International carbon market

The Commission adopted the revised Registry Regulation on 2 May and it entered into force on the day following its publication in the Official Journal of the European Union.

The term "legally binding" refers to the entry into force of the amendment to the Kyoto Protocol under international law (i.e. when three-quarters of Parties to the Kyoto Protocol have deposited instruments of ratification).

In accordance with Article 58(2) of the revised Registry Regulation, emission reduction units (ERUs) issued after 31 December 2012 in respect of emission reductions taking place up until 31 December 2012 from non-EU ETS Annex B Parties can only be held in ETS accounts in the Union Registry provided that:

• The amendment to the Kyoto Protocol including a commitment for such a Party has entered into force; or
• The Party has deposited an instrument of ratification; or
• The units are issued under track 2; or
• Where track 2 issuance is not possible, where the date of reduction (pre-2013) is certified by an accredited independent entity (AIE).

The Commission is currently working on such guidance and as soon as it is finalised it will be made public. In any case, the guidance will be finalised in advance of entry into force of the revised Regulation.

In light of the revised Registry Regulation approved by vote of the Climate Change Committee in January, it is envisaged that project participants will switch tracks where possible. Although this will not always be possible for all units issued in respect of a Joint Implementation project (e.g. for units already issued as track 1 before the entry into force of the revised Regulation), a project participant may at any time apply to switch tracks [426 KB]. Hence, the cases in which issuance under track 2 is not possible are expected to be quite limited.

Unit holdings in ETS accounts in the Union Registry are harmonised in accordance with Annex I of the revised Registry Regulation. It should be noted that for Kyoto Protocol (KP) accounts in the consolidated system of European Registries (CSEUR), Member States can determine unit holdings.

If allowed by the Member State National Administrator, these units can be held in KP accounts (person holding accounts or national KP accounts). An account holder will be able to distinguish eligible units held on a KP account from those that are either ineligible / pending eligibility.

In accordance with Article 58(3) and Article 115, the Central Administrator will provide National Administrators with a list to enable the transfer of these units to an appropriate KP account. These units will then be transferred to a KP account specified by the account holder or, if the account holder fails to specify a KP account within the given timeframe (40 days from request by National Administrator), to a national KP account.

The guidance [12 KB] on the DG CLIMA webpage explains that "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 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).

Subject to no other quality restrictions, credits from projects registered before 2013 will be eligible for use in the EU ETS. The date of registration shall be the registration date determined by the EB, including the effective date of registration in accordance with Decision 3/CMP.6 i.e. "the date on which a complete request for registration has been submitted by the designated operational entity where the project activity has been registered automatically".

The ETS Directive does not specify the time by which these volumes should be determined. The Commission foresees that the necessary rules should be in place before credits are used in respect of phase 3.

The ETS Directive (Directive 2009/29) and the Effort Sharing Decision (Decision 406/2009) make clear that the term "international agreement on climate change" refers to the "future" agreement that was expected to be reached at COP15 in Copenhagen and that would apply for the period "beyond 2012". This, however, did not happen in Copenhagen.

Negotiations have continued ever since, resulting in the decision in Durban in December 2011 to "launch a process to develop a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties", to be adopted by 2015 and to come into effect and be implemented from 2020.

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.

Articles 11a(7) of the EU ETS Directive and Article 5(3) of the 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.

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.

The magnitude and nature of international credits for which a demand may be created in the EU ETS from 2021 onwards is yet to be defined. The European Parliament and Council would, on the basis of a proposal from the Commission, decide how much demand the EU should create for international credits and of what types at a later stage and in the light of various factors, including the level of ambition of countries in the post-2020 climate regime.

The use of international credits from the Clean Development Mechanism (CDM) and Joint Implementation (JI) from projects involving the destruction of trifluoromethane (HFC-23) and nitrous oxide (N2O) from adipic acid production in the EU Emission Trading System (EU ETS) will be prohibited as of 1 January 2013. An exception is made until 30 April 2013 for projects taking place before 1 January 2013, complying with 2012 commitments.

No. Full use restrictions have already been applied in the EU ETS to credits generated from projects at nuclear facilities and from credits generated from agriculture and forestry (so-called LULUCF) activities.

There are a number of reasons for adopting use restrictions on some industrial gas projects. The acceptance of credits from industrial gas projects has been controversial for some time. Certain gases have a very high global warming potential and abatement is very cheap. This can create huge financial rewards for project developers. The main concerns about these projects are:

During the preparations of the Commission proposal and accompanying impact assessment, stakeholders were invited to submit their views on the design of use restrictions for industrial gas credits. Many stakeholders responded and provided valuable written input.

Revenues from the sale of HFC-23 credits in the EU ETS represent up to 78 times the initial capital investment and operational costs of these projects. In other words, the rates of return of these projects are excessive. These projects are not reducing global emissions in an efficient manner. The EU considers that cheap emission reductions, such as those from industrial gas projects, should not be done through the carbon market, but instead should be the responsibility of developing countries as part of their appropriate own action to keep global warming below 2 degrees Celsius.

80% of HFC-23 credits and 60% of N2O credits under the CDM come from China. The remainder of these projects are mostly generated in India and some advanced developing countries (some of them OECD-members). Use restrictions are therefore fully in line with an increasing focus of the CDM on LDCs. The EU considers that OECD countries, such as South Korea and Mexico, should contribute to mitigation through measures such as sectoral market mechanisms or emissions trading, rather than through CDM projects.

No. The EU ETS Directive (2009/29/EC) allows for restricting the use in the EU ETS of credits from certain project types. This by no means affects the issuance of units, which is managed by the CDM Executive Board. The Directive foresees a notice period of 6 months to 3 years for the application of restrictions from the time they are formally adopted in order to allow sufficient time for market participants to adapt.

The EU considers there will be enough credits available from the 3300 other projects (non HFC-23, non-adipic acid N2O) registered so far  to supply the EU ETS up to the limit allowed over the next 10 years, even without any new credits from sectoral crediting. Therefore allowance prices should be relatively unaffected.

The market was given early notice of the use restrictions, so as to enhance investment in alternative projects that can deliver credits for the EU ETS from 2013 to 2020. The impact assessment shows that even if developed and developing countries fully implement their pledges under the Copenhagen Accord; there would still be sufficient reduction potential in developing countries in areas other than industrial gases at prices below the current European carbon price. This is confirmed by e.g., a recent study by Bloomberg New Energy Finance^[1].

Overall liquidity is guaranteed by the fungibility between CERs/ERUs and EU allowances. The economic recession has produced a situation where many EU companies accumulate and hold sizeable surpluses of allowances. In the light of this, there will be sufficient liquidity in the market for the coming years.

No, because the EU makes up the vast majority of the international carbon market. In addition, other (developed) countries are likely to follow the EU's lead in not accepting industrial gas credits,.

As the largest purchaser of JI and CDM credits in the world, and to safeguard the integrity of its Emissions Trading System, the EU takes the lead in the UNFCCC process in trying to reform the CDM  in order to improve its environmental integrity, effectiveness, efficiency, regional distribution and contribution to sustainable development. The EU will continue to work in the UNFCCC process towards this end.  Nonetheless, it is for the EU to ensure the integrity of the EU Emission Trading System and to decide which international credits it allows for compliance, in accordance with the EU ETS Directive (2009/29/EC).

The restrictions proposed would not replace the function of the CDM Executive Board or the Joint Implementation Supervisory Committee. The restrictions apply only to the use of these units for compliance purposes in the EU ETS.

The Board is assessing allegations of non-additionality of HFC-23 credits. We strongly support action of the CDM Executive Board to eliminate these allegations, but this is not the only reason for restrictions in the EU ETS. There are other concerns related to the environmental merits, cost-effectiveness and competitive distortions of these projects. The EU must also reconcile the domestic use of CDM credits and its demands internationally to move away from the CDM towards sectoral mechanisms. Finally, the same concerns apply to JI projects of these categories.

The ban on credits from these industrial gases is one of the implementing provisions of the revised ETS Directive for the third phase of the EU ETS, from 2013 to 2020. There may be further use restrictions in the future. However, the European Commission is currently not considering any specific use restrictions beyond industrial gases.

The European Union advocates creating a new generation of sectoral market mechanisms in more advanced developing countries, as a first step towards cap-and-trade systems. In addition, the environmental integrity of the CDM should be improved and the system should focus on Least Developed Countries. The CDM is a pure offsetting mechanism, where a tonne of greenhouse gas emissions reduced in a developing country creates a right to emit a tonne of greenhouse gases in a developed country. The EU believes that such a system cannot deliver the emission reductions needed to keep global warming below 2°C. To achieve this goal, commitments by industrialised countries should be complemented by appropriate mitigation actions by developing countries, in particular the most advanced developing countries.

No. Use restrictions applied in accordance with the revised EU ETS Directive are only applicable to companies covered by the EU ETS. However, if Member States intend to use credits which are restricted in the EU ETS, for compliance with their 2013-2020 targets outside the EU ETS, they will have to motivate this to the European Commission. Several Member States have already decided not to use such credits for non-ETS compliance.