Checking Global Warming: The Dutch Way

 A D Kant

A detailed description of the Netherlands Pilot Project for Joint Implementation to mitigate the Greenhouse Effect, by A. D. Kant from the Netherlands Ministry of  Foreign Affairs.

In the discussion on adaptation and prevention of the greenhouse effect, the Netherlands has a clear stand. The  greenhouse effect will occur anyway, even if we deploy all possible counter measures at once. So , our aim is to prevent the occurrence of the greenhouse effect to the highest extent possible, and to protect the most vulnerable areas meanwhile, notably the coastal zones. in order to reach these goals, the Dutch government has established a Pilot Project Programme for Joint Implementation  (PPP-JI) in accordance with the provisions made by the Conference of Parties in Berlin (1955).

The pilot phase for Joint Implementation is still at a very early stage. The Netherlands Pilot Project for Joint Implementation is perceived to be an ongoing process of ‘learning by doing’. The learning process applies as much to the host countries and industries involved as well as to the Dutch programme itself. After consultation of the Dutch industry, it became clear that each AIJ project has to be designed tailor-made. There is a project procedure, though there is flexibility to follow other routes.

In the next sections, the principles of the Dutch PPP-JI are outlined as well as the procedure for AIJ projects.  Some words are spent on the Memorandum of Understanding trajectory. 

Principles of Dutch PPP-JI

The Dutch PPP-JI is shaped as a subsidy programme.  A main reason for this choice is the principle that the polluter (e.g. the industry) should pay for projects saving our environment.  It is therefore believed that the implementation of pilot projects should be left to industrial companies, NGOs and local administrations.  Also, there are only limited possibilities for governments to have a quick and direct influence on entrepreneurial activities.  Among the several classes of policy instruments (regulatory instruments, subsidy and tax instruments as well as information dissemination) only subsidies may have a quick result, once the instrument is in place.

The PPP-JI has been designed as a demand-driven programme to the extent possible.  Giving ample consideration to a developing country’s fears that JI/AIJ should not impose limitations on future growth potential, projects preferably start as an intrinsic demand in a developing country.  For example, an industry is willing to renovate its production processes or it is considering expanding its production capacity. 

In both cases there will be some investment resources available as well as a market expectation which justifies the anticipated investment.  This gives an excellent base to the potential cooperation with Dutch industries in the same sector which are able to provide the new technology, knowledge and additional investment capital.

The programme is willing to facilitate normal business to business relationships, however, under the umbrella of AIJ.  This implies that:

AIJ Procedures

Our main objective is the realization of an AIJ project with industrial partners in the Netherlands and in developing countries.  This supposes that two partners enter into a mode of cooperation.

After the first contact, a short project outline of a couple of pages is expected.   The short outline should expand on several aspects of the intended project such as: technical, environmental, economic, organizational, financial and social aspects.  If a project outline is positively evaluated, a full scale proposal is required.  As commitment towards an intended AIJ project has to be shown to PPP-JI, a Letter of Intent (Lol) should define the intentions of both the partners. 

The Lol gives the general information on the objectives and, if possible, on the technology requested.  Apart from these details, both companies are requested to state their conditions to the intended project, notably the needed Internal Rate of Return or the preferred type of cooperation such as a Joint Venture (with a desired minority/majority share), Build, Own and Transfer (BOT) or Build, Own, Operate and Transfer (BOOT) relationship.  Given the Lol between the industrial partners, the Dutch PPP-JI requires a detailed project proposal for the project.  The proposal usually has the character of a feasibility study proposal.  The financial resources for execution of the study are provided by the PPP-JI.

As soon as the PPP-JI receives the Lol and expects the application of a full-scale proposal, the Minister of Development Cooperation starts the procedure for an MoU between the Netherlands and the host country.  More details on the MoU follow in this section.

Execution of the feasibility study finishes with a clear investment report presented to both the partners and the PPP-JI.  Both the PPP-JI and the participants evaluate the results.  The investment report provides the basis for the participating parties to decide to invest in the joint activity.  Thereafter, negotiations may start on the mode (BOT, BOOT joint venture and modalities/ownership, inputs in the cooperation) of cooperation.

One of the study outcomes is the extent of GHG emission reduction (in tonnes) per year.  As the pilot phase for Joint Implementation has, amongst others, the objective to determine costs of the reduction of GHG emission and, secondly, to develop a mechanism for enduring emission reduction efforts after the experimental period, an agreement on the share in emission-reduction certificates should be part of the contract between both partners as well.  To establish the precise number of tonnes of emission reduction, the difference between a baseline study and subsequent monitoring will be certified by a Dutch based independent institute (Joint Implementation Registration Centre), wherever possible, in cooperation with a host country institution.

The PPP-JI will take the costs of prefeasibility and feasibility studies.  Costs of identification of projects should be paid by the participants.  Baseline study and monitoring of the GHG emission reduction will also be paid by the PPP-JI, including training as an integral package of the entire project.  There are no predefined percentages for the PPP-JI support established so far; support will be based on the incremental cost principle. 

     If an investment in e.g. new process technology to be provided by the Dutch partner is higher than the best conventional alternative in the host country, the difference is defined as the incremental costs.  It is, however, not envisaged that the PPP-JI is going to finance the full incremental costs.  The new technology also creates profits as e.g. the energy intensity per unit of product reduced.  These profits have to be deducted from the incremental costs in a reasonable way. 

The remaining costs result in the payback period with a calculable number of months.  The threshold IRR settled by the industries as the Go, No-go criterion for the project, may incorporate the effect of the incremental costs on the investment decision. 

This is a non-specialist perception of the problem which may be highly simplified.  However, one cannot wait until the last theoretical obstacle is put aside: the Netherlands government is offering support to any party desiring to participate in AIJ projects under the conditions set out by the Conference of Parties.  The incremental cost issue has to be carefully dealt with in discussions between parties and governments. 

MoU Trajectory

Every signatory under the Climate Convention is supposed to designate a responsible authority for Joint Implementation/Activities Implemented Jointly.  The designated authorities in the donor and host country communicate on the bilateral agreement needed for each AIJ project.  The agreement is usually shaped as a Memorandum of Understanding, and with a minority of countries as a Letter of Intent.  The MoU states that both countries accept the project as an ‘Activity Implemented Jointly’ and that it fits in the national development priorities of the host country.

Summing Up    

"The  greenhouse effect will occur anyway, even if we deploy all possible counter measures at once. So , our aim is to prevent the occurrence of the greenhouse effect to the highest extent possible, and to protect the most vulnerable areas meanwhile, notably the
coastal zones."

The starting point for the Joint Implementation Projects is in the identification of development needs of potential host countries.  The focus is on demand driven projects for which adequate Dutch counterparts have to be found, with the help of the Dutch Embassy or the PPP-JI, if need be.  The PPP-JI can function as a broker between demanding and supplying parties.

The focus will be on projects in the sectors like industry, energy and transport as they constitute the most important GHG emitting sectors in most developing countries.

The largest resources for development do not come from traditional development aid budgets, but from private capital flows.  This is an important fact that may result in technology transfer on the basis of direct relationships between industries all over the world.  The desired high leverage effect of the JI resources can only be realized when Dutch industries can be made interested in investments in developing countries.  They are eager to do so as soon as interesting opportunities provide higher profits than traditional alternatives.  Commercially profitable projects are a precondition to initiate or to enhance this capital flow.

Training (or capacity building) will be an important component in many AIJ projects, especially when the delivery of hardware is an anticipated project element.  The parties involved will have to design a training plan which ensures the technology to be maintained for the recipient industry.  Maintenance of appliances and equipment is a basic condition for a sustainable project.  Involvement of the PPP-JI guarantees that training aspects beyond those directly connected to the technology transfer will be covered under the programme’s expenses.  This is to assure that knowledge-transfer in a wider perspective takes place as well.    q 

The author is working with the Climate, Energy, and
Environmental Technology Division of the Pilot Project  Programme
for Joint Implementation at The Hague, Netherlands.

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