombia are equal to those of a million tons reduced in Denmark or Japan. However, the welfare gains to society of the $19 million dollar investment required to do so may be much greater in poor societies than in rich societies.

Under this premise, we analysed - based on studies by the Massachusetts Institute of Technology (MIT) - the impacts in Zimbabwe and Colombia of supplementarity limits of 75 percent, 50 percent and 25 percent, for the case of Clean Development Mechanism (CDM) projects.

The study indicates that by forcing Annex I Parties to further reduce emissions internally and import fewer Certified Emissions Reductions (CER), the demand for developing nations' CDM projects falls.

As the limit on the use of CERs is tightened from 75 to 50 percent and from 50 to 25 percent, the price of CERs declines, fewer CDM projects are financed, and the potential economic benefits to developing nations are reduced accordingly.

Clearly, supplementarity limits severely curtail the potential for developing nations to contribute to the mitigation of climate change, restricting their ability to assist Annex I in achieving their targets and minimising support for sustainable development.

The analysis is based on the ability of producers in each nation to execute the CDM projects when the cost of producing a CER (a one-ton carbon dioxide reduction) is less than or equal to the price of CERs on the international emissions permit market. For each supplementarity restriction level, the impacts of the reduced CER price are evaluated for each nation in terms of potential export earnings, producer surplus, tons of carbon dioxide reduced, and number of viable projects, when possible.

Without Limits, Greater Incentives

The generation of foreign exchange from export earnings over the period 2000 to 2012 is of particular interest to all developing nations, and CERs represent a unique and sustainable new export option.

The Zimbabwe National Strategy Study for Implementation of the CDM evaluates 11 potential projects. Under optimal conditions, Zimbabwe could produce as many as 1.8 million CERs per year, generating new hard currencies of up to 35.5 million dollars per year - approximately equal to its current export total. Over the 2000 to 2012 period, this represents a major potential contribution to the national accounts.

The Zimbabwe project data demonstrate the capacity to mitigate emissions - without supplementarity limits - at significantly lower cost than the estimated market price. An indicator of programme profitability, the "producer surplus" measures the difference between the cost of the carbon reduction and the sale price of the CERs. The larger the producer surplus, the greater the profitability and the incentive to undertake the CDM projects.

In many cases the producer surplus is several times greater than the cost of abatement. Given this potential for high profitability, the generation of CERs should be carefully evaluated by any government or firm seeking to efficiently allocate investment resources. If the Kyoto Protocol is ratified and the greenhouse gas emissions reduction market generates the price levels estimated by the leading models, the market incentive to carry out the emission reductions projects is very strong indeed.

The study of the impacts of supplementarity limits on economic benefits to Zimbabwe indicates that as the CER market price falls due to restricted demand, the economic benefits to the nation drops dramatically. Export earnings potential plummets from 34 million annually - in the no-limit case - to 7.8 million in the most restrictive case, and producer surplus, a better indicator of the gains from trading, is cut by nearly half.

Severe Economic Impacts

In the Colombian case, the study concludes that the economic impacts of increasingly restrictive limits are severe. As the price falls, the number of projects that are viable at the reduced prices declines, as do the number of tons of carbon dioxide to be reduced, limiting Colombia's ability to contribute to climate change mitigation endeavours.

Colombia could curb up to 22.9 million tons of greenhouse gas emissions per year, but with a 25 percent limit, its potential contribution would drop to 8.7 million tons.

Potential export earnings and the level of consumer surplus plummet approximately 90 percent compared to the no-limit scenario. As with Zimbabwe, what is a promising new export sector under the no-limit scenario is reduced to a low profit, low benefit option as the gains from trading are transferred away from Colombia and its CER producers to Annex I nations.

We have seen how, in both Zimbabwe and Colombia, tightening supplementarity limits on Annex I nations would affect the potential economic benefits to the two countries. Additionally, losses in potential foreign exchange earnings and producer surplus are very large as compared to the no-limit case. Worse, the economic gains from the limited trading possible under these restrictions would be transferred from the host countries to Annex I CER purchasers in the form of lower prices.

Given that the social welfare gains of investing those financial resources are much greater in Zimbabwe and Colombia than in the European Union, and that the global climatic benefits are the same, policy makers have cause for concern. The rigid supplementarity limits would damage the potential for the CDM to support sustainable development in non-Annex I nations.

These are inequitable results, outcomes that work against the legally established objectives of the Climate Change Convention and the spirit and letter of the Kyoto Protocol. .


* The author is director of the Andean Centre for Economics in the Environment, Bogota, Colombia.

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