As part of the Kyoto Protocol, industrialised countries agreed to reduce their greenhouse gas emissions by 5 per cent of 1990 levels between 2008 and 2012. As industrial activity in Europe’s ex-communist countries has declined since 1990, they will find it easier to reduce pollution levels than other industrialised countries. A trading system is being developed that will enable countries to ‘buy’ pollution quotas from countries that pollute less. However, the countries with most to ‘sell’ under this system are often those with the most risky business environments.

Research from the European Bank for Reconstruction and Development (EBRD) examines the Joint Implementation Trading Scheme, due to start in 2008. This will facilitate trading in pollution quotas and countries with high pollution levels, such as the European Union (EU) countries, will find it easier to meet their targets. They will be able to ‘buy’ pollution quotas from countries that are under their targets.

They can also reduce their emissions through governments funding pollution reduction projects in other countries which find it easier to reduce pollution levels, or through companies investing in foreign industries with low pollution levels. Much of this trading is likely to involve the thirteen ex-communist states of central and eastern Europe, and could see them receive up to US$10 billion in investments.

Unlike western countries, Europe’s ex-communist states have few problems in meeting emission targets, because of the decline in industry since the end of communism. Because they currently use energy inefficiently, they have the potential to reduce pollution levels at relatively little cost. However, these countries often have the most difficult conditions for business and investment.

The research shows that:

• Croatia and Slovenia have suitable business environments, but are not attractive for investors because of their limited potential for low cost reduction programmes.
• Russia and Ukraine have potential for reduction programmes but their business environment is often difficult. Other countries and businesses may choose not to work here unless they can obtain economic risk coverage or insurance from institutions such as the EBRD.
• The Czech Republic, Estonia and Hungary have been the most successful at reducing pollution in Eastern Europe, and have the least risky business environments. However, their interest to other countries and businesses could be short-term. As their industries grow, they will produce more emissions of their own, and they may change from selling quotas to buying them from other countries.
• Bulgaria, Romania and Slovakia are likely to be the most attractive locations for trading, having a reasonable potential for pollution reduction and an acceptable business climate.

Eight of the ex-communist states joined the EU in May 2004, and many of the remaining states are due to join at later dates. Before joining, however, they must adopt directives that will affect their greenhouse gas pollution levels. In most cases, this involves lower emission targets. This will make them less attractive to potential traders, as they will have fewer quotas to sell.

Much remains to be done to introduce the institutional and regulatory changes required for an effective trading market. The research warns that:

• Knowledge of emission reduction procedures is scarce and experts to monitor and verify these are lacking.
• The speed with which institutional capacity can be built depends on the amount of technical assistance provided by donors.
• There is considerable regulatory uncertainty, both at the international and the national level, and translation of the Kyoto rules into national legislation has barely started.

These new trading systems could benefit ex-communist states and help to achieve the overall aims of the Kyoto Protocol. However, there is a lot to be done to ensure that a fair and effective trading system can be introduced.

Source(s):
‘The investment climate for climate investment: joint implementation in transition countries’, Climate Policy 3, pp 417–434, by Samuel Fankhauser and Lucia Lavric, 2003
‘The investment climate for climate investment: joint implementation in transition countries’ Working paper No. 77, European Bank for Reconstruction and Development, by Samuel Fankhauser and Lucia Lavric, January 2003 Full document.

Funded by: European Bank for Reconstruction and Development

id21 Research Highlight: 15 January 2005

Further Information:
Samuel Fankhauser
European Bank for Reconstruction and Development
One Exchange Square
London EC2A 2JN
UK

Tel: +44 (0) 207 338 6088
Fax: +44 (0) 207 338 6110
Contact the contributor: fankhaus@ebrd.com

European Bank for Reconstruction and Development (EBRD), UK

Other related links:
'Synergies and trade-offs in climate change responses'

'International policy in supporting adaptation'

United Nations Framework Convention on Climate Change

Intergovernmental Panel on Climate Change (IPCC)