On 7 October, Parliament’s environment committee voted on its revisions to the EU Emissions Trading Scheme (ETS) after 2012, responding to European Commission proposals. Market participants reacted with dismay to its proposals for the use of credits from projects outside the EU after 2012.

"The way the EU Parliament has decided on CER/ERU usage is fiendishly complex,” said Henry Derwent, president of the International Emissions Trading Association, speaking at a Carbon Finance conference in London on 8 October.

"It’s rather closer to the Commission’s original proposal and the environment committee’s in May than to the industry committee’s,” commented Alessandro Vitelli, director of strategy and intelligence at analysis firm IDEAcarbon.

The more straightforward aspect of the environment committee vote relates to the use by member state governments of CERs and ERUs to count towards their greenhouse gas emissions reduction targets for non-EU ETS sectors of their economies. There, Parliament voted to slash the Commission proposal of up to 3% of a country’s 2005 emissions each year over 2012–20 to just 1% – or from around 700 million tonnes (Mt) of carbon dioxide equivalent (CO₂e) to 233 Mt.

For installations within the EU ETS, the Parliament offered a choice. Operators could follow the Commission proposal, which suggests that (in the absence of a new international agreement), installations would have to spread their Phase II offset limits (which vary from country to country) across both phases – essentially not creating any additional demand for carbon credits, capping European CER and ERU demand at 1.4 billion over 2008–20.

Alternatively, Parliament proposed an option, whereby those installations that used offsets for the equivalent of less than 6.5% of their 2005 emissions in Phase II could use CERs and ERUs to meet up to 4% of their targets in Phase III. This proposal makes it almost impossible to calculate likely demand for CERs – each company would have to calculate, based on its emissions trajectory, which approach would be most effective.

If each country and installation “acts rationally”, this option could lead to a maximum CER and ERU use of 1.572 billion over 2008–20 in the EU ETS, said Vitelli. Trevor Sikorski, of London bank Barclays Capital, calculated it as 1.66 billion. The parlimentary committee rapporteur, Avril Doyle, is understood to have calculated that the 4% limit would lead to 1.6 billion tonnes of CO₂e being imported.

This construction was criticised by carbon asset management group First Climate. “A company that has already bought credits beyond the proposed limit of 6.5% for 2008–12 would suddenly be at a disadvantage after 2013 as it would not be allowed the same amount of credits in the period leading up to 2020,” said Urs Brodmann, a member of First Climate’s executive board.

“Penalising installations in the future for having played according to current member states’ rules would be a dangerous message to send, questioning the credibility of Brussels’ legislators as consistent law-makers,” he added.

A further complication is introduced by a proposal that only credits from projects “in countries which are contributing appropriately to global emission reductions under a future international agreement which they have ratified” can be used.

“If the text passes, investment in the Clean Development Mechanism in coming the years will really decrease,” said Tuomas Rautanen, a senior project manager with First Climate in Zurich. “It will only pick up when an international treaty is ratified, because only then will we know which countries we can source from.”

The committee proposals also suggest that only those credits which are “accepted, or are likely to be accepted, in other major emission trading systems, having regard in particular to their likely acceptability in a US federal emissions trading system”, should be included, introducing further uncertainty.

Robert Casamento, director in power and utilities at consultancy Ernst & Young, said that while it was important to reduce domestic emissions, “the decision to cut the amount of carbon offsets, coupled with the current economic crisis, could do more damage than good when trying to incentivise investment in emission reduction projects around the world.”

“Last year, an estimated $9.5 billion was invested by public and private funds purchasing CERs and ERUs,” he said. “Europe is the largest source of demand for such carbon assets and any reduction in demand could have significant implications for the level of investor interest in the sector”.

However, participants welcomed a committee proposal to include credits from forestry.


Source: www.carbon-financeonline.com/index.cfm