Article 11a(9) of the Directive 2003/87/EC is these days “hot topic” among emission traders and compliance buyers of CERs.
The issue is really worth considering - the very wording of the said provision sounds mysterious, may potentially be capacious and constitute a legal basis for many interesting structures. But nobody likes to be surprised – especially when big money is at stake.
The provision that cause the above mentioned headaches is:
“From 1 January 2013, measures may be applied to restrict the use of specific credits from project types. Those measures shall also set the date from which the use of credits under paragraphs 1 to 4 shall be in accordance with these measures. That date shall be, at the earliest, six months from the adoption of the measures or, at the latest, three years from their adoption.”
In MEMO/10/391 of 25 August 2010 titled „Clean Development Mechanism: Questions and Answers concerning further quality restrictions on the use of credits from industrial gas projects in the post-2012 EU ETS” the European Commission was not able to explain the doubts.
One of the key issues is really when will the possible restrictions apply. But the answer given in the said document is not satisfactory. The Commission simply said, that
“Some have been asking for restrictions not to apply to credits issued by the Executive Board prior to the adoption of the measure, calling this "retroactive". To be clear, the EU ETS Directive (2009/29/EC) allows for measures to be applied "to restrict the use" in the EU ETS of credits from certain project types. The issuance of units is managed by the CDM Executive Board. The EU ETS already applies full use restrictions to projects from nuclear facilities and to projects from LULUCF activities. Under the EU ETS, Member States have always been free to apply such use restrictions on a unilateral basis. The application of article 11a(9) in the Directive simply harmonises this approach. In accordance with the Directive, use restrictions can apply from 1 January 2013.”
“2. To the extent that the levels of CER and ERU use, allowed to operators or aircraft operators by Member States for the period from 2008 to 2012, have not been used up or an entitlement to use credits is granted under paragraph 8, operators may request the competent authority to issue allowances to them valid from 2013 onwards in exchange for CERs and ERUs issued in respect of emission reductions up until 2012 from project types which were eligible for use in the Community scheme during the period from 2008 to 2012.
Until 31 March 2015, the competent authority shall make such an exchange on request.
3. To the extent that the levels of CER and ERU use, allowed to operators or aircraft operators by Member States for the period from 2008 to 2012, have not been used up or an entitlement to use credits is granted under paragraph 8, competent authorities shall allow operators to exchange CERs and ERUs from projects that were registered before 2013 issued in respect of emission reductions from 2013 onwards for allowances valid from 2013 onwards.
The first subparagraph shall apply to CERs and ERUs for all project types which were eligible for use in the Community scheme during the period from 2008 to 2012.
4. To the extent that the levels of CER and ERU use, allowed to operators or aircraft operators by Member States for the period from 2008 to 2012, have not been used up or an entitlement to use credits is granted under paragraph 8, competent authorities shall allow operators to exchange CERs issued in respect of emission reductions from 2013 onwards for allowances from new projects started from 2013 onwards in LDCs.
The first subparagraph shall apply to CERs for all project types which were eligible for use in the Community scheme during the period from 2008 to 2012, until those countries have ratified a relevant agreement with the Community or until 2020, whichever is the earlier.”
In the document published in August this year “IETA questions on possible restrictions of international offsets for use in the EU ETS” (www.ieta.org) IETA asked the European Commission whether such restrictions will apply to all credits from all projects of that type, or only to projects registered after the date of implementation of the qualitative restrictions.
An assumption is visible in the said question that the date of the registration of the projects should be the binding criterion for differentiation of legal status of credits for the purposes of Article 11a(9) of the Directive. But the exact wording of the Directive as well as the MEMO/10/391 don’t exclude the scenario where the afore-mentioned criterion could be also the date of issuance of credits.
The structure where restrictions adopted under Article 11a(9) of the Directive would apply to credits that had been issued prior to the date of the adoption of these restrictions would really be retroactive. But I’m afraid that EU ETS legal framework allows for such a possibility.
An important conclusion can be inferred from the objective assessment of the described situation. It is that as long as there won’t be more clarity on the issue, the acquisition by the compliance buyers of more CERs than allowed limits in the second phase of the EU ETS (2008-2012), brings some risks.
Acquisition of allowable quotas of CERs and ERUs in the second phase is more certain, because it follows from the very wording of the Article 11a (and is expressly confirmed by MEMO/10/391) that restrictions may be applied from 1 January 2013. I hope that the date 30 April 2013 as a compliance date for surrendering of units for the last year of the second trading period will not be meaningful as regards such use restrictions – it falls however after 1 January 2013...
Probably the time spans provided for in the said para. 9 were also safeguarded to induce the confidence of potential investors.
Unfortunately they seem totally ineffective. Six months from the adoption of the measure to its entry into force is too short to sell such a “hot potato” on profitable conditions. If the date 30 April were included in that period of six months (depending on the date of the adoption of the measure), the operators would have the chance to surrender these units accordingly to the proportion EUA/CER applied so far i.e. 1:1 (obviously taking into account that in the third trading period the CERs and ERUs will not be the compliance units but they will be subject to the exchange for EUAs – but see important date 31 March 2015 as regards CP1 CERs).
These risks exist in spite of rules described in Article 11a paragraphs 2 – 4 which were intended to serve a function of providing a safety for investors. But having in mind the actual lack of clarity when the potential use restrictions under para. 9 of that Article are at issue, the rules flowing from the Article 11a paragraphs 2 – 4 are not of major importance.
Another circumstance that influences the assessment of these risks is that the measures under Article 11a (9) can theoretically be adopted till 2020 (in the Directive there is no definitive time limits for such an action) and that the adoption of a certain measure doesn’t exclude the possibility of future adoption of another measures.