1. Introduction

     The current Framework Convention on Climate Change established the worldwide recognition of the significance of climate change issue.  The Kyoto Protocol is nothing but the first step for the ultimate objective of the Convention, which is "the stabilization of GHGs concentration", by introducing the binding "targets" on developed country emissions (including those from economies in transition).  The Kyoto Protocol, however, does not include any new commitment for developing countries.

     In terms of developing countries participation, the clean development mechanism (CDM), in which both developed and developing countries jointly implement projects, can form a basis for an international framework beyond the Kyoto Protocol, and its success will certainly take an extremely important role in future climate change mitigation frameworks.

     CDM was proposed by developing country side and its prominent purpose is to assist the host developing countries to develop sustainably not emphasize only on the developed country side incentives to earn credits.  With these desirable features of CDM, the remaining discussion pivots around the actual designing of international institutional framework which is supposed to be decided at the COP 6.

     Furthermore, besides these UNFCCC/Kyoto Protocol processes, the circumstantial trends on CDM discussion are increasing their significance.  Here, let us look at some new trends related to investor side.

2. Recent external trends

2.1 Move by the World Bank

     The largest obstacle for implementing the CDM is its enormous risks on investors, despite the intention to use the market mechanism.
Although every type of investment accompanies what we call a country risk, CDM involves a risk from undetermined scheme details.  Therefore, the present CDM situation pushes investors to hesitate on taking such risks, despite it is expected to be valid since the year 2000 though the Protocol's ratification possibility is greatly dependent on the US Senate.  Nonetheless, what is originally required for investors is to properly assess the possible risks.  For private industries, however, there is a limit on such assessment capacity.

     The World Bank, with its purpose of initiating a market of emission allowances and credits, started the Prototype Carbon Fund (PCF) as a program to reduce these investor risks by utilizing its own know-how.
Although delayed for a considerable period, the program actually started (with approval of its Board) and would formulate a group of investors by the middle of November, and schedule to collect sufficient fund by the end of January, 2000.  The scheduled fund for the program is US$ 75 to 100 million initially and US$ 150 million at the maximum.  Some national governments and big corporations have expressed their intention to participate in the program.

2.2 The trend of national emissions trading systems

     Private companies require some incentives for participating in CDM to earn emission credits.  These incentives are rather a national framework on emission control than an international one.  Already in the United States, the participating companies of USIJI program, a national AIJ scheme, are allowed to use credits earned from USIJI for complying with the domestic voluntary targets.

     The most direct method of domestic incentives is for a national government to allow the application of CDM credits for attaining self-imposed targets. (As a supplemental measure) It will be preferable for this type of incentives to allow the intra-company trading of emissions and emission credits.

     Some developed countries are already reviewing practical measures to introduce a domestic emission trading system before the year 2008.
Denmark has introduced the regulations on a domestic emission trading system applicable for power industry only.  Norway and other countries are following the suit.  New Zealand and Australia are also reviewing such a system at the national government level.  Sweden is also following such trend.  In the United States, both houses of the Senate and Representatives have some legislative on the floor (although their passing will have many obstacles).  Canada is in review of such a system but will follow US policy direction.

     Although there is no talk of official reviewing of such systems in Japan, it needs to examine such possibility as an option for ratifying the Protocol.

3. Summary and tasks

A proper problem for CDM is the importance of designing actual procedures.  Among these, the biggest problem is how to define the acceptability of CDM projects, in other words, how to draw the trajectory between CDM and the situation without the project, and how to determine the quantity of credits to be earned in each approved CDM project.

     For the former problem, one controversial issue is the use of ODA (and other public funds) for CDM.  The international negotiation on CDM has not addressed any practical argument on this matter.  It seems Japan is the only country claiming the applicability of ODA for CDM.  Recently, the European Commission started to step into this issue in its document of COM(99)230 discussing the "methodology" of ODA use.

     In addition, there are other problems in CDM, including how to ensure the assistance for the sustainable development of host developing countries, how to address sink-related projects, and whether to allow existing AIJ projects as CDM projects or not.

     For the issue of credit determination, the focal point is the discussion on emission baseline setting, especially its standardizing methods.  In the term of baseline setting, it is unlikely for COP 6 to determine the methods for every type of projects.
Yet, it will be necessary for COP 6 to indicate the 'procedure' in baseline setting, at least.

     The time limit for the submission of each country Party proposal on the designing of Kyoto Mechanisms was July 31, 1999.  I would like to anticipate significant progress since the subsidiary bodies' meeting in June, 1999.

* Institute for Global Environment Strategies