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Introduction to CDM and JI Special Project Types Domestic Offset Projects
Domestic Offset Projects
Concept and Legalities
Domestic offset projects (national projects) are a new mechanism whose introduction has sparked increasing debate
in recent years. They can be seen as a form of ‘unilateral’ JI: they generate emission reduction certificates, but
the project activity is actually carried out in the investor country and no other country is involved.
In terms of their legal framework, the instruments differ considerably. CDM and JI are enshrined in the Kyoto
Protocol and the emission reduction certificates they generate can thus be traded and used internationally. Questions as to
which climate change projects are eligible and how many emission reduction certificates they may generate are governed by
international law (Kyoto Protocol and COP/MOP decisions), EU legislation (Linking Directive) and national law (Germany’s
ProMechG). Domestic offset projects, by way of contrast, would be based solely on EU legislation or national law. The degree to
which the emission reduction certificates they generate might be used would depend on how the instrument was structured.
During negotiations on the EU Linking Directive, a number of EU Member States (particularly Great Britain and Germany) were in
favour of creating this type of instrument. Although the decisions set out in the Directive do not provide for domestic offset
projects, they contain an option to allow their use from 2008 onwards. The modalities and procedures will not be discussed,
however, until the first review of the EU Emissions Trading Scheme in 2006 and 2007.
If no agreement is reached at EU level, solutions are thinkable at a lower level in the form of national measures in single EU
Member States or in bilateral cooperation activities. New Zealand’s Projects to Reduce Emissions Programme could serve as
a model: the programme allowed both foreign and domestic investors to register with the scheme. Domestic investors can choose
either to receive AAUs or have their project registered as a JI project in order to receive ERUs. More information is available
at 
www.climatechange.govt.nz.
Another way to allow domestic offset projects has been proposed by France. What they term as Cross JI allows cooperation
between two or more Annex I states. Projects conducted at national level and approved by the JI Designated Focal Point are
recognised by the partner country serving as the investor country without the investor country conducting its own assessment of
the projects. The host country issues the emission reduction certificates and transfers them to the investor country which then
immediately passes them back to the host country. Looked at from a formal a perspective, this procedure complies with
international requirements for JI projects.
Open Issues and Need for Regulation
Proponents of domestic offset projects claim they are justified on grounds of inequality: foreign investors can carry out
projects in Germany and obtain emission reduction certificates, while domestic investors from Germany cannot – unless,
that is, they cooperate with a foreign partner. From the proponents’ perspective, therefore, domestic offset projects are
seen as a logical simplification of the Kyoto Mechanisms. It is also assumed that their introduction would spark the
market’s search function and thus mobilise decentralised reduction potential that is difficult to exploit by means of
government policy measures and is perhaps not even on the policy radar screen.
Germany’s first experience with domestic offset projects was with pilot projects in the Hesse Tender implemented in 2002
and 2003 as a joint initiative of the State of Hesse Environment Ministry and Deutsche Ausgleichsbank (now KfW Bank Group). The
aim of the Hesse Tender was to allow German investors the chance to gather experience in emissions trading: businesses in the
state of Hesse who wanted to conduct emission reduction projects were able to offer to sell the emission reduction certificates
generated either to the State of Hesse or to other interested parties.
There is, nonetheless, some concern regarding the implementation of domestic offset projects. Two main objections come to
light:
Secondly, the question arises as to the extent to which the project is really ‘additional’ if emission reductions proposed in the form of a domestic offset project are already covered by another policy instrument.
Should policymakers decide in favour of domestic offset projects, the legislature must introduce appropriate legislation to ensure they prove a meaningful addition to the climate change instruments that have either already been introduced or are in the planning stages. This is possible if domestic offset projects are made subject to the same criteria and procedures as JI projects – something the German government and other proponents of this project type have called for during the EU negotiations.
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