International carbon market
The EU emissions trading system (EU ETS) is by far the world's biggest carbon market and the core of the international carbon market. To reduce global greenhouse gas emissions most cost-effectively the international carbon market needs to be developed by creating a network of linked cap-and-trade systems. In this process, international crediting mechanisms can play a valuable but transitional role.
The EU expects the international carbon market to develop through "bottom-up" linking of compatible emission trading systems. Linking enables participants in one system to use units from a linked system for compliance purposes.
Linking the EU ETS with other cap-and-trade systems offers several potential benefits, including reducing the cost of cutting emissions, increasing market liquidity, making the carbon price more stable, leveling the international playing field and supporting global cooperation on climate change.
The number of emissions trading systems around the world is increasing. Besides the EU ETS, national or sub-national systems are already operating in Australia, Japan, New Zealand and the United States, and are planned in Canada, China, South Korea and Switzerland.
The Commission is a founding member of the International Carbon Action Partnership (ICAP), which brings together countries and regions that are actively pursuing the development of carbon markets through implementation of mandatory cap-and-trade systems. ICAP provides a forum for sharing experience and knowledge.
In a major step towards the first full inter-continental linking of emission trading systems, the Commission and Australia announced agreement in August 2012 on a pathway for linking the EU ETS and the Australian emissions trading scheme.
A full two-way link between the two cap-and-trade systems will start no later than 1 July 2018. Under this arrangement, businesses will be able to use carbon units from the Australian emissions trading scheme or the EU ETS for compliance under either system. The Commission will seek a mandate from the Council to negotiate, on behalf of the EU, a treaty by mid-2015 for the full link.
An interim link will be established from 1 July 2015 enabling Australian businesses to use EU allowances to help meet liabilities under the Australian emissions trading scheme until the full link is established, i.e. no later than 1 July 2018.
Based on a mandate from the Council, the Commission is also negotiating with Switzerland on linking the EU ETS with the Swiss ETS.
As part of its vision for the international carbon market, the EU would like to see a new market mechanism implemented in developing countries. By covering whole economic sectors, not only projects as the Clean Development Mechanism (CDM) does, such a mechanism would go beyond the pure offsetting of emissions and could form a stepping stone towards a system of globally linked economy-wide cap-and-trade systems. The new mechanism would help major developing countries to scale up their efforts to reduce greenhouse gas emissions in the most cost-effective way.
This goal has been given momentum by the decision of the 2011 UN climate conference in Durban to set up a new market mechanism under the UNFCCC. The EU is pressing for the modalities and procedures of the new mechanism to be established as soon as possible, and is exploring the idea of setting up pilot programmes in sectoral crediting.
Under the new mechanism, the EU believes that real, verifiable and additional emission reductions achieved against ambitious crediting thresholds should generate international credits.
Sales of these credits could raise substantial revenues for the host countries while helping developed countries meet their emission commitments and EU ETS operators to comply with their obligations. Credits from the new market mechanism could be used in addition to credits from the CDM or Joint Implementation (JI) mechanism.
Continued incentives for use of project-based international credits in the EU ETS
The EU ETS legislation allows participants to use most categories of credits from the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI) mechanism towards fulfilling part of their EU ETS obligations.
Credits are accepted from all types of projects except nuclear energy projects, afforestation or reforestation activities, and – from 2013 - projects involving the destruction of industrial gases.
Unused entitlements from phase 2 (2008-2012) are transferred to phase 3 (2013-2020). The exact amount per operator for phase 3 is determined in line with the methodology set out in the revised EU ETS Directive (Article 11a(8)) and is further specified in a Regulation on determining international credit entitlements .
Operators used 1.058 billion international credits in phase 2. Based on an earlier draft of the Regulation on international credit entitlements, market analysts expect that a total of around 1.6-1.7 billion credits will be available for use in phases 2 and 3 combined. The precise amount will be known once Member States have submitted their entitlement tables and these have been approved by the Commission. This will be done following adoption of the Regulation.
The EU wants to see JI and CDM further reformed in order to improve their environmental integrity and efficiency e.g. through more use of standardised baselines and alternative ways of assessing additionality. For advanced developing countries CDM offsets should be replaced over time by the new market mechanism covering broad segments of the economy and incentivising net emission reductions. CDM would then be focused on least developed countries.
Credits from large hydroelectric projects subject to conditions
Acceptance in the EU ETS of credits from JI or CDM hydroelectric projects exceeding 20 MW of installed capacity is subject to certain conditions.
In line with Article 11b(6) of the Directive 2004/101/EC Member States approving such projects have to ensure compliance with international criteria and guidelines, including those contained in the 2000 report of the World Commission on Dams.
At the request of Member States and market participants, the Commission has endeavoured to develop uniform guidelines on the application of Article 11b(6) of the Directive and a template of a questionnaire guiding project proponents through the preparation of a compliance report.
Member States will monitor the functioning of the voluntary harmonised approach and review it periodically.