International carbon markets can play a key role in reducing global greenhouse gas emissions cost-effectively.
The number of emissions trading systems around the world is increasing. Besides the EU emissions trading system (EU ETS), national or sub-national systems are already operating or under development in Canada, China, Japan, New Zealand, South Korea, Switzerland and the United States.
Carbon markets in Paris Agreement
The Paris Agreement provides for a robust and ambitious basis for the use of international markets and reinforces international targets, transparency and the accountability of Parties.
Recognising the importance of international carbon markets, Article 6 of the agreement
- allows Parties to use international trading of emission allowances to help achieve emissions reduction targets
- establishes a framework for common robust accounting rules, and
creates a new, more ambitious market mechanism.
In 2014-2017, the European Commission in close cooperation with China carried out a 3-year project to support the design and the implementation of emissions trading in China.
The project provided technical assistance for capacity building and supported the seven regional pilot systems already set up and the establishment of a national emissions trading system.
In the EU-China Joint Statement on Climate Change adopted at the EU-China summit in 2015, the EU and China agreed to further enhance their bilateral cooperation on carbon markets.
Against this background, the Commission and the National Development and Reform Commission of the People’s Republic of China agreed on a new project for 2017-2020.
The project titled “Platform for Policy Dialogue and Cooperation between EU and China on Emissions Trading” is now being implemented. It aims to provide capacity building and training to support Chinese authorities (since April 2018 the newly created Ministry of Ecology and Environment) in their efforts to implement and further develop the Chinese nationwide emissions trading system. More information is available on the project website.
The project has also established a policy dialogue between the Commission and the Chinese Ministry of Ecology and Environment, with the first dialogue held in April 2018.
At the EU-China summit in 2018, the EU and China signed a Memorandum of Understanding to further enhance cooperation on emissions trading. It provides a reinforced basis for the policy dialogue, including through further forms of cooperation such as the joint organisation of seminars and workshops, joint research activities and ad-hoc working groups.
The Korean emissions trading system (KETS), launched in 2015, covers around 66% of Korea's total greenhouse gas emissions. It is the first mandatory emissions trading system among non-Annex I countries under the UNFCCC.
The KETS could trigger the expansion of emissions trading among emerging economies and developing countries.
The European Commission supports Korea through a technical assistance project focused on building the necessary capacity to implement the KETS.
The European Commission is a founding member of the International Carbon Action Partnership (ICAP), which brings together countries and regions with mandatory cap-and-trade systems. The ICAP provides a forum for sharing experience and knowledge and organises regular training courses.
The Commission also supports the development of domestic carbon markets through the Partnership for Market Readiness (PMR). The PMR is a platform for the exchange of experience on carbon market instruments and assists some 17 countries in preparing and implementing these.
Linking with other cap-and-trade systems
Linking compatible emissions trading systems with each other enables participants in one system to use units from another system for compliance purposes.
Linking offers several potential benefits, including:
- reducing the cost of cutting emissions
- increasing market liquidity
- making the carbon price more stable
- levelling the international playing field by harmonising carbon prices across jurisdictions, and
- supporting global cooperation on climate change.
The EU ETS legislation provides for the possibility to link the EU ETS with other compatible emissions trading systems in the world at national or regional level.
Conditions for linking include:
- system compatibility (the systems have the same basic environmental integrity, and a tonne of CO2 in one system is a tonne in the other system)
- the mandatory nature of the system, and
- the existence of an absolute cap on emissions.
Including aviation on both sides in the scope of the linked systems, wherever possible, would also represent an essential requirement of linking.
In 2017, the EU and Switzerland signed an agreement to link their systems. The agreement entered into force on 1 January 2020 following the exchange of the instruments of ratification or approval between the EU and Switzerland.
The Joint Committee, established by the Linking Agreement, paved the way for the entry into force of the Agreement through adopting its Decision 2/2019 that ensures the compatibility of the two systems for the year 2020 (consolidated version of the Linking Agreement). In November 2020, it adopted Decisions 1/2020 on the adoption of Common Operational Procedures (COP) and 2/2020 on amending Annexes I and II to the Agreement and the adoption of Linking Technical Standards (LTS). Both decisions mainly serve to provide common rules on the operation of the link. Furthermore, they establish legal certainty in this respect. As a consequence of the Corona pandemic, Decision 2/2020 also changes some provisions of Annexes I and II to the Agreement. Another decision of the Joint Committee will take account of the new trading period starting in 2021.
Linking of the EU ETS and the Swiss ETS results in the mutual recognition of EU and Swiss emission allowances when surrendering allowances to cover emissions occurring as from January 2020. Switzerland keeps a separate system from the EU ETS, but applies a similar scope as the EU ETS, including aviation.
The EU and Australia also considered the possibility to link their systems. However, due to the repeal of the Australian system in 2014, the linking negotiations have not been pursued.
- 08/11/2013 - Commission Regulation (EU) No 1123/2013 on determining international credit entitlements
- 07/06/2011 - Commission Regulation (EU) No 550/2011 determining certain restrictions applicable to the use of international credits from projects involving industrial gases
- Positive and negative credit lists
- Harmonised rules regarding large hydroelectric dam projects:
- 05/11/2020 - Decision No 1/2020 of the Joint Committee established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emission trading systems of 5 November 2020 on the adoption of Common Operational Procedures (COP)
- 05/11/2020 - Decision No 2/2020 of the Joint Committee established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emission trading systems of 5 November 2020 on on amending Annexes I and II to the Agreementand the adoption of Linking Technical Standards (LTS)
- 12/10/2020 - Council Decision (EU) 2020/1492 of 12 October 2020 on the position to be taken on behalf of the European Union within the Joint Committee established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems as regards the adoption of Common Operational Procedures
- 12/10/2020 - Council Decision (EU) 2020/1493 of 12 October 2020 on the position to be taken on behalf of the European Union within the Joint Committee, established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems, as regards amending Annexes I and II to the Agreement and the adoption of Linking Technical Standards
- 01/01/2020 - Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems (consolidated version on 1 January 2020)
- 01/01/2020 - Notice concerning the entry into force of the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems
- 10/12/2019 - Council Decision (EU) 2019/2106 - on the position to be taken, on behalf of the European Union, within the Joint Committee established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems, as regards the amendment of Annexes I and II to the Agreement
- 05/12/2019 - Decision No 2/2019 of the Joint Committee established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emission trading systems
- 25/01/2019 - Decision No 1/2019 of the Joint Committee established by the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems
- 07/12/2017 - Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems
- 16/08/2017 - Proposal for a Council Decision on the conclusion, on behalf of the European Union, of an Agreement, between the European Union and the Swiss Confederation on the Linking of their Greenhouse gas Emissions Trading Systems
- 16/08/2017 - Proposal for a Council Decision on the signing, on behalf of the European Union, of an Agreement, between the European Union and the Swiss Confederation on the Linking of their Greenhouse gas Emissions Trading Systems
- 27/08/2012 - Letter - Minister Combet to Commissioner Hedegaard
- 27/08/2012 - Reply - Commissioner Hedegaard to Minister Combet
- 23/04/2009 - Directive 2009/29/EC (including Article 25) of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community
- 28/01/2009 - COM(2009) 39 - Commission Communication of 28 January 2009, Towards a comprehensive climate change agreement in Copenhagen
- International Carbon Action Partnership
- 31/08/2012 - Study: Design options for sectoral carbon market mechanisms
- EU submissions on the new market mechanism
- 11/04/2012 - Views on the new market based mechanism
- 13/08/2012 - Addendum
- 26/05/2010 - COM(2010) 265 - Communication: Analysis of options to move beyond 20% greenhouse gas emission reductions and assessing the risk of carbon leakage
- 09/03/2010 - COM(2010) 86 - Communication: International climate policy post-Copenhagen
- Study on the Integrity of the Clean Development Mechanism (December 2011)
- Briefing paper "Sustainable Development and Social Equity"
- Briefing paper "Technology Transfer through the Clean Development Mechanism (CDM)"
- Briefing paper "Political Lock-in in the context of the CDM"
- Briefing paper "Governance of the Clean Development Mechanism (CDM)"
- Briefing paper "Baseline Setting and Additionality Testing within the Clean Development Mechanism (CDM)"
- Briefing paper "JI Track 1 preliminary assessment"
- Scoping paper "The potential for CDM induced leakage in energy intensive sectors"
FAQs concerning the linking between the EU ETS and the ETS of Switzerland
- FAQ relating to revision of Annexes of the Agreement between the European Union and the Swiss Confederation on the linking of their Greenhouse Gas Emission Trading Systems (Linking Agreement) (Part 2)
- FAQ relating to revision of Annexes of the Agreement between the European Union and the Swiss Confederation on the linking of their Greenhouse Gas Emission Trading Systems (Linking Agreement) (Part 1)
Questions & answers on implementation of rules regarding the eligibility of international credits in the EU ETS (10/2014)
The term 'legally binding' refers to the entry into force of the amendment to the Kyoto Protocol under international law (i.e. once three quarters of Parties to the Kyoto Protocol have deposited instruments of ratification).
In accordance with Article 58(2) of the new Registry Regulation, ERUs issued after 31 December 2012 in respect of emission reductions taking place 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 credits are issued under track 2 OR
- Where track 2 issuance is not possible, the date of reduction (pre-2013) is certified by an AIE.
Unit holdings in ETS accounts in the Union Registry are harmonised in accordance with Annex I of the Registry Regulation. It should be noted that for person holding accounts in Member States' Kyoto Protocol Registries, Member States can determine unit holdings. Person holding accounts in Member States' Kyoto Protocol Registries can be identified by their 121 account type (e.g. PT-121-1234567 for a person holding account in the Portuguese part of the Union Registry).
These credits can be held in Member States' Kyoto Protocol Registries part of the Union Registry, in person holding accounts if allowed by the Member State.
The Registry application itself will flag international credits as eligible or ineligible. This status will be clearly visible in the application. On this basis, an account holder will be able to distinguish eligible credits held on a KP account from those that are either pending eligibility (because further steps are required) or ineligible (in accordance with relevant legislation).
Yes, in Accordance with Article 60 of the Registry Regulation, credits issued in respect of emission reductions occurring in the first commitment period of the Kyoto Protocol can be exchanged until 31 March 2015. These credits cannot be exchanged after this date, even if they are "carried-over" or banked into the second commitment period of the Kyoto Protocol. After 31 March 2015, these credits will be marked as "ineligible" in the Union Registry.
The serial number of each credit contains both the original commitment period (the commitment period for which the unit was issued) and the applicable commitment period (the period in which the unit can be retired). The original commitment period is visible in the Union Registry. After 31 March 2015, those international credits with an original commitment period of 1 (i.e. those units issued for CP1 reductions) will no longer be eligible for exchange. That is, after 31 March 2015, these credits will be marked as "ineligible" in the Union Registry.
It is important to note, that even if these credits are "carried-over" or banked between commitment periods of the Kyoto Protocol, the original commitment period will remain unchanged and these credits will continue to be ineligible for exchange in the EU ETS.
International credits issued after the respective deadlines set out in Article 58 and Article 60 of the Registry Regulation have become ineligible following the entry into force of the Regulation or, for CP1 units, after 31 March 2015.
In accordance with Article 58(3), and Article 115, the so-called "cleaning" operation, the National Administrators have requested the account holders of these credits to transfer them to an appropriate Kyoto Protocol account.
A similar operation will be undertaken after 31 March 2015 to implement Article 60 of the Registry Regulation in respect of CP1 credits.
The exchange can take place at any point during the calendar year.
The international credit entitlement tables contain entitlements calculated for each installation and aircraft operator by Member States in accordance with the Regulation on international credit entitlements (RICE).
The process for the exchange is described in detail in the Registry Regulation (Articles 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. Once credits are exchanged for allowances, they cannot be exchanged back into credits.
The information in the Union Registry regarding the eligibility of international credits is subject to change over time based on the best information available.
If the credit is a CER, it will be important to check the effective registration date of the project. If the host Party is not an LDC and the effective registration date is after 2012, CERs from the project will not be eligible for exchange in the EU ETS in accordance with the provisions of Article 11a(8) of the EU ETS Directive.
If the credit is a CER and the effective registration date is before 2013, it is also important to check that it is not ineligible in phase 3 of the EU ETS in accordance with Regulation 550/2011 (e.g. it is not an HFC-23 project nor an N2O-adipic acid project).
If the credit is a track 2 ERU,check the registration date as above.
If the credit is a track 1 ERU issued by a non-EU Party before 2013, the information in the Union Registry is, to our knowledge, accurate with respect to the provisions in the EU ETS Directive and the Registry Regulation.
Likewise, for CERs, track 2 ERUs and ERUs issued by an EU Member State the information in the Union Registry is, to our knowledge, accurate with respect to the provisions in the EU ETS Directive and the Registry Regulation.
In the first instance, check the eligibility lists published on our website.
If the credit has been incorrectly marked based on the published criteria, please contact your National Administrator.
If the ERU was issued after 31 December 2012, the status of the credit will be updated upon successful completion of the certification referred to in Q16.
In all cases, if a change of status is warranted, the status of a credit will be changed the day after the information is updated in the Union Registry.
The immediate impact is that such credits cannot be transferred to another ETS account in the Union Registry. These credits can, however, be transferred to a KP account.
After a "cleaning" operation referred to in Article 58 (3) (see Q9) has been completed, it will no longer be possible to hold credits marked as ineligible in EU ETS accounts and these credits will need to be moved accordingly.
An initial operation has already taken place and your national administrator should have already contacted account representatives. A further "cleaning" operation will take place to manage units issued in the first commitment period of the Kyoto Protocol. This operation is foreseen after the deadline for the exchange of the credits, 31 March 2015, in accordance with Article 60 of the Regulation 389/2013.
Guidance on the certification which applies in accordance with Article 58(2) of the Registry Regulation is available.
Questions & answers on use of international credits in the third trading phase of the EU ETS (January 2012)
The guidance 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".
a) What are the modalities for this swapping process? Who will do it, when will it start?
The exchange of credits will start from 1 January 2013 onwards or as soon as a forthcoming revision of the Registry Regulation has been adopted, whatever is latest. The modalities will be developed in this revision. Only "operators" as defined in the ETS Directive can exchange CERs/ERUs for allowances.
b) Will this be an instant process or would there be a delay in receiving an allowance in return for a CER on the same user account?
Details in this regard will be determined in a forthcoming amendment of the registry regulation.
c) Can a request for a swap be refused on grounds other than the credit not being a compliance credit and if yes under which circumstances?
Details in this regard will be determined in a forthcoming amendment of the Registry Regulation. Given that the exchange route is only for operators, an exchange will be declined if an operator has exhausted the limit of its entitlements for exchanging credits, as reflected in articles 11.a(2-4) and (8) of the ETS Directive.
d) Can swapping be done at any time during the year, or do operators have to wait until the surrender deadline?
Details in this regard will be determined in a forthcoming amendment of the Registry Regulation. The Commission envisages for the exchange to take place throughout the calendar year and not limited to the annual compliance date. The competent authority will make the exchange on request from operators.
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.
a) Can a compliance company, or a non-compliance actor carry over international credits "as credits" to the post-2012 period? In other words, will it be possible to bank CERs/ERUs?
For phase 3, credits can only be used for compliance in the EU ETS if exchanged for phase 3 allowances. This exchange of international credits with a first commitment period identifier into allowances will only be allowed until March 2015, which is before the end of the Kyoto Protocol's true-up period. On the difficulties of banking under the Kyoto protocol of selective CDM CP1 into the future, see chapter 6.2.4. 'Transition and predictability' of the 2008 impact assessment accompanying the revision of the EU ETS.
b) Are all EU ETS account holders able to carry over credits within limits?
Under the EU ETS, all compliance buyers (i.e. not all account holders) can exchange unused credits within the limits provided in article 11a and this exchange is guaranteed until the end of March 2015
a) Given the continuing absence of an international agreement, what action has the Commission taken to negotiate bilateral agreements with major host countries?
The Commission envisages the primary focus of potential bilateral agreements to be on creating demand for credits from new market mechanisms and to pilot the establishment of such new market mechanisms. The Commission contributes and actively participates in the World Bank's Programme for Market Readiness to promote such initiatives.
b) Bilateral agreements: How can interested stakeholders contribute to the set-up and implementation of bilateral agreements?
Stakeholders are encouraged to reach out to developing countries to support and explain the EU's position on the future of the carbon market, share lessons learned from emissions trading, Joint Implementation, Activities Implemented Jointly, and the CDM and explore areas for testing new market mechanisms.
c) Bilateral agreements: Will bilateral agreements be broad in nature (e.g. for all sectors in the host country) or targeted to specific sectors?
EU legislation is very open with regard to the scope of bilateral agreements that might be reached.
a) What is the definition of 'type'? What is the definition of 'specific credits'?
Under 'type' the Commission understands credits that were generated using one or several methodologies approved by the UNFCCC CDM Executive Board and JI Supervisory Committee. 'Specific credits' could refer to all credits under a project type or credits from a project type generated in a set of countries.
b) Have any such qualitative restrictions been adopted so far?
From the start of the EU ETS in 2005 full use restrictions have already been applied in the EU ETS to CERs from projects at nuclear facilities and from projects in agriculture and forestry (so-called LULUCF). As of 1 January 2013 CERs and ERUs from projects involving the destruction of trifluoromethane (HFC-23) and nitrous oxide (N2O) emissions from adipic acid production will be prohibited in the EU ETS. An exception is made until 30 April 2013 for destruction from existing projects that is credited before 1 January 2013, for compliance with 2012 commitments.
c) Are there further proposals under consideration to apply qualitative restrictions to any specific project type?
The revised ETS Directive provides for use restrictions to be introduced as part of the implementing provisions for credits which are otherwise usable during phase 3 of the EU ETS, running from 2013 to 2020. While the legislation allows putting in place further use restrictions adding to those adopted in early 2011, the European Commission is currently not considering any additional use restrictions.
d) How will qualitative restrictions be tracked and controlled?
Qualitative restrictions will be 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.
e) Is a positive list of unrestricted credits possible?
EU legislation does not foresee such a list.
f) Type of qualitative restrictions: What type of restrictions could be invoked according to article 11a(9)?
The Directive does not limit the types of restrictions that can be introduced. These will depend on project-type, economic, environmental, strategic and administrative circumstances.
a) Does this imply that CDM Project Activities (CPAs) included after 2012 to PoAs registered pre-2013 are also eligible?
Article 11.a(3) of the EU ETS Directive states that "…competent authorities shall allow operators to exchange CERs and ERUs from projects that were registered before 2013 issued in respect of emission reductions from 2013 onwards for allowances valid from 2013 onwards". This wording would indicate that the moment of registration of a project is to be taken as a cut-off date for determining whether future CERs would be eligible for use in the EU ETS. A PoA is only registered once and CPAs are added to a PoA without a separate registration. It is therefore the Commission's interpretation that CERs from CPAs added after 2012 to a PoA registered prior to 2013 can be used for compliance in the EU ETS.
The Commission is, however, also aware that this interpretation of article 11.a(3) may increase the supply of CERs from non-LDCs. This contradicts the spirit of the Directive to allow only CERs from projects registered after 2012, if they come from LDCs. The Commission will therefore continue to monitor the evolution of PoAs, including their impact on the development of new sectoral mechanisms. The Commission notes that the Directive allows the Commission to propose appropriate regulatory measures under article 11.a(9) of the EU ETS, if the situation would require this.
b) Would restrictions (if adopted according to article 11a(9)) be applicable to PoAs?
Any use restrictions for specific credits from project-types agreed under article 11.a(9) would also be applicable to PoAs.
c) Will CERs from CPAs in LDCs be EU ETS eligible, if the PoA (no matter date of registration) also includes non-LDCs (so called cross country PoAs)?
This will depend on the possibility to clearly distinguish the country of origin of each CER, and whether such a filter can easily be introduced in the CITL. If this is the case, the Commission sees no objections to this.
However, in the case of ERUs, issuance and transfer by the Host Party is subject to prior conversion of AAUs. This means that the absence of a second commitment period under the Kyoto Protocol would imply no continuation of JI projects after 2012. Has it been considered how to implement Article 11a(3) with regard to ERUs, in the absence of a second commitment period under the Kyoto Protocol: Continuation of JI project baselines beyond 2012 via a bilateral agreement – would this be a bilateral agreement signed between the EU as a block and various host countries to allow continuation of projects within that country?
a) Continuation of JI project baselines beyond 2012 via a bilateral agreement – would this be a bilateral agreement signed between the EU as a block and various host countries to allow continuation of projects within that country?
As explained in relation to question 6, bilateral agreements are envisaged to focus on the promotion of sectoral market mechanisms.
b) In the event that projects fall outside the EU ETS: Can such projects use commitment period 1 (CP1) AAUs to back ERUs generated January 2013 – March 2015?
The Commission considers that this is not in line with the Kyoto Protocol, according to which AAUs have been created in respect of emissions from 2008 to 2012 (CP1). In line with the principle of the Kyoto Protocol, the continuation of JI after 2012 is subject to new quantified emission targets being in place (CP2). This is also referred to in the recitals of the EU legislation (recital 28 of Directive 2009/29/EC). Using CP1 AAUs for backing ERUs generated between January 2013 and March 2015 is opposed to this, as it would allow the conversion of CP1 AAUs (not usable in the EU ETS) into a CP1 ERUs on behalf of post 2013 reductions (usable in the EU ETS). This would mix up the accounting system under which these units are created. Also, the UNFCCC Secretariat's advice on CDM accounting goes in the opposite direction, thereby creating an inconsistency that should not be supported. The CDM Executive Board have advised that "CERs may be used by Annex I Parties in complying with their emission targets for the first commitment period, as long as they have been issued for emission reductions or removals taking place up to the end of 2012". If nothing else, the continuation of crediting CDM projects is less of an issue as these projects do not impact on the inventories of Annex I Parties.
a) Has the Commission assessed the actual possibility of sectoral mechanisms to meet demand for international credits in the EU ETS in the near future?
Under existing commitments there is currently no shortage of supply to accommodate the maximum possible EU demand for international credits. In fact, one of the main challenges for the introduction of sectoral mechanisms is to ensure sufficient demand for such credits. The speed by which new mechanisms can be implemented will also depend on other factors, including progress made in the international negotiation on their establishment, the geographical and sectoral scope of the first application, and the level of interest from developing countries.
b) How does the Commission intend to address possible disruptions in the market (due to the combined effect of possible CDM restrictions and new crediting mechanisms)?
The Commission does not share the view that the market would be disrupted by a (temporary) shortage of supply of international credits. The flexible nature of the EU ETS design would simply result in the allowance price incentivising more reductions in installations covered by the EU ETS and a reduced reliance on international credits for compliance purposes
c) Does the Commission have plans to consult with stakeholders on the practical implementation of sectoral crediting?
No specific stakeholder consultation is planned on this issue, as the Commission regularly interacts with interested stakeholders and always welcomes ideas and input from stakeholders on practical implementation of sectoral crediting.
d) How could the private sector get involved with sectoral crediting?
Implementation of sectoral crediting will require a considerably more important role of the host country governments. They offer host governments to implement sectoral policies that achieve structural transformations of targeted sectors. The role of the private sector, in particular current project developers and consultants, is likely to change significantly. Instead of directly receiving credits from an international body as it is the case with CDM, project developers will need to interact with national governments. This provides for a more proactive role of national governments to introduce appropriate regulatory frameworks for blending of public and private sources of finance. The incentives for the private sector to invest in GHG emissions reductions will depend on the chosen policy mix, and will be country-specific. The proactive interaction between developing country host governments and the private sector on how to best put an incentive structure in place to attract private capital should be encouraged.
e) Could the emerging international REDD+ mechanism qualify as a sectoral mechanism?
No, for reasons of liability, non-permanence and capacity to monitor emissions with sufficient level of accuracy credits from a possible REDD+ mechanism will not be considered for compliance use in the EU ETS before the end of phase 3.
a) Could potential rules on credit eligibility (except where bilateral agreements) be relaxed in a move beyond the current 20% reduction target?
The impact assessment accompanying the introduction of use restrictions on industrial gas credits in the EU ETS has identified significant economic and environmental shortcomings of such credits. These would not disappear with more stringent EU targets. Therefore there are no reasons to reconsider the ban on such credits. But more generally, under a stricter cap strategic decisions will have to be made whether to allow for more credits, and if so which types of credits this would be (new market mechanisms, CDM, etc.).
b) In case of a 30% reduction target with increased access to credits, what would be the share of use of these credits between ETS and non ETS sectors
This would have to be determined through an appropriate impact assessment, if and when such an increased target is politically decided.
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.
Countries (LDCs)? What would an agreement mean for eligibility of credits from LDCs?
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.
Questions & answers on use restrictions for certain industrial gas credits as of 2013 (November 2010)
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:
a) Additionality – is production and subsequent destruction of the gas higher than what would have happened without a CDM project?
HFC-23 is produced as a by-product during production of another greenhouse gas, HCFC-22, principally in air conditioners and refrigerators. HFC-22 is a powerful ozone depleting substance, which is covered by the Montreal Protocol. Crediting the abatement of HFC-23 can create a perverse incentive to produce more HCFC-22 than would have happened without the CDM, and consequently produce credits that are not additional.
Also, the EU considers that cheap emission reductions in developing countries, such as those from certain industrial gas projects, should not be realised through the carbon market, but instead should be the responsibility of developing countries as part of their own efforts. Alternatively, these reductions could still be in part or fully funded by developed countries based on the actual costs for their abatement.
b) Obstacles to development of sectoral crediting mechanisms
Due to the big quantity of cheap credits available from HFC-23 and N2O from adipic acid production, there is insufficient demand for credits from sectoral mechanisms. The EU favours these mechanisms above HFC-23 and N2O projects, because they stimulate domestic climate policy action in developing countries across broad segments of the economy, generate higher volume of credits at lower transaction costs, facilitate a move to multi-sectoral cap-and-trade system, and scale up additional international carbon finance flows to Developing countries.
c) Obstacles to phase out of gases under the Montreal Protocol
The current incentive structures for HFC-23 undermine attempts under the Montreal Protocol to accelerate the phase-out of HCFC-22 for non-feedstock use, and to consider financing the destruction of HFC-23 on an via contributions to the Multilateral Fund.
d) Imbalance in the geographical distribution of projects
The dominance of industrial gas projects distorts the geographical distribution of projects under the Kyoto Protocol's flexible mechanisms in favour of some advanced developing economies. The EU has called for a better geographical distribution of projects in the CDM, in particular for Least Developed Countries (LDCs). Use restrictions can encourage investment in projects in LDCs.
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.
-  Bloomberg New Energy Finance (2010): "Impact of CER import restrictions on the EU ETS and international carbon market", Carbon Markets - Global - Research Note 20 October 2010.
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.