Analysis of a commitment period reserve at national and global levels

To reduce the risk of overselling in the context of international greenhouse gas trading under the Kyoto Protocol, Parties have agreed to a commitment period reserve requirement. The commitment period reserve requires each Annex B Party to hold in its national registry quota equal to the lower of (a) X% of five times the Party's most recently reviewed emissions inventory; and (b) Y% of the Party's initial assigned amount. The agreement reached at the resumed sixth session of the Conference of the Parties (COP) sets X = 100% and Y = 90%. This paper analyses different specifications (values of X and Y) of the commitment period reserve in terms of potential non-compliance due to overselling and restricted sales of quota surplus to compliance needs of the seller. To eliminate potential non-compliance due to overselling, Y must be equal to 100% and X must be greater than 105%. Specifications that limit potential non-compliance due to overselling, may temporarily restrict sales of quota surplus to the compliance of some countries. The Annex II Parties are less likely to face restrictions on sales of surplus quota than other Annex B countries. The risk of temporarily restricted sales is reduced to less than 10% for almost all countries for a value of X close to 90%. (C) 2002 Elsevier Science Ltd. All rights reserved.