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Linking the EU ETS to other Emissions Trading Systems and incentives for international credits
One of the key means to reduce emissions more cost-effectively is to enhance and further develop the global carbon market. The Commission sees the EU Emissions Trading System (EU ETS) as an important building block for the development of a global network of emission trading systems. Linking other national or regional cap-and-trade emissions trading systems to the EU ETS can create a bigger market, potentially lowering the aggregate cost of reducing greenhouse gas emissions.
Linking with other greenhouse gas emissions trading systems
The EU has set out a vision for the development of an international carbon market: the market is expected to develop through bottom-up linking of compatible domestic cap-and-trade systems. An OECD-wide carbon market is expected by 2015, which would be extended to include economically more advanced developing countries by 2020. New sectoral crediting mechanisms would be a stepping stone to cap and trade for these developing countries.
Currently, domestic cap-and-trade systems are being implemented or discussed in the US, Japan, Australia, South Korea, New Zealand and Switzerland, amongst others.
The European Commission is also a founding member of the International Carbon Action Partnership (ICAP). The partnership is made up of countries and regions that are actively pursuing the development of carbon markets through implementation of mandatory cap and trade systems. The partnership provides a forum to share experiences and knowledge.
Encouraging new sectoral market mechanisms in the EU ETS
The EU supports the design of new sectoral crediting mechanisms for actions in developing countries, preferably within the UNFCCC framework. These mechanisms could help scale up emission reduction activities in developing countries and result in real, verifiable and additional emission reductions against ambitious crediting thresholds.
From 2013 onwards, operators covered by the EU ETS could use sectoral credits as substitutes for the project-based Joint Implementation/Clean Development Mechanisms (JI/CDM) credits for compliance within the overall limits determined by the supplementarity provisions.
Incentives for project-based international credits in the EU ETS
EU legislation provides for participants in the EU ETS to use most categories of JI/CDM credits from mechanisms established under the Kyoto Protocol towards fulfilling their obligations under the EU ETS. Credits from afforestation, reforestation and nuclear projects cannot be used.
In the 2008-2012 trading period, the EU laws allow operators to use JI/CDM credits up to a percentage determined in the National Allocation Plans (NAPs). Unused entitlements are transferred to the next trading period (2013-2020). Between 2008 and 2020, the EU ETS legislation provides for use of credits up to 50% of the overall reductions below 2005 levels made under the EU ETS. The exact amount per operator is to be determined in line with methodology outlined in Directive 2OO9/29/EC - Article 11a(8).
JI and CDM should be substantially reformed at the UNFCCC level, in order to improve their environmental integrity and efficiency. To limit climate change to 2°C, the project based CDM offsets should be replaced over time by sectoral crediting mechanisms for advanced developing countries. These types of mechanisms go beyond the pure offsetting of emissions from the EU and could form stepping stones towards a system of globally linked economy-wide cap-and-trade systems. CDM would then be focused on Least Developed Countries.