The European Commission has proposed an Emissions Trading System (ETS) ban on €440 million of Kyoto-era carbon credits from non-EU countries such as Russia, which have not signed up to a second Kyoto commitment period.
The document, which EurActiv has seen, says Emission Reduction Unit credits, or ERUs, "issued from 1st January 2013 in respect of projects in host Parties without new quantified emissions targets in place shall not be held in accounts in the Union registry.”
ERUs are issued to denote carbon dioxide reductions by countries in the former Soviet bloc. These pollution permits, issued under the Kyoto Protocol's Joint Implementation scheme, can be bought by richer Western nations to offset against their own pollution.
Because of the collapse of heavy industry that accompanied the Soviet Union’s demise, there is a glut of such credits, beside which even the ETS’s over-supply pales.
An estimated 355 million ERUs will be on the global carbon market by 1 January 2013, rising to 500 million by the middle of the next year.
The European Commission fears that emissions reductions claimed next year for projects begun in 2012 – whether legitimate or not – could undermine the ETS’s foundations and implode the entire carbon trading edifice.
Future ERUs are currently trading at less than €0.88 cents per tonne on the ICE futures exchange, way below the €7.94 per tonne price of EUAs within the ETS.
But some analysts were alarmed that ETS articles guaranteeing the future sale of verified emissions reductions in 2012 were being unilaterally dumped.
“What’s being introduced seems to go further than what the ETS allows and hence we have an issue of due process here,” said Simone Ruiz, the European policy director for the International Emissions Trading Association (IETA), which represents businesses involved in the carbon trading cycle.
“There will be some countries challenging the Commission,” she added. “I’m not claiming that someone has said ‘We will sue the Commission’, but I’d be surprised if some people didn’t make use of that. It seems such a clear breach of the ETS directive.”
Environmentalists have also been watching developments on the Climate Change Committee with one eye on the bigger debate around reforming the EU’s cap-and-trade system with ‘backloading’ or set-asides.
“Limiting the amount of leftover ‘hot air’ Kyoto credits from Russia is definitely not enough to revive the EU ETS,” said Julia Michalak of Climate Action Network Europe, an environmental NGO.
“A ban on credits from countries not joining the second commitment period of the Kyoto Protocol should be just one of a variety of measures that the EU must implement,” she told EurActiv.
The cancellation of 2.2 billion EUA allowances and a faster timeline for CO2 reductions would be more effective, she said.
News of the planned ETS moratorium on Kyoto-era carbon credits comes a month before the start of the UNFCCC’s Climate Change Summit in Doha, at which consenting nations may agree to participate in a second Kyoto commitment period.
But this will only involve a small minority of the world’s states, and with carbon trading only taking place in the EU nations, Australia, New Zealand, California and Quebec, opportunities for Russia and Ukraine to sell their emissions reductions may be limited.
Some believe that the EU’s proposed ban may be a gambit to entice Moscow and Kyiv into a second Kyoto round of emissions-reduction pledges at Kyoto. But if so, Brussels may be disappointed.
“It’s not the best negotiating strategy,” one market analyst told EurActiv. “It’s more of a bullying tactic than a charm offensive.”
The price of ERUs is thought too low to make joining a second Kyoto round an attractive business proposition.
The European Commission’s proposal was submitted to the Climate Change Committee in mid-September and will now be voted on in mid-November.
If approved, there will be a three month’s period of scrutiny, making 1 March 2013 the earliest that the new rule could come into effect.
With a turnover of some €90 billion in 2010, the EU's Emissions Trading System (ETS) is the world's largest carbon market. Around 80% of it is traded in futures markets and 20% in spot markets.
The ETS aims to encourage companies to invest in low-polluting technologies by allocating or selling them allowances to cover their annual emissions. The most efficient companies can then sell unused allowances or bank them.
After a series of VAT "carousel" and "phishing" frauds in 2009, the European Commission proposed tighter security measures. But a number of member states declined to implement them because they said they could not afford to.
One Commission official pointed out that tens of thousands of euros spent on security could prevent millions of euros in losses.
- Mid-Nov. 2012: Climate Change Committee to vote on ban of ERUs and CERs
- 26 Nov. 2012: UNFCCC Doha Climate Change Summit begins
- 1 Jan. 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020
- 1 March 2013: Earliest date that a ban on ERUs and CERs by non-EU countries could begin