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EUA/CER spread tendency and the legal framework for CER’s after 2012 - Page 2
Friday, 07 May 2010 18:54


Some may also wonder whether there will be any place for CDM after 2012 if the international negotiations fail and the post-Kyoto agreement isn’t concluded. Some guidance on that matter can be found in the COMMISSION STAFF WORKING DOCUMENT accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Unlocking Europe's potential in clean innovation and growth - Analysis of options to move beyond 20% Draft - Not final (published by EurActiv).


The European Commission argues that even without a 2nd commitment period, the Kyoto Protocol remains in force, unless the Protocol is explicitly repealed by another agreement that enters into force or all 180+ Parties withdraw from it. It also points out that at the end of 2012 the Kyoto Protocol’s targets under its Annex B expire, not the Protocol itself. As it further explains,

 

”The same goes for the set of decisions implementing the CDM. This is for instance clear from paragraph 4 in decision 3/CMP.1 (Modalities and procedures for a clean development mechanism as defined in Article 12 of the Kyoto Protocol). Rather than setting an end-date for the CDM, this Decision explicitly provides for a review of these modalities and procedures “no later than one year after the end of the first commitment period”, and that “further reviews shall be carried out periodically thereafter”, thus clearly indicating its validity after 2012, unless it is explicitly repealed.

Moreover, it is important to point out that COP 7 in November 2001, in its Decision 17/CP.7, provided for a “prompt start” for the CDM even before the Protocol entered into force, anchoring its operation in the Convention rather than the Protocol. Although not strictly necessary for the future of the CDM, it does set a clear precedent for securing the continuity of the CDM under the Convention rather than the Protocol, if politically desirable.

A further possible concern is the continuity post-2012 of the administrative and institutional support for the CDM, in absence of a 2nd commitment period under the Kyoto Protocol. Apart from the fact that the continuity of the legal framework on which the CDM is based is guaranteed post-2012, it should also be underlined that the CDM is self-funding through a charge on credits before they are issued to investors. The majority of this funding has come from charges on credits for which the end-user has been EU Member States or companies operating in the EU ETS. This means that the continuity of the institutions is not dependent on the political will of Parties to fund those institutions, but on the demand for credits.

In relation to the latter, one of the arguments made in the discussions on a 2nd Kyoto Protocol commitment period is that the absence of internationally agreed developed country targets means that there will be no demand for the CDM. This argument is not correct.

Already today, demand for the CDM is mostly driven by domestic legislation. In May 2009 the World Bank reported that, for the third consecutive year, European buyers continued to dominate the CDM and JI markets for compliance, with a combined market share of over 80%, 90% of which comes from private contractors.

The vast majority of current demand is therefore driven through EU’s domestically defined ETS, not the EU’s Kyoto targets.

Moreover, the EU climate and energy package has not only ensured the continuation of legally binding reduction targets post-2012, both under the EU ETS and for the non-ETS sectors, but also explicitly provides for the continuation of the use of CDM credits, even though the use of specific credits from project types can be restricted. In addition, domestic emissions trading systems that are under development outside the EU also foresee the recognition of international credits. Demand for CDM credits, and other forms of international credits, is therefore first and foremost determined by domestic legislation, and in particular the level of ambition set within that legislation, rather than by the existence of binding targets under the Kyoto Protocol for the period after 2012.”

 

So, what are the conclusions? Despite European Commission’s assurances, regulatory environment for CER’s use in the post-2012 EU ETS is unstable. Comparing relatively certain asset, which are EUA’s in the third trading period, with CER’s (where we can’t address now, which of the projects will be restricted as regards the compliance use as from 2013), it would be logical that the EUA/CER spread were all the more extensive. This tendency has no base in the second trading period, where the legal framework for CERs is predictable. But the closer we are 2013, the more the afore-mentioned uncertainties and related risk could negatively influence the price of CER. It is of course the private view of the author who  assumes no responsibility for practical consequences of it’s application...

 



 

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