Climate Action

Use of international credits

Policy

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 (JI) provides for the creation of emission reduction units (ERUs), whereas the clean development mechanism (CDM) 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

Participants in the EU emissions trading system (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 the 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

EU legislation specifies maximum limits up to which operators under the EU ETS may use eligible international credits for compliance in phase 2 and phase 3.

The initial international credit entitlements for each participant in the system for phase 2 and 3 combined are determined by Member States and then approved by the Commission in line with the relevant legislation.

Participants in the EU ETS used 1.058 billion tonnes of international credits in phase 2 (2008-2012). Unused entitlements have been 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 allowances. Operators must request the exchange of CERs and ERUs for allowances up to their individual entitlement limit set in the registry.

Credits issued in respect of emission reduction in the first commitment period of the Kyoto Protocol (2008-2012) had to be exchanged with 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 use of international credits after 2020.

Nevertheless, it is important that the Paris Agreement lays out provisions on use of markets to provide a clear and robust framework for linking carbon markets in the future.

Article 6 of the Agreement provides for:

  • accounting rules requiring parties to apply robust accounting rules to approaches that involve 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 commitments. This could facilitate participation in international carbon markets on the basis of a defined contribution to mitigation.

These provisions will need to be implemented 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, but there are a variety of contribution types.

Documentation

Eligibility of international credits

A new market mechanism/reforming the CDM/JI

  1. The EU-Brazil Joint Proposal
  2. 29th May 2015 - Paris Agreement and Markets and Accounting
  3. 29th September 2014 on NMM
  4. 29thth September 2014 on FVA
Studies

Studies

FAQ

Eligibility

Can I use international credits for compliance in the EU ETS Phase 3? Which ones?

Yes, subject to the quantitative and qualitative restrictions. De facto this means that as from 1 April 2015, only international credits from projects registered in an LDC post 2012 are eligible for use in the EU ETS, except for credits from nuclear energy projects, afforestation or reforestation projects (LULUCF) and projects involving the 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. Furthermore, international credits must be exchanged for EU allowances before they can be used for compliance in the EU ETS. Credits issued in respect of emission reduction in the first commitment period of the Kyoto Protocol (2008-2012) had to be exchanged with EU allowances by the deadline of 31 March 2015.

What happens if a country loses its Least Developed Country (LDC) status?

A project in an LDC that is included in the UN LDC list when the project is registered by the CDM Executive Board may continue to generate credits up to 2020, whatever happens to the UN LDC list.

How are qualitative restrictions tracked and controlled?

Qualitative restrictions are tracked and controlled through the introduction of automatic checks in the Union registry, based on the information regarding the project ID and the commitment period identifier of relevant international credits.

Are there further proposals under consideration to apply qualitative restriction to any specific project type?

The EU ETS Directive provides for use restrictions to be introduced as part of the implementing provisions for credits which are otherwise useable during Phase 3 of the EU ETS. While the legislation allows putting in place further use restrictions, the European Commission is currently not considering any additional use restrictions for Phase 3.  However, the EU's domestic 2030 target does not currently envisage continuing the use of international credits after 2020.

Exchange of international credits for allowances

How will the exchange work?

The process for the exchange is described in detail in the Registry Regulation (Article 59-61). An account representative can request an exchange of eligible international credits from an operator holding account or an aircraft operator holding account in the Union registry. The exchange request needs to be approved by a second person nominated as additional account representative, or, if no additional account representative is nominated for the account, by a second account representative different than the one who initiated the request. The exchange process is automated: after the international credits are transferred to a central account, an equivalent number of allowances will be transferred automatically to the account from which the exchange was requested.

An operator can request as many exchanges of credits for allowances as needed, provided it does not exceed its international credit entitlement. The international credit entitlement tables contain entitlements calculated for each installation and aircraft operator by Member Stats in accordance with the Regulation on international credit entitlements. The exchange can take place at any time during the calendar year. Once credits are exchanged for allowances, they cannot be exchanged back into credits.