Both of the above possibilities are admissible in the EU and US schemes.
Additionally, Boxer Kerry provides for an interesting solution: “borrowing with interest”.
"Banking" consist in a possibility, that an allowance may be used to comply with requirements of the scheme not only in the vintage year for the allowance, but also in any calendar year subsequent to the vintage of the allowance.
On a contrary, "borrowing" amounts to using an emission allowance to comply with requirements of the scheme in the calendar year immediately preceding the vintage year for the allowance.
Both of the above possibilities are admissible in the European Union Emission Trading Scheme under Directive 2003/87/EC (as amended by the Directive 2009/29/EC).
As is apparent now from the draft of the Boxer Kerry “Clean Energy Jobs and American Power Act”, which was publicized last week, that also American legislative proposals are leaning in this direction.
The aligning of the basic principles of both schemes seems to be useful and could contribute to increasing environmental benefits and lower the costs of implementation thereof.
Interesting proposition makes the Boxer Kerry bill in regard of “borrowing with interest”. Such an concept isn’t introduced in EU ETS.
According to the provisions of the said bill:
“A covered entity may demonstrate compliance [...] in a specific calendar year for up to 15 percent of its emissions by holding emission allowances with a vintage year 1 to 5 years later than that calendar year.
Emission allowance borrowed pursuant to this paragraph shall be an emission allowance that is established by the Administrator for a specific future calendar year [...] and that is held by the borrower.
The bill provides also for prepayment of interest:
“For each emission allowance that an owner or operator of a covered entity borrows pursuant to this paragraph, such owner or operator shall, at the time it borrows the allowance, hold for retirement by the Administrator a quantity of emission allowances that is equal to the product obtained by multiplying -
"(i) 0.08; by
"(ii) the number of years between the calendar year in which the allowance is being used to satisfy a compliance obligation and the vintage year of the allowance.”
Of course the bill also envisages borrowing on common terms (“without interest”) – in that case it relates to using an allowance to comply in the calendar year immediately preceding the vintage year for the allowance.