Compliance flexibility can be enhanced by the option of saving credits/allowances to future periods (banking). This option enhances cost-effectiveness and foster carbon price stability. In addition, banking provides incentives for early action, but also involves increasing risks of over-allocation of allowances/credits in subsequent periods.
Analysing emerging emission trading schemes like California and Australia as well as an relatively old one - EU ETS, a general thesis can be posed that banking of allowances between periods becomes now a common rule. Sparse exceptions cover the EU ETS first trading period in the years 2005-2007 and the Australian fixed charge phase which will last till 1 July 2015.
Definition of ‘banking’ with respect to emission units
‘Banking’ under California emissions trading legislation (California Final Regulation Order (California Cap On Greenhouse Gas Emissions And Market-Based Compliance Mechanisms) means ‘the holding of compliance instruments from one compliance period for the purpose of sale or surrender in a future compliance period.’
Also Australia legislators use the term ‘banking’ with reference to emission units for situations ‘where carbon units can be surrendered in years that are later than their vintage year’ (Explanatory Memorandum to the Clean Energy Bill 2011).
Banking under EU ETS rules
Banking of European Union Emissions Trading Scheme allowances (EUAs) is allowed without limitations (these considerations don’t go, however, into details relating to banking of international units like CERs which is a separately regulated issue – see for instance ‘CER and ERU market as from 2013’).
When EU ETS started its first phase as from 1 January 2005 allowances with the first phase vintages i.e. from years 2005 – 2007 were not transferable into the second period (2008-2012). It means that to the extent the said allowances were not used up for 2005-2007 greenhouse gas emissions settlement they lost its value in entirety. Besides, the said value was at the end of the first phase near to zero, due, among others, to such design of the allowances transferability between periods.
Banking of EUAs between second (2008-2012 and third (2013-2020) EU ETS trading periods does not rise doubts and the said transferability is rooted in the very Directive 2003/87/EC (Article 13).
For rules on CER/ERU banking refer to ‘CERs and ERUs market as from 2013’
The exact, literal wording of the above mentioned Article 13 of the Directive leads to the conclusion that any surplus EUA’s issued for the period 2008 – 2012 will be replaced with EUA’s valid in the third settlement period 2013 – 2020. So, current legal regime allows for banking in relation to emission allowances – as opposite to the rules regulating the transition from the first settlement period (2005-2007) to the second (2008-2012).
Also the European Commission in the document MEMO/08/796 of 17 December 2008 (Questions and Answers on the revised EU Emissions Trading System) confirmed in the point 23 that: ‘sharp fall in the allowance price during the first trading period was due to over-allocation of allowances which could not be “banked” for use in the second trading period. For the second and subsequent trading periods, Member States are obliged to allow the banking of allowances from one period to the next and therefore the end of one trading period is not expected to have any impact on the price.’
For some additional nuances on banking of allowances under EU ETS rules see for instance here.
Banking under California cap-and-trade rules
California Final Regulation Order (California Cap On Greenhouse Gas Emissions And Market-Based Compliance Mechanisms) states clearly ‘California compliance instruments do not expire’ (Article 5 § 95922(c)). As opposite to the EU ETS, California cap-and-trade program introduced inter-period banking of allowances from the outset of the scheme (i.e. from 1 January 2013). Statement of Reasons to the California cap-and-trade regulation explains that the intention is to allow entities ‘to hold the instrument until it is needed’, and ‘to save instruments across compliance periods.’
The said Statement of Reasons further clarifies that banking is intended ‘to limit price variability, as entities buy additional instruments during times of relative oversupply and use or sell them when supplies are short and prices are higher.’
The recent reform of the California emissions trading program (intended to facilitate linking with the Quebec GHG cap-and-trade) has not introduced any changes to the said rules.
Banking under Australia emission trading program
Units issued for flexible charge years
Carbon units that have a vintage year that is a flexible charge year (i.e. as from 1 July 2015) do not have a ‘use by’ date. They can be used for surrender in their vintage year and any year after that.
The purpose of allowing banking pursuant to the Explanatory Memorandum to the Clean Energy Bill 2011, is to allow liable entities ‘to shift the timing of their emissions and abatement activities to reduce their costs’. It will also have the effect of ‘smoothing the unit price over time.'
Units issued in fixed charge years
An unlimited number of carbon units whose vintage year is a fixed charge year will be available to liable entities at a fixed charge. These units will not be able to be banked for use in future years.
Those carbon units that are issued free of charge under Parts 7 and 8 of the Australian Clean Energy Act can only be surrendered for the eligible financial year corresponding to their vintage year and, if not surrendered, will be cancelled at the end of 1 February of the next financial year.
Carbon units issued for a fixed charge are automatically surrendered for the eligible financial year corresponding to their vintage year. They cannot be banked.