ERUs prices recently experience sharp movements. It is hard to imagine any commodity evenly exposed to regulatory tensions. The new legislative draft for the Registry Regulation implements provisions reflecting complex regulatory situation on CERs and ERUs units which emerged after 1 January 2013.
At present, there is no international agreement replacing the Kyoto Protocol in force that would apply to the EU Member States as from 2013.
Article 11a of Directive 2003/87/EC provides for the use of certified emission reductions and emission reduction units from project activities before the entry into force of an international agreement on climate change, by setting up the possibility for operators to exchange such units against allowances.
The package of agreements referred to as the ‘Doha Climate Gateway’ determined that:
1) Parties can carry over 2.5% of any excess CERs and ERUs to the second compliance period (partial bankability).
2) Only Parties participating in the 2nd commitment period of the Kyoto Protocol can be eligible to transfer and acquire CERs. Any Party not participating in the 2nd commitment period of the Kyoto Protocol cannot use CERs after 31 December 2012.
3) Any AAU’s held in a Party’s national registry that have not been retired during the first commitment period will be added to the AAU amount for that Party’s 2nd commitment period, but transferred to a “previous period surplus reserve account.”
The European Commission communication of 8 December 2012 contains, among others, the following comments on the Doha conference outcome:
"The balanced Doha outcome enabled the EU to confirm its commitment to participate in the second commitment period of the Kyoto Protocol starting on 1 January 2013. The conference adopted a ratifiable amendment setting out the rules governing the second period. It will run for eight years, thus ensuring no gap occurs between its end and the entry into force of the new global agreement in 2020. The EU will apply the amendment from 1 January 2013 even though formal ratification by the European institutions and Member States is likely to take over a year.
- For the second period the EU has taken on an emissions reduction commitment in line with its domestic target of cutting emissions by 20% of 1990 levels by 2020, but has left the door open to stepping up this reduction to 30% if the conditions are right. The reduction commitment will be fulfilled jointly by the EU and its Member States, Croatia and Iceland. The targets of all countries participating in the second period will be revisited by 2014 with a view to considering raising ambition.
- The EU and other countries taking on targets under the second period will have continued access to the Kyoto mechanisms from the start of the period. A limit on purchases of surplus emission budgets ('AAUs') from the first commitment period will apply. Moreover, the decision includes political declarations by EU and its Member States and all other potential buyers - Australia, Japan, Liechtenstein, Monaco, New Zealand, Norway and Switzerland – stating that they will not purchase AAUs carried over from the first period.
- The second period forms part of the transition to the global agreement taking effect in 2020."
CMP 8 has taken the key decision - it reaffirmed the second commitment period of the Kyoto Protocol begins on 1 January 2013 and it will end on 31 December 2020.
The said decision has come a little bit late, thus CMP 8 recognized that Parties may provisionally apply the amendment pending its entry into force and decided that Parties will provide notification of any such provisional application to the Depositary. Parties that do not provisionally apply the amendment, will implement their commitments and other responsibilities in relation to the second commitment period, in a manner consistent with their national legislation or domestic processes, as of 1 January 2013 and pending the entry into force of the amendment.
The most significant issue is that CMP 8 clarified that for the purposes of the second commitment period, from 1 January 2013 onwards, a Party included in Annex I to the Doha Decision may continue to participate in ongoing project activities under Article 12 of the Kyoto Protocol (relating to the Clean Development Mechanism) and in any project activities to be registered after 31 December 2012, but only a Party with a quantified emission limitation and reduction commitment inscribed in the third column of Annex B to the Kyoto Protocol as contained in annex I to the Doha Decision will be eligible to transfer and acquire certified emission reductions (CERs) in accordance with decision 3/CMP.1.
As follows from comparison of the third column of the said Annex B to the Kyoto Protocol in the original wording, and that as contained in Annex I to the Doha Decision, four countries: Canada, Japan, New Zealand and Russian Federation currently have not a quantified emission limitation and reduction commitment inscribed.
ERU restrictions as from 2013
Pursuant to the European Commission communication of 13 December 2013 the Climate Change Committee debates the amendments to the Registry Regulation which relate to international credits generated from Joint Implementation (Emission Reduction Units - ERUs). The Commission signalled that draft texts for the following provisions were presented to the said Committee:
1. in accordance with rules on avoiding the double counting of emission reductions ERUs from projects hosted in Member States related directly or indirectly to activities within the scope of ETS in phase 2 may be issued no later than 31 December 2012;
2. ERUs for emission reductions taking place before 31 December 2012 from projects hosted in Member States related to activities not directly or indirectly in the scope of ETS in phase 2, but included in the scope of ETS from phase 3 onwards, may be issued no later than 30 April 2013;
3. ERUs for emission reductions taking place before 31 December 2012 from projects hosted in third countries not having legally binding quantified emission reductions in the period 2013-2020 may be held in the Union registry provided they are issued by 30 April 2013 and verified in accordance with Joint Implementation track 2 procedures.
The Commission noted in the said communication that the debate “showed growing consensus on the substance of these amendments.”
The above indications are confirmed by the European Commission communication of 10 January 2013 submitted to the Climate Change Committee, which is accompanied by the legislative proposal to update the Registry Regulation.
In the said communication the Commission indicated that apart from a small number of other improvements, the following provisions of the above-mentioned draft regulate the outstanding issues relating to the use of international units in the third trading period:
(1) articles 59 to 61 - the exchange mechanism of eligible international credits for allowances;
(2) article 58(1) first subparagraph – that the possibility to issue ERUs from projects hosted in Member States related directly or indirectly to activities in the scope of the ETS in phase 2 (2008-2012) ceases on 31 December 2012;
(3) article 58(1) second subparagraph – that ERUs for emission reductions taking place before 31 December 2012 from projects hosted in Member States related directly or indirectly to activities not in the scope of the ETS in phase 2, but included in the scope of the ETS in phase 3 (2013-2020), may be issued up to 30 April 2013;
(4) article 58(2) - that ERUs issued after 31 December 2012 from third countries not bound by quantified emission reduction commitments under the Kyoto Protocol's second commitment period (2013-2020) may be held in the Union registry provided it is assured they represent emission reductions taking place before 31 December 2012. This assurance can be given in two possible ways: either they are issued in accordance with the Joint Implementation track 2 procedure; or if this proves not possible, they may be held if they are certified as corresponding to emission reductions before 31 December 2012 by an independent entity accredited by the Joint Implementation Supervisory Committee.
These provisions related to ERUs concern units issued as first Kyoto commitment period ERUs.
Following the relevant Joint Implementation decisions taken at the Doha climate conference, second commitment period ERUs may not be issued before 2016.
Morover, recital 13 in the preamble to the above proposal for the new Registry Regulation contains the mention that Article 11b of Directive 2003/87/EC forbids the issuance of certified emissions reductions (CERs) and emission reduction units (ERUs) after 31 December 2012 that result in double counting of greenhouse gas emission reductions. However, Article 5(2) of Commission Decision 2006/780/EC of 13 November 2006 on avoiding double counting of greenhouse gas emission reductions under the Community emissions trading scheme for project activities under the Kyoto Protocol pursuant to Directive 2003/87/EC of the European Parliament and of the Council allows allowances in the set-asides established pursuant to Article 3 of that Decision to be converted into assigned amount units (AAUs) or to be sold as 2008-2012 period allowances. The said recital also confirms that Member States should be able to issue until 30 April 2013 ERUs from projects involving activities only included in the scope of Directive 2003/87/EC from 1 January 2013 in respect of emission reductions which took place until 31 December 2012.
Recital 14 also observes that an amendment of the Kyoto Protocol should put in place internationally legally binding quantified emission targets from 2013 to 2020 for parties listed in its Annex B once it has entered into force for those parties. Decision 13/CPM.1 of the Conference of the Parties to the UNFCCC serving as the Meeting of the Parties to the Kyoto Protocol (Decision 13/CPM.1) requires that ERUs only be issued by converting AAUs or removal units (RMUs), which have a serial number comprising the commitment period for which they are issued. ERUs cannot be issued if the commitment period marked in the relevant serial number does not match the period during which the emissions reductions took place. Emission trading scheme accounts in the Union Registry should not hold ERUs inconsistent with these rules. To this end, ERUs issued by third countries which do not have legally binding quantified emission targets from 2013 to 2020 set out within an amendment to the Kyoto Protocol pursuant to its Article 3, paragraph 9, or that have not deposited an instrument of ratification relating to such an amendment to the Kyoto Protocol, should only be held in the Union Registry if they have been certified to relate to emission reductions verified as having taken place before 2013.
The said legislative proposal to update the Registry Regulation also introduces the important date 1 May 2013 as the point in time therefrom the operator or aircraft operator may require the exchange of CERs and ERUs for third phase general allowances or aviation allowances. This exchange will generally concern CERs and ERUs issued in respect of emission reductions up until 2012 from project types which were eligible for use in the EU ETS during the period from 2008 to 2012 that have not been already used up. Let's recall that to swap CERs and ERUs with third phase allowances the request from the operator will be necessary and the deadline March 31, 2015 will need to be observed.