Recent communication from the European Commission contains invaluable directions for project developers, emission credits investors and, last but not least, installation’s operators.
In a recently published document European Commission made some important clarifications with respect to CERs and ERUs use as from 2013 (see: ‘Questions and answers on use of international credits in the hird trading phase of the EU ETS’ source: http://ec.europa.eu/clima/news/news_archives_en.htm#REGULATORY).
Qualitative restrictions
I signalled the problem with the provision of Article 11a(9) of the Directive 2003/87/EC in the post ‘Article 11a(9) of the Directive 2003/87/EC – a headache for compliance buyers’ a long time ago. After the recent communication from the Commission the uncertainty with eligibility of the said Kyoto units due to potential qualitative restrictions unfortunately persists.
The European Commission reminded in the communication concerned that qualitative restrictions adopted so far to CERs from the start of the EU ETS in 2005 are full use restrictions:
a) from projects at nuclear facilities,
b) projects in agriculture and forestry (so-called LULUCF).
Furthermore, as of 1 January 2013 CERs and ERUs from projects involving the destruction of trifluoromethane (HFC-23) and nitrous oxide (N2O) emissions from adipic acid production will be prohibited in the EU ETS (an exception is made until 30 April 2013 for destruction from existing projects that is credited before 1 January 2013, for compliance with 2012 commitments).
As regards any other potential moves in that area the Commission declared that while the legislation allows putting in place further use restrictions adding to those already adopted, the European Commission is currently not considering any additional ones.
The word that should be stressed in the previous phrase is: ‘currently’. The investors should be mindful of the fact the Directive does not limit the types of restrictions that can be introduced. These will depend on project-type, economic, environmental, strategic and administrative circumstances.
Given the exact wording of the controversial Article 11a(9) of the Directive (from 1 January 2013, measures may be applied to restrict ‘the use of specific credits from project types’) the Commission failed to precisely specify the legal definition of ‘specific credits’.
Under 'type' the Commission understands credits that were generated using one or several methodologies approved by the UNFCCC CDM Executive Board and JI Supervisory Committee. 'Specific credits' could refer to all credits under a project type or credits from a project type generated in a set of countries.
The creation of a positive list of unrestricted credits isn’t, however, possible because EU legislation does not foresee such a list.
CERs/ERUs banking
The modalities for banking CERs or ERUs from the second into the third trading period are quite complicated matter.
The first fundamental issue is that for phase 3, credits can only be used for compliance in the EU ETS if exchanged for phase 3 allowances. This exchange of international credits with a first commitment period identifier into allowances will only be allowed until March 2015.
The very subtle distinction is, however, not all EU ETS account holders being able to carry over credits within limits. Under the EU ETS, only compliance buyers (i.e. not all account holders) can exchange unused credits within the limits provided in Article 11a of the Directive. So, only “operators” as defined in the ETS Directive can exchange CERs/ERUs for allowances.
The Commission made clear that given that the exchange route is only for operators, an exchange will be declined if an operator has exhausted the limit of its entitlements for exchanging credits, as reflected in articles 11a(2-4) and (8) of the ETS Directive.