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In the second option a surrender charge is based on the market price of a given class of international units, at the time that the contract to purchase the unit was entered into (the third option is the same with the distinction that instead of the time the contract to purchase the unit was entered into, the time of surrender of the unit is decisive).
The fourth option is, in turn, identical with the third one, however, liable entities would also be able to enter into a binding legal undertaking to surrender international units on a particular date in the future with the surrender charge determined by the observed price at the time of making the undertaking adjusted for the time value of money. For example, on 8 August 2014, a liable entity could enter into an undertaking with the Regulator to surrender 25,000 CERs on 1 July 2015, with a pre-specified surrender. The surrender charge would be determined by the market price for CERs on 8 August 2014 adjusted by an uplift factor for the time value of money.
COMPLICATIONS TO OVERCOME
I admit I’m a little bit scared with the scale of complications generated by all four options.
The fourth option is, in turn, identical with the third one, however, liable entities would also be able to enter into a binding legal undertaking to surrender international units on a particular date in the future with the surrender charge determined by the observed price at the time of making the undertaking adjusted for the time value of money. For example, on 8 August 2014, a liable entity could enter into an undertaking with the Regulator to surrender 25,000 CERs on 1 July 2015, with a pre-specified surrender. The surrender charge would be determined by the market price for CERs on 8 August 2014 adjusted by an uplift factor for the time value of money.
COMPLICATIONS TO OVERCOME
I admit I’m a little bit scared with the scale of complications generated by all four options.
Even for the first, relatively simple option, there are problems in determining whether the contract purchase price was the real cost of the unit. It is true that, as analyses the Discussion Paper, there is a risk that liable entities would have an incentive to inflate the reported unit price to avoid paying the surrender charge. For example, a business could pay the seller a high price for the unit, and then receive a ‘side payment’ from the unit seller, for example through payment of a higher price for some other good or service.
Another important difficulty is to determine the ‘purchase price’ of units generated on the primary market (for example, through international offset projects such as under the Clean Development Mechanism). As Discussion Paper points out, ‘This is because investments in the project are generally made well before the actual units are issued and often face significant risks. Some project investors might invest in a number of projects, but only receive units from some of these. The total cost of each unit could then actually be the full sum of investment in all the projects. In other circumstances, the units might only account for part of the return on the investment.’
In the face of above difficulties the necessity of using an uplift factor to account for any time differences (sometimes years) between when the unit was purchased and when the unit was surrendered (to reflect the time value of money) seems to be relatively small bother.
Another important difficulty is to determine the ‘purchase price’ of units generated on the primary market (for example, through international offset projects such as under the Clean Development Mechanism). As Discussion Paper points out, ‘This is because investments in the project are generally made well before the actual units are issued and often face significant risks. Some project investors might invest in a number of projects, but only receive units from some of these. The total cost of each unit could then actually be the full sum of investment in all the projects. In other circumstances, the units might only account for part of the return on the investment.’
In the face of above difficulties the necessity of using an uplift factor to account for any time differences (sometimes years) between when the unit was purchased and when the unit was surrendered (to reflect the time value of money) seems to be relatively small bother.