The investment climate for climate investment: Joint Implementation in transition countries

Under the Kyoto Protocol, transition countries are expected to become important players in the emerging market for greenhouse gas emission reductions, as they can reduce emissions at a relatively low cost. However, the attractiveness of the region as a supplier of emission reductions will not only depend on its cost advantage. It will also rely heavily on the business climate offered to carbon investors. Factors like a well-functioning legal and regulatory system, economic and political stability and the capacity to process emission reduction projects efficiently will be key. This paper looks at the carbon investment climate in the transition countries eligible for Joint Implementation (JI) – Russia, Ukraine, Croatia and the EU accession countries of the region. It concludes that JI investors will face a clear trade off between the scope for cheap JI on the one hand, and the quality of the business environment and JI institutions on the other. The countries with the highest potential for cheap emission reductions also tend to be the countries with the most difficult investment climate. The institutional capacity for JI is lowest in countries where the business environment and institutions are generally weak. It is also low in the most carbon-efficient countries, where there is less scope for, and hence less interest in, JI.