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CERs and ERUs market as from 2013
 
Access to international credits was originally designed for moving towards a global market with a view of linking schemes with one another. The Kyoto Protocol flexible mechanisms (Clean Development Mechanism (CDM) and Joint Implementation (JI) sometimes jointly referred to as "UN offsets)" were also intended as a cheaper source of compliance instruments integrated into some cap-and-trade schemes such as EU ETS or Australian and New Zealand carbon price mechanisms.

At present, however, there is no international agreement replacing the Kyoto Protocol in force that would apply to the EU Member States after 2012.

 

On 8 November 2013 the European Commission have adopted the Regulation on international credit entitlements during phase three of the EU ETS (unchanged from the version approved by the EU Climate Change Committee in July 2013).


The Regulation entered into force on the day following its publication in the Official Journal of the European Union. Member States had one month to notify to the Commission the international credit entitlement for each of their operators in accordance with the limits set in the Regulation.

 

Download the European Commission Regulation on determining international credit entitlements pursuant to Directive 2003/87/EC of the European Parliament and of the Council.

 

 

Article 11a of Directive 2003/87/EC provides for the use of certified emission reductions and emission reduction units from project activities before the entry into force of an international agreement on climate change, by setting up the possibility for operators to exchange such units against allowances.

 

Enacting post-2012 use restrictions on CERs from industrial gas projects and projects registered post-2012 from non-LDCs as well as legal possibility for applying further similar measures influencing demand-side for CERs were, however, among the most salient drivers that have given an effect of dropping CERs prices and significant uncertainty among investors and developers.

 

As regards CDM carbon credit market many different signals appeared lately. At the one end of the spectrum we have a Durban decision to extend the Kyoto Protocol for a second period, at the other end there appear new initiatives and designs as Sectoral Crediting Mechanism (SCM) features thereof have some advantages over CDM (for basic rules regarding Sectoral Crediting Mechanism (SCM) click here). CDM market as from 2013 will undoubtedly be at the crossroad and the current prices for CERs seem already reflect this setback.

Such effect could have been predicted earlier given among others the provision of the Article 11a(9) of the Directive 2003/87/EC (in the wording amended by the Directive 2009/29/EC) – see for instance article ‘EUA/CER spread tendency and legal framework for CER’s after 2012’ or ‘Article 11a(9) of the Directive 2003/87/EC – a headache for compliance buyers’.
 

Draft Commission Staff Working Document ‘Information provided on the functioning of the EU Emissions Trading System, the volumes of greenhouse gas emission allowances auctioned and freely allocated and the impact on the surplus of allowances in the period up to 2020’ (hereinafter referred to as ‘Commission’s Staff Working Document of 25 July 2012”) also confirms that ‘no further restrictions are envisaged at present but the possibility remains to do so in the future’ (situation in that regard changes, however, dynamically and recent rumors as regards potential qualitative restrictions involve ERUs).

 

The scale of the problem is presented by market data for 2010 for instance, where CDM credits that are banned for use in the EU ETS from 1 May 2013 accounted for almost 80 per cent of offsets surrendered for compliance by installations in the EU emissions trading scheme.

 

Recent data show a general drastic fall in the number of the new CDM projects in 2013. The reason for this is indicated mainly the EU ETS qualitative restrictions on CERs use (apart from CERs visible oversupply). The sharp decline in the market CER's price (from 20€ in 2008 to 0.40€ in 2013) can be perceived as an effect of this regulatory circumstance.

 

International context

 

EU ETS isn't however unique in regard of qualitative restrictions on CERs use as also the Australian cap-and-trade program provides a power for the Governement to disallow by regulation eligibility of certain international units to ensure that only credible international credits are used for compliance (this relates however to the flexible charge years since till 1 July 2015 the use for compliance of international units under the Australian scheme is entirely forbidden).

 

The specific feature of the Australian carbon reduction program is, however, that for the first three flexible charge years, there will be a charge potentially imposed on the surrender of eligible international units (where observed international unit prices fall below the specified price for the relevant year a charge will be imposed on users of international units, representing the difference between the observed price and the floor price (for particulars see ‘Will the Australia’s carbon price floor influence on the prices for international units?’).

 

In the flexible charge years as from 1 July 2015 the limit on the use of international units under the Australian scheme is 50%. Note, however, recently proposed amendments to reduce the usage limit for Kyoto-units compliance in the Australian program starting in 2015 (the newly proposed limit is 12.5% down from 50%). Further potential restrictions are possible with only one year's notice.

 

The above notwithstanding, in addition to the exclusion of time limited CERs (that is, long term or temporary CERs), the Australian Government has already announced (Australian Government (2011) Securing a clean energy future: The Australian Government’s climate change plan Table 8 on p.107) potential restrictions on CERs and ERUs if they arise from:

- nuclear projects;

- the destruction of trifluoromethane;

- the destruction of nitrous oxide from adipic acid plants;

and

- large-scale hydro-electric projects not consistent with criteria adopted by the EU (based on the World Commission on Dams guidelines).

 

When it comes to offsets percentage limits under the California cap-and-trade, each covered entity is limited to satisfying up to 8% of its total compliance obligation, per compliance period, with offset credits (there is, however, no limit on the percentage of offsets that may be used to satisfy the annual 30% surrender requirement). Under the California scheme sector-based offsets, in addition to counting towards the usage limit for total offsets, are limited to 2% of a firm’s total compliance obligation in the first compliance period and 4% of a firm’s total compliance obligation in the second and third compliance periods.

Offset protocols in the California carbon program include the one for ozone depleting substance (ODS), livestock, urban forests, and US forest projects. Under these protocols, no offsets are allowed outside of the US, Canada, and Mexico.

 

Also New Zealand Government considered (communication of 13 November 2012) restricting the following international emission units from surrender in the New Zealand Emissions Trading Scheme (NZ ETS):

- Emission Reduction Units (ERUs) generated from HFC-23 and N2O industrial gas destruction projects

- Certified Emission Reduction units (CERs) and ERUs generated from large-scale hydropower projects (greater than 20 MW capacity) that do not meet the guidelines in the World Commission on Dams’ final report: Dams and Development: A Framework for Decision Making.

The restriction on the use of CERs generated from HFC-23 and N2O industrial gas destruction activities was introduced in the New Zealand Emissions Trading Scheme already  in December 2011.

As the reason for banning CERs generated from industrial projects that destroy HFC-23 and N2O industrial gases from the New Zealand Emissions Trading Scheme was the lack of environmental integrity, banning ERUs derived from the same activities would ensure a consistent approach is taken.

 

Under the Korea Enforcement Decree of Allocation and Trading of Greenhouse Gas Emission Allowance Act of 13 November 2012 CERs and ERUs are excluded from the use in the Korean emission trading scheme till 2020, while in the later phase the relevant limit is 50%, but the absolute number of international offsets submitted for compliance cannot exceed the number of domestic offsets submitted for each compliance year (see "South Korea's Emissions Trading Scheme, White Paper'"of 10 May 2013).

 

CERs and ERUs conversion process


 Article 60 of the European Commission Regulation No 389/2013

Use of international credits through allowance exchange

1. An operator may request the exchange of an international credit for a general allowance pursuant to Article 11a(2) of Directive 2003/87/EC until 31 March 2015 and pursuant to Article 11a(3) and (4) of that Directive until 31 December 2020. It shall propose a transfer of international credits from the relevant operator holding account to the EU International Credit Account for operators in the Union Registry.
An aircraft operator may request the exchange of an inter­national credit for an aviation allowance pursuant to Article 11a(2) of Directive 2003/87/EC until 31 March 2015 and pursuant to Article 11a(3) and (4) of that Directive until 31 December 2020. It shall propose a transfer of international credits from the relevant aircraft operator holding account to the EU International Credit Account for aircraft operators in the Union Registry.

2. Upon a request, the central administrator shall ensure that the Union Registry carries out a transfer of international credits to the relevant EU International Credit Account if:
(a) the transfer is allowed by the status of the initiating account;
(b) the relevant international credit entitlement table has been entered into the EUTL and the operator or aircraft operator has an entry in the table pursuant to Article 59;
(c) the number of units proposed in the transfer does not exceed the remaining credit entitlement pursuant to Article 61;
(d) all units proposed in the transfer are eligible for use pursuant to Articles 11a and 11b of Directive 2003/87/EC, Article 58 of this Regulation and any measures adopted pursuant to Article 11a(9) of Directive 2003/87/EC.

3. Upon completion of the transfer pursuant to the first subparagraph of paragraph 1, the central administrator shall ensure that the Union Registry creates an equivalent number of general allowances on the EU Credit Exchange Account for operators and transfers, on behalf of the relevant competent authority, an equivalent number of general allowances to the operator holding account from which the transfer was initiated.

Upon completion of the transfer pursuant to the second subparagraph of paragraph 1, the central administrator shall ensure that the Union Registry creates an equivalent number of aviation allowances as appropriate on the EU Credit Exchange Account for aircraft operators and transfers, on behalf of the relevant competent authority, an equivalent number of aviation allowances to the aircraft operator holding account from which the transfer was initiated.

 

The salient qualitative difference as regards CERs and ERUs use in the EU ETS third trading period, as compared to the years 2008-2012, is that as from 2013 CERs and ERUs no longer are compliance units within the EUETS but are exchangeable with EUAs. The modalities for this exchangeability pursuant to the Article 11a of the EU ETS Directive are quite differentiated.

The first thing is that to swap CERs and ERUs with third phase allowances the request from the operator is necessary and the deadline March 31, 2015 needs to be observed. This exchange will generally concern CERs and ERUs issued in respect of emission reductions up until 2012 from project types which were eligible for use in the EU ETS during the period from 2008 to 2012 that have not been already used up (the Commission made clear that given the exchange route is only for operators, an exchange will be declined if an operator has exhausted the limit of its entitlements for exchanging credits, as reflected in Articles 11a(2-4) and (8) of the ETS Directive).

The Commission’s Staff Working Document of 25 July 2012 intended the exchange process be defined in the  amendment of the emission allowances registry regulation (as a part of actions to finalise the preparation of Phase 3 - see below).

The said amendment was presented by the European Commission communication of 10 January 2013 submitted to the Climate Change Committee, accompanied by the legislative proposal to update the Registry Regulation. The proposal introduced the date 1 May 2013 as the point in time therefrom the operator or aircraft operator may require the exchange of the above-mentioned CERs and ERUs for third phase general allowances or aviation allowances.

 

THe final legislative text took shape in the form of the Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and No 1193/201 (see box).

 

On 2 May 2014 the European Commission announced that aggregate number of international credits that were exchanged for allowances by EU ETS operators by 30 April 2014 amounts to 132.8 million, of which 66.4 million were Certified Emission Reductions (CERs) and 66.4 million were Emission Reduction Units (ERUs).

 

Practically, companies can exchange CERs and ERUs for allowances up to their individual entitlement limits set in the registry.

 

The surprising effect of the changed surrendering mechanisms for international units in the EU ETS phase three is  that - in contrast with phase two - no information is available on the number of CERs and ERUs used for compliance.

As the European Commission confirmed, since in phase 3 CERs and ERUs are no longer directly surrendered but exchanged for allowances, it is impossible to trace how many CERs and ERUs were used in a particular compliance year.

 

By the end of phase two, 1058 million CERs and ERUs had already been surrendered.

 

Of the 132.8 million credits that were exchanged for allowances by 30 April 2014, 50% were Certified Emission Reductions (CERs) and 50% Emission Reduction Units (ERUs). 80% of CERs originated from China and nearly 5% from India, and 70% of ERUs from Ukraine and 25% from Russia.

More complete breakdown of the relevant data, containing volumes and percentages for particular countries, is provided by the following  European Commission website.

 

The EU ETS quantitative limit on the use of international credits

 

The exact limit on the use of international credits pursuant to Article 11a(8) of the ETS Directive is established by a separate Commission Regulation.

The relevant legislative draft has been published on 5 June 2013 and o n 8 November 2013 the European Commission have adopted the Regulation on international credit entitlements during phase three of the EU ETS (unchanged from the version approved by the EU Climate Change Committee in July 2013).

 

The Regulation enters into force on the day following its publication in the Official Journal of the European Union. Member States will then have one month to notify to the Commission the international credit entitlement for each of their operators in accordance with the limits set in the Regulation.

 

Download the European Commission Regulation on determining international credit entitlements pursuant to Directive 2003/87/EC of the European Parliament and of the Council.

 

Articles 1 - 2 of the European Commission Regulation  of 8 November 2013 on international credit entitlements during phase three of the EU ETS:

 

"Article 1
1. Each operator of a stationary installation which received a free allocation or an entitlement to use international credits in the period from 2008 to 2012 shall be entitled to use international credits during the period 2008 to 2020 up to the amount allowed to it from the period 2008 to 2012, or to an amount corresponding to a maximum of 11% of its allocation during the period from 2008 to 2012, whichever is the higher.
2. Each operator of a stationary installation which received neither a free allocation nor an entitlement to use international credits in the period from 2008 to 2012 shall be entitled to use international credits during the period from 2008 to 2020 up to a maximum of 4.5% of its verified emissions during the period from 2013 to 2020.
3. Each operator of a stationary installation receiving an additional allocation following significant capacity extension pursuant to Article 20 of Decision 2011/278/EU shall be entitled to use international credits during the period from 2008 to 2020 up to the amount allowed to them from the period from 2008 to 2012, or to an amount corresponding to a maximum of 11% of their allocation during the period from 2008 to 2012, or up to a maximum of 4.5% of their verified emissions during the period from 2013 to 2020, whichever is the higher.
4. Each aircraft operator shall be entitled to use international credits up to a maximum of 1.5% of its verified emissions during the period from 2013 to 2020.


Article 2
Member States shall calculate and publish the international credit entitlement for each of its operators and aircraft operators in accordance with Article 1 and notify the Commission in accordance with Article 59 of Regulation (EU) No 389/2013 one month after the date of the entry into force of this Regulation."

 

 

The legislative language (Articles 1 and 2 of the Regulation) is cited in the box. The plain description of the said rules has been laid down in the European Commission communication of 10 July 2013. It is as follows:

 

1. EU ETS participants operating stationary installations will be entitled to use international credits during the 2008-2020 period up to the higher of two limits:

- The international credit entitlement specified in the national allocation plan for the phase 2; OR
- 11% of the free allocation of EU allowances granted to them in that period.


2. Operators of stationary installations who were new entrants in phase 2 and operators of stationary installations newly included in the scope of the EU ETS in phase 3, which did not receive free allocations nor entitlements for international credit use in phase 2, will be able to use international credits up to a maximum of 4.5% of their verified emissions in phase 3.

 

3. There are also special provisions for operators of stationary installations with a significant capacity extension. These will receive the highest of:

- The international credit entitlement specified in the national allocation plan in phase 2; OR

- 11% of the free allocation of EU allowances granted to them in phase 2; OR
- 4.5% of their verified emissions in phase 3.


4. For operators of stationary installations which received a free allocation in phase 2 which carry out activities newly included in the EU ETS in phase 3 will receive the highest of:

- The international credit entitlement specified in the national allocation plan in phase 2; OR
- 11% of the free allocation of EU allowances granted to them in phase 2; OR
- 4.5% of their verified emissions in phase 3.


5. Finally, aircraft operators are entitled to use international credits beyond those allowed in 2012, up to a maximum of 1.5% of their verified emissions in phase 3.

 

The Regulation specifies the maximum limits up to which operators under the EU emissions trading system may use eligible credits from the Kyoto Protocol's project based mechanisms (i.e. Clean Development Mechanism and Joint Implementation) for compliance with emission limits from 2013 to 2020 - see box. In view of the number of allowances valid for the period 2013 to 2020 issued, the entitlements to use international credits are set at the minimum levels. 

 

Why there is danger that anyone will not be much more willing to buy CERs

The IETA organisation in its paper ‘The Consequences of the Durban COP for the Carbon Market and Climate Finance’ (released in December 2011 at www.ieta.org) highlighted the hypothesis that it does not seem likely that anyone will be much more willing to buy CERs. As it further elaborates, at first sight it might appear, with larger developing countries in effect signing up to an international agreement, that their post-2013 CERs might again be eligible in the EUETS. But the formidably complex provisions in the EUETS revised Directive do appear to rule that out.

The said stance of IETA is reasoned in the following way:

Firstly - CERs would have to fit within the existing quantitative limits, which are quite tight;

Secondly - the law specifies only Least Developed Countries (LDCs) as sources of post-2012 new project credits – this is not dependent on any international agreement, though it seems they would have to ratify one if it existed;

Thirdly - agreements between the EU and third countries allowing new CERs to be accepted were only to be triggered in the absence of an international agreement, and Commission officials had recently been making clear that negotiations would not start until failure at an international level was clear. Any ratification condition, of course, could put off the golive date of such an agreement until the eve of 2020 (it is appropriate to add that also in the Commission’s Staff Working Document of 25 July 2012 can be found a mention that ‘no concrete plans exist’ for concluding such bilateral agreements at present).

IETA concluded that ‘The market will eagerly await clarification from the Commission of how, if at all, Durban has changed anything here. Pending that, it would seem unwise for developers to assume the EU is back in the demand game, outside LDCs.'

Current EU ETS regulatory position

The documents of the European Commission, although made some important  clarifications with respect to CERs and ERUs use as from 2013 (see: ‘Questions and answers on use of international credits in the hird trading phase of the EU ETS’), were not able to ease the uncertainty.

In additional portion of Q&A the Commission appears to literally refer to ambiguities raised by IETA by reasoning:

‘The adoption of a second commitment period of the Kyoto Protocol without a legally binding agreement for the period beyond 2012 under which other developed countries commit themselves to comparable emission reductions and economically more advanced developing countries commit themselves to contributing adequately according to their responsibilities and capabilities is therefore not an international agreement as referred to in Article 11a(7) of the EU ETS Directive and Article 5(3)of the Effort Sharing Decision.’

The Commission also expressly underlined that articles 11a(7) of the EU ETS Directive and Article 5(3) of the Effort Sharing Decision (ESD) limit the acceptance of CDM credits to those from countries that have ratified the new "international agreement on climate change". They do not "broaden" access in any way.

Particularly important is the following Commission’s interpretation:

‘Thus, once an international agreement pursuant to Article 11a(7) of the EU ETS Directive and Article 5(3) of the ESD is reached, the limitation to CDM credits from new projects from the LDCs for the period starting in 2013 continues to apply. Any broadening of the eligibility criteria to allow new credits from other countries, with the exception of credits used under Article 11a(5), would require an amendment of the ETS Directive. Credits from projects in LDCs and other countries started before 2013 will only be accepted if they originate from countries that have ratified the agreement.’

So, the effect appears to be that the IETA suppositions cited at the beginning gained regulatory confirmation to the full extent.

Qualitative restrictions

I signalled the problem with the provision of Article 11a(9) of the Directive 2003/87/EC in the post ‘Article 11a(9) of the Directive 2003/87/EC – a headache for compliance buyers’ a long time ago. After the recent communication from the Commission the uncertainty with eligibility of the said Kyoto units due to potential qualitative restrictions unfortunately persists.

The European Commission reminded in the communication concerned that qualitative restrictions adopted so far to CERs from the start of the EU ETS in 2005 are full use restrictions:
a) from projects at nuclear facilities,
b) projects in agriculture and forestry (so-called LULUCF).

Furthermore, as of 1 January 2013 CERs and ERUs from projects involving the destruction of trifluoromethane (HFC-23) and nitrous oxide (N2O) emissions from adipic acid production are prohibited in the EU ETS (an exception was made until 30 April 2013 for destruction from existing projects that is credited before 1 January 2013, for compliance with 2012 commitments).
 

The said legal developments are reflected in the current market arrangements as, according to the European Energy Exchange (EEX) Customer Information of 20 November 2012, the EEX offers from the 5 December 2012 two CER Spot products:

 

(1) the Grey CER product - which comprises certificates from all projects involving the destruction of trifluoromethane (HFC-23) and nitrous oxide (N2O) from adipic acid production;

 

(2) the Green CER Product - covering all projects which can be used at the respective delivery day for means of compliance according to the valid rules of EU ETS. Projects for the reduction of HFC- 23, adipic N2O and large hydro projects i.e. hydropower generation projects with a generating capacity exceeding 20MW are excluded.

 

On 4 February 2013 EEX registered the first trades on the Spot Market for Green CER at a price of 0.35 €/CER and a volume of 21,000 CER.

 

As regards any other potential moves in that area the Commission declared in the Q&A document that while the legislation allows putting in place further use restrictions adding to those already adopted, the European Commission is currently not considering any additional ones.

The word that should be stressed in the previous phrase is: ‘currently’. The investors should be mindful of the fact the Directive does not limit the types of restrictions that can be introduced. These will depend on project-type, economic, environmental, strategic and administrative circumstances.

Given the exact wording of the controversial Article 11a(9) of the Directive (from 1 January 2013, measures may be applied to restrict ‘the use of specific credits from project types’) the  Commission failed to precisely specify the legal definition of ‘specific credits’.

Under 'type' the Commission understands credits that were generated using one or several methodologies approved by the UNFCCC CDM Executive Board and JI Supervisory Committee. 'Specific credits' could refer to all credits under a project type or credits from a project type generated in a set of countries.
 
Practical tools for CER/ERU eligibility verification

The stance of the European Commission was that the creation of a positive list of unrestricted credits wasn’t possible because EU legislation does not foresee such a list.
 
Nevertheless, the "general positive list", "general negative list" and "specific positive list" have been published on the European Commission website. Legal status od these lists is, however, ambiguous.
 
Moreover, the following UNFCCC websites may be used for the verification of sources of origin CERs/ERUs units:
 
1) for CERs:
 
To verify CERs/EURs units the project number should be entered (without the country code: for instance for CN-1194 the number 1194 should be entered).

 

CERs/ERUs banking

The modalities for banking CERs or ERUs from the second into the third trading period are quite complicated matter.

The first fundamental issue is that for phase 3, credits can only be used for compliance in the EU ETS if exchanged for phase 3 allowances. This exchange of international credits with a first commitment period identifier into allowances will only be allowed until March 2015.

The infrastructure enabling the exchange of international credits for EUAs has been put in płace in April 2014.

The very subtle distinction is, however, not all EU ETS account holders being able to carry over credits within limits. Under the EU ETS, only compliance buyers (i.e. not all account holders) can exchange unused credits within the limits provided in Article 11a of the Directive. So, only “operators” as defined in the ETS Directive can exchange CERs/ERUs for allowances.

Perpetual status of the project as regards the LDCs list

The said Communication provides a substantial note on Least Developed Countries (LDCs) list. As there had been no international agreement at the end of 2010, nor had there been any EU agreements with third countries, Article 11a(4-5) provides a default situation of prohibition on using new-project CERs beyond 2013, unless they are from LDCs or can be swapped for CERs from LDCs.
According to the Commission "A project in an LDC that is included in the UN list when the project is registered by the CDM Executive Board may continue to generate credits up to 2020, whatever happens to the list” (the issue relates to the situation where a country loses its LDC status: when the project is at validation stage, when the project is registered or when  CERs have already been issued).

Crediting period renewal

Another important clarification relates to the crediting period renewal. The Commission’s answer to the question ‘Does the registration date pertaining to ‘projects that were registered before 2013’ referred to in Article 11a(2-4) correspond to the start date of the first crediting period of the project, or to the start date of any subsequent crediting period?’ is ‘The start date refers to the start date of the first crediting period. Hence credits from projects that were registered prior to 2013 and that have their crediting period renewed after 2012 will continue to be usable (in the absence of use restrictions)’. Such broad interpretation is, undoubtedly, particularly advantageous for developers of the said projects.

PoAs

The potential significance of the clarification on Programme of Activities (PoAs) is so far-reaching that it seems that it would be most appropriate to quote literally the whole passage.

According to Article 11a(2) credits from projects registered pre-2013 are eligible for compliance in the EU ETS .

Question: ‘Does this imply that CDM Project Activities (CPAs) included after 2012 to PoAs registered pre-2013 are also eligible?’

Answer: ‘Article 11a(3) of the EU ETS Directive states that "…competent authorities shall allow operators to exchange CERs and ERUs from projects that were registered before 2013 issued in respect of emission reductions from 2013 onwards for allowances valid from 2013 onwards". This wording would indicate that the moment of registration of a project is to be taken as a cut-off date for determining whether future CERs would be eligible for use in the EU ETS. A PoA is only registered once and CPAs are added to a PoA without a separate registration. It is therefore the Commission's interpretation that CERs from CPAs added after 2012 to a PoA registered prior to 2013 can be used for compliance in the EU ETS.

The Commission is, however, also aware that this interpretation of Article 11a(3) may increase the supply of CERs from non-LDCs. This contradicts the spirit of the Directive to allow only CERs from projects registered after 2012, if they come from LDCs.

The Commission will therefore continue to monitor the evolution of PoAs, including their impact on the development of new sectoral mechanisms. The Commission notes that the Directive allows the Commission to propose appropriate regulatory measures under article 11.a(9) of the EU ETS, if the situation would require this.’
 

Conclusions to be drawn from the European Commission’s Report to the European Parliament and the Council on the state of the European carbon market in 2012 of 14 November 2012

 

Report from the Commission to the European Parliament and the Council on the state of the European carbon market in 2012”, presented on 14 November 2012 among other options contains also considerations on potential limiting access to international credits.

 

The Commission reminds that international credits have been allowed for use in the EU ETS primarily to contain compliance costs.

 

Further, it remarks that following the exceptional macro-economic developments and the fact that emissions have been substantially lower than the cap, the quantity limit of international credits in the period 2008 to 2020 has turned out to be ‘rather generous’ and is ‘a major driver for the build-up of the surplus.’

The Commission also recalls the fact that without international credits, the surplus in the EU ETS by 2020 would potentially be only around a quarter (25%) of the presently expected surplus.

 

These circumstances led the Commission to the reflection that in phase 4 of the EU ETS (i.e. as from 2020) the regulatory framework could be crafted in a manner that initially allows for no or much more limited access to international credits. This may, however, have to be balanced against ‘adverse impacts on financial flows and transfer of technology to developing countries.’ According to the above-mentioned Report additional flexibility regarding the access to international credits could be foreseen ‘in case of strong and sustained price increases.’

 

The issue of limiting access to international credits analysed in the said Report is concluded with the remark that ‘the right international conditions could enable a strengthening of the cap and therefore allow for additional cost containment through increased access to international credits.’

 

Transition from CDM to the New Market Mechanism (NMM)

 

At the other end are the conclusions of the analysis ‘Design options for sectoral carbon market mechanisms’ Final Report of 31 August 2012 (CLIMA.B.3/SER/2011/0029

http://ec.europa.eu/clima/news/articles/news_2012111402_en.htm) which highlight potential ways of managing the transition from CDM to the New Market Mechanism (NMM).

 

According to the above document in order to prevent or reduce double counting in the reduction of emissions by the CDM and the NMM there are four main options:

 

(1) Carve out CDM projects from sectoral boundary. This option will be acceptable to project participants and is easy to administer. It however results in significant risk of intra-sectoral leakage, particularly if new CDM projects continue to be allowed. In addition, there is potential for double counting from indirect overlaps and the option is less compatible with the EU ETS.

 

(2) Phase-out CDM projects immediately, after their current crediting period or after their last crediting period and until the phase-out, deduct CERs from sectoral performance. This option addresses double counting adequately and is easy to administer. While phase-out after project’s last crediting period would be acceptable to project participants, they would probably strongly resist the other two options. There is some potential for leakage within the sector to small installations outside the NMM boundaries. The phase-out could be limited to those CDM projects which are subject to direct or indirect double-counting.

 

(3) Continue CDM and deduct CERs from the sectoral performance. This option is the most acceptable to project participants, is easy to administer and addresses double counting well. On the other hand, there are strong risks of ‘system shopping’ for investors and intra-sectoral leakage. It is also less compatible with the EU ETS and may complicate mitigation planning.

 

(4) Integrate existing CDM projects into a sectoral scheme, e.g. by adapting a CDM benchmark to the benchmark for the sectoral scheme. This option minimises intra-sectoral leakage, addresses double counting, has high environmental effectiveness and is compatible with the EU ETS. Its acceptability to project participants and administrative feasibility may be lower than the other options and depends on each specific case.

 

Doha Conference

 

The European Commission communication of 8 December 2012 contains, among others, the following comments on the Doha conference outcome:

"The balanced Doha outcome enabled the EU to confirm its commitment to participate in the second commitment period of the Kyoto Protocol starting on 1 January 2013. The conference adopted a ratifiable amendment setting out the rules governing the second period. It will run for eight years, thus ensuring no gap occurs between its end and the entry into force of the new global agreement in 2020. The EU will apply the amendment from 1 January 2013 even though formal ratification by the European institutions and Member States is likely to take over a year.

  • For the second period the EU has taken on an emissions reduction commitment in line with its domestic target of cutting emissions by 20% of 1990 levels by 2020, but has left the door open to stepping up this reduction to 30% if the conditions are right. The reduction commitment will be fulfilled jointly by the EU and its Member States, Croatia and Iceland. The targets of all countries participating in the second period will be revisited by 2014 with a view to considering raising ambition.

  • The EU and other countries taking on targets under the second period will have continued access to the Kyoto mechanisms from the start of the period. A limit on purchases of surplus emission budgets ('AAUs') from the first commitment period will apply. Moreover, the decision includes political declarations by EU and its Member States and all other potential buyers - Australia, Japan, Liechtenstein, Monaco, New Zealand, Norway and Switzerland – stating that they will not purchase AAUs carried over from the first period.

  • The second period forms part of the transition to the global agreement taking effect in 2020."

     

CMP 8 has taken the key decision - it reaffirmed the second commitment period of the Kyoto Protocol begins on 1 January 2013 and it will end on 31 December 2020.

 

The said decision has come a little bit late, thus CMP 8 recognized that Parties may provisionally apply the amendment pending its entry into force and decided that Parties will provide notification of any such provisional application to the Depositary. Parties that do not provisionally apply the amendment, will implement their commitments and other responsibilities in relation to the second commitment period, in a manner consistent with their national legislation or domestic processes, as of 1 January 2013 and pending the entry into force of the amendment.

 

The most significant issue is that CMP 8 clarified that for the purposes of the second commitment period, from 1 January 2013 onwards, a Party included in Annex I to the Doha Decision may continue to participate in ongoing project activities under Article 12 of the Kyoto Protocol (relating to the Clean Development Mechanism) and in any project activities to be registered after 31 December 2012, but only a Party with a quantified emission limitation and reduction commitment inscribed in the third column of Annex B to the Kyoto Protocol as contained in annex I to the Doha Decision will be eligible to transfer and acquire certified emission reductions (CERs) in accordance with decision 3/CMP.1.

As follows from comparison of the third column of the said Annex B to the Kyoto Protocol in the original wording, and that as contained in Annex I to the Doha Decision, four countries: Canada, Japan, New Zealand and Russian Federation currently have not a quantified emission limitation and reduction commitment inscribed.

 

ERU restrictions as from 2013

 

The amendments to the Registry Regulation (see: European Commission communication of 13 December 2012 the Climate Change Committee) relating to international credits generated from Joint Implementation (Emission Reduction Units -  ERUs) covered:

 

1. in accordance with rules on avoiding the double counting of emission reductions ERUs from projects hosted in Member States related directly or indirectly to activities within the scope of ETS in phase 2 may be issued no later than 31 December 2012;

 

2. ERUs for emission reductions taking place before 31 December 2012 from projects hosted in Member States related to activities not directly or indirectly in the scope of ETS in phase 2, but included in the scope of ETS from phase 3 onwards, may be issued no later than 30 April 2013;

 

3. ERUs for emission reductions taking place before 31 December 2012 from projects hosted in third countries not having legally binding quantified emission reductions in the period 2013-2020 may be held in the Union registry provided they are issued by 30 April 2013 and verified in accordance with Joint Implementation track 2 procedures.

 

The above indications were confirmed by the European Commission communication of 10 January 2013 submitted to the Climate Change Committee.

 

In the said communication the Commission indicated that apart from a small number of other improvements, the following provisions regulate the outstanding issues relating to the use of international units in the third trading period:

 

(1) articles 59 to 61 - the exchange mechanism of eligible international credits for allowances;

 

(2) article 58(1) first subparagraph – that the possibility to issue ERUs from projects hosted in Member States related directly or indirectly to activities in the scope of the ETS in phase 2 (2008-2012) ceases on 31 December 2012;

 

(3) article 58(1) second subparagraph – that ERUs for emission reductions taking place before 31 December 2012 from projects hosted in Member States related directly or indirectly to activities not in the scope of the ETS in phase 2, but included in the scope of the ETS in phase 3 (2013-2020), may be issued up to 30 April 2013;

 

(4) article 58(2) - that ERUs issued after 31 December 2012 from third countries not bound by quantified emission reduction commitments under the Kyoto Protocol's second commitment period (2013-2020) may be held in the Union registry provided it is assured they represent emission reductions taking place before 31 December 2012. This assurance can be given in two possible ways: either they are issued in accordance with the Joint Implementation track 2 procedure; or if this proves not possible, they may be held if they are certified as corresponding to emission reductions before 31 December 2012 by an independent entity accredited by the Joint Implementation Supervisory Committee.

 

These provisions related to ERUs concern units issued as first Kyoto commitment period ERUs. Following the relevant Joint Implementation decisions taken at the Doha climate conference, second commitment period ERUs may not be issued before 2016.

 

Morover, the recital 13 in the preamble to the above proposal contained the mention that Article 11b of Directive 2003/87/EC forbids the issuance of certified emissions reductions (CERs) and emission reduction units (ERUs) after 31 December 2012 that result in double counting of greenhouse gas emission reductions. However, Article 5(2) of Commission Decision 2006/780/EC of 13 November 2006 on avoiding double counting of greenhouse gas emission reductions under the Community emissions trading scheme for project activities under the Kyoto Protocol pursuant to Directive 2003/87/EC of the European Parliament and of the Council allows allowances in the set-asides established pursuant to Article 3 of that Decision to be converted into assigned amount units (AAUs) or to be sold as 2008-2012 period allowances. The said recital also confirms that Member States should be able to issue until 30 April 2013 ERUs from projects involving activities only included in the scope of Directive 2003/87/EC from 1 January 2013 in respect of emission reductions which took place until 31 December 2012.

 

The recital 14 also observed that an amendment of the Kyoto Protocol should put in place internationally legally binding quantified emission targets from 2013 to 2020 for parties listed in its Annex B once it has entered into force for those parties. Decision 13/CPM.1 of the Conference of the Parties to the UNFCCC serving as the Meeting of the Parties to the Kyoto Protocol (Decision 13/CPM.1) requires that ERUs only be issued by converting AAUs or removal units (RMUs), which have a serial number comprising the commitment period for which they are issued. ERUs cannot be issued if the commitment period marked in the relevant serial number does not match the period during which the emissions reductions took place. Emission trading scheme (ETS) accounts in the Union Registry should not hold ERUs inconsistent with these rules. To this end, ERUs issued by third countries which do not have legally binding quantified emission targets from 2013 to 2020 set out within an amendment to the Kyoto Protocol pursuant to its Article 3, paragraph 9, or that have not deposited an instrument of ratification relating to such an amendment to the Kyoto Protocol, should only be held in the Union Registry if they have been certified to relate to emission reductions verified as having taken place before 2013.

 

Due to the fact the said rules are to a certain extent ambiguous the European Commission has published a new series of F&Q documents on JI mechanism: “Questions & answers on implementation of new registry rules regarding units from Joint Implementation (February 2013)”.

 

The above legislative process found its final determination in the provisions of the Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant to Directive 2003/87/EC of the European Parliament and of the Council, Decisions No 280/2004/EC and No 406/2009/EC of the European Parliament and of the Council and repealing Commission Regulations (EU) No 920/2010 and No 1193/2011 (Registry Regulation).

 

Revisions to JI guidelines and to modalities and procedures for the CDM pursuant to Doha decisions

 

Documents adopted at Doha stressed the need to ensure the continued success of joint implementation (JI) and clean development (CDM) mechanisms  after the first commitment period of the Kyoto Protocol in contributing to the achievement of the objective of the Convention.

 

The said documents with respect to JI mention that 327 project design documents, one programme of activities design document, 51 determinations regarding project design documents, 105 monitoring reports and 96 verifications of reductions in anthropogenic emissions by sources or enhancements of anthropogenic removals by sinks have been made publicly available in accordance with joint implementation guidelines, that there are 11 accredited independent entities, and that to date over 400 million emission reduction units have been issued.

 

When it comes to CDM during the first commitment period of the Kyoto Protocol over 5,200 clean development mechanism project activities have been registered in over 80 countries, with over 50 programmes of activities being registered in 27 countries, over one billion certified emission reductions being issued and in excess of USD 215 billion being invested.

 

As follows from the decisions of the CMP.8 the set of key attributes that will characterise the future operation of joint implementation in the second commitment period of the Kyoto Protocol has been agreed:

 

(a) A single unified track for joint implementation projects;

 

(b) Closely aligned or unified accreditation procedures between joint implementation and the clean development mechanism that take into account differences in the respective modalities and procedures of the two mechanisms;

 

(c) Clear and transparent information regarding all relevant public information required for joint implementation projects by stakeholders, accredited independent entities and host Parties in English on the UNFCCC website in accordance with decision 13/CMP.1;

 

(d) An appeals process under the authority of and accountable to the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol against decisions of the Joint Implementation Supervisory Committee;

 

(e) Clear, transparent and objective requirements to ensure that projects are additional to what would otherwise occur;

 

(f) Mandatory requirements for host Parties with respect to the approval of baselines, monitoring and reporting, including clear, transparent and objective requirements for the setting of standardized baselines by host Parties;

 

The Subsidiary Body for Implementation has also been requested in preparing the revised joint implementation guidelines to address the additionality of joint implementation projects, recognizing such concepts as positive lists of project types that would automatically be deemed additional and prior consideration of joint implementation projects, taking into account, as appropriate, the application of standardized baselines.

 

As regards the CDM modalities in the second commitment period of the Kyoto Protocol the said decisions of the CMP.8 among others:

 

(a) Welcomed the adoption by the Executive Board of improved standards for the demonstration of additionality, in particular with regard to “first-of-its-kind” and common practice; the work undertaken by the Executive Board in further developing and implementing the regulatory framework relating to standardized baselines has been welcomed;

 

(b) Encouraged the Executive Board to further extend the simplified modalities for the demonstration of additionality, including positive lists, to a wider scope of small-scale project activities, while ensuring environmental integrity;

 

(c) Requested the Executive Board and the secretariat to continue seeking ways to streamline the processes for the registration of clean development mechanism project activities and programmes of activities, and the issuance of certified emission reductions, to ensure that the average time between the receipt of a submission and the commencement of the completeness check is fewer than 15 calendar days;

 

It appears that also the initiative to include CCS in clean development mechanism project activities has gained momentum, since the Doha decisions stipulated that the eligibility under the clean development mechanism of carbon dioxide capture and storage in geological formations project activities which involve the transport of carbon dioxide from one country to another or which involve geological storage sites that are in more than one country and the establishment of a global reserve of certified emission reduction units for carbon dioxide capture and storage in geological formations project activities should be considered by Subsidiary Body for Scientific and Technological Advice at its forty-fifth session.

 
 
 
 
 

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Last Updated on Wednesday, 11 June 2014 21:40
 

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