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Climate Action

Use of international credits

On 14 July 2021, the European Commission adopted a series of legislative proposals setting out how it intends to achieve climate neutrality in the EU by 2050, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030. The package proposes to revise several pieces of EU climate legislation, including the EU ETS, Effort Sharing Regulation, transport and land use legislation, setting out in real terms the ways in which the Commission intends to reach EU climate targets under the European Green Deal.

International credits are financial instruments that represent a tonne of CO2 removed or reduced from the atmosphere as a result of an emissions reduction project.

At present, international credits are generated through two mechanisms set up under the Kyoto Protocol. These are:

  • Clean Development Mechanism (CDM) – allowing industrialised countries with a greenhouse gas reduction commitment (called Annex 1 countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emissions reductions in their own countries
  • Joint Implementation (JI) – allowing industrialised countries to meet part of their required cuts in greenhouse gas emissions by paying for projects that reduce emissions in other industrialised countries

Joint Implementation provides for the creation of emission reduction units (ERUs), whereas the Clean Development Mechanism provides for the creation of certified emission reductions (CERs).

The Paris Agreement established a new market mechanism to replace the CDM and JI after 2020.

Use of international credits in EU ETS phase 3 (2013-2020)

Participants in the EU ETS can use international credits from CDM and JI towards fulfilling part of their obligations under the EU ETS until 2020, subject to qualitative and quantitative restrictions.

As the world's largest carbon market, the EU ETS is currently the biggest source of demand for international credits, making it the main driver of the international carbon market and the main provider of clean energy investment in developing countries and economies in transition.

Qualitative restrictions

Credits are accepted from all types of projects, except:

  • nuclear energy projects;
  • afforestation or reforestation activities (LULUCF);
  • projects involving destruction of industrial gases (HFC-23 and N2O).

Credits from hydroelectric projects exceeding 20 MW of installed capacity can only be accepted under certain conditions.

In addition, the use of new project credits/CERs after 2012 is prohibited, unless the project is registered in one of the least developed countries (LDC).

Quantitative restrictions

The EU legislation specifies maximum limits on the eligible international credits that can be used under the EU ETS for compliance in phase 3.

The initial international credit entitlements for each participant to the EU ETS for phases 2 and 3 combined were determined by Member States and then approved by the Commission in line with the relevant legislation.

Participants to the EU ETS used 1.058 billion tonnes of international credits in phase 2 (2008-2012) to account for their emissions. Unused entitlements were transferred to phase 3 (2013-2020).

Exchange of credits

Since phase 3, CERs and ERUs are no longer compliance units within the EU ETS and must be exchanged for EU ETS emission allowances. Operators must request the exchange of CERs and ERUs for general allowances up to their individual entitlement limit set within the Union Registry.

Credits issued in respect of emission reduction in the first commitment period of the Kyoto Protocol (2008-2012) had to be exchanged to EU allowances by 31 March 2015.

Use of international credits in EU ETS after 2020

The EU has a domestic emissions reduction target and does not currently envisage continuing the use of international credits for EU ETS compliance after 2020.

The Paris Agreement lays out provisions on the use of markets to provide a clear and robust framework for linking carbon markets in the future.

Article 6 of the Paris Agreement provides for:

  • accounting rules requiring parties to apply robust accounting frameworks to approaches that involve the use of ‘internationally transferred mitigation outcomes’ towards nationally determined contributions. These rules will enable linking of schemes while ensuring the integrity of commitments.
  • a mitigation mechanism to replace existing mechanisms (such as CDM and JI) and provide for certification of emission reductions for use towards nationally determined contributions. This could facilitate participation in international carbon markets on the basis of a defined contribution to mitigation.

These provisions will need to be applied through implementing decisions over the coming years. While building on experience, they will need to be adapted to the new context in which all countries are making contributions through a variety of contribution types.

FAQ

Eligibility

Exchange of international credits for allowances