CERs and the European Emissions Trading Scheme (EU ETS)

The EU ETS was devised as one of several strategies to meet the European Kyoto Protocol target of an 8% reduction for the period 2008 – 2012, and now for the more ambitious EU target of 20% by 2020. Policies regarding renewable energies and energy efficiency, agriculture, and transportation, (to name a few), also contribute to European emissions reductions goals.

The EU ETS covers approximately 45% of total European Emissions (EC, 2013), including emissions from the power sector, aviation (for flights within Europe, though the original proposal covered international flights as well), and has successfully managed to integrate environmental costs into financial cost structures, thus ensuring that emissions are allocated a cost which will be taken into consideration during planning. This puts a monetary value on emissions, and incentivises reductions, and investment into R&D of more efficient, and less pollutant technologies.

In order to provide some flexibility, the Linking Directive (2004) was brought into effect, which allows for the use of Kyoto Protocol flexibility mechanisms, and serves to connect the EU ETS with the international carbon market, and increases international cooperation. The incorporation of these mechanisms allows countries to meet some of their reductions commitments through obtaining Certified Emissions Reductions (CERs) – to focus of the post – and Emissions Reductions Units (ERUs) through the Clean Development Mechanism (CDM) and Joint Implementation (JI), respectively.  Both mechanisms involve the emissions reductions projects, the former in non-annex I countries (developing countries and LDCs), and the latter in annex I countries (i.e. those countries with binding KP targets) (UNFCCC, 2014).

Unfortunately, these mechanisms, which were designed to complement domestic reductions options, increase cost efficiency, and promote international efforts to reduce, have had unexpected results on the effectiveness of EU ETS.

Firstly, instead of supporting domestic reductions strategies CERs came to substitute for domestic action to meet international requirements. In terms of global emissions targets, provided the projects meet standards for environmental integrity, global targets will be met. However, an excessive use of CERs by EU countries for projects in non-EU countries undermines the EU reductions goals. In order to stay on track with for these goals, a limit on the use of CERs was put in place, forcing countries in the EU to consider domestic reductions. Unfortunately, difficulty in determining an adequate limit has made it so loose, that it creates little incentive for domestic action.

Secondly, CDM, in combination with over-allocation, has undermined the overall capacity of the mechanisms to create real reductions. Between the surplus of EUAs, and the availability of cheap CERs, industries under the EU ETS had to make very little domestic changes to meet targets. And if we consider cases like the HFC CER ‘fraud’, where Chinese and Indian companies were producing more HCFC-22 to take advantage of CER revenues for the subsequent destruction of HCFC-23 byproduct (EIA, 2011). Moving forward will require higher standards regarding the environmental integrity of CDM projects, in order to guarantee the effectiveness of our strategies to stabilize CO2 concentrations.

Regardless of potential and actual problems associated with CERs in the EU ETS, the most cost effective path to low carbon intensive economies requires that ‘where-flexibility’ mechanisms like CDM. Cost constitutes a major barrier for adopting low carbon, and more efficient technologies, and compliance with measures can be increased if structures that allow us to take advantage of differences between marginal reductions costs, and incentivise action are accepted, supported.

Moreover, mechanisms that allow for the transfer of capital, and technology from developed countries to developing countries are necessary if we are going to have a real impact on global emissions targets. Additionally, the guidelines for CDM projects combine environmental requirements, with broader socioeconomic goals and helping to bridge the ‘development gap’ between countries of different economic capacity.

The future of CDM in the EU ETS is complicated, emissions trading, and CDM and JI are new, and we are still learning. The urgency of effective climate change mitigation requires mechanism like these in order to make a meaningful impact, and share the associated economic burden. Whether or not we like it, collaborative action is necessary, so itis time to iron out the wrinkles, and get to it.

Sources:

Environmental Investigation Agency (2011) Massive climate subsidies for HFCs industry to continue. . Retrieved 31 March 2014 from:
http://eia-international.org/massive-climate-subsidies-for-super-greenhouse-gas-industry-to-continue

EU ETS (2013) CERs and ERUs market as from 2013. Retrieved 31 March 2014 from:
http://www.emissions-euets.com/cers-erus-market-as-from-2013

European Commission (2013) The EU Emissions Trading System. Retrieved 31 March 2014 from:
http://ec.europa.eu/clima/publications/docs/factsheet_ets_en.pdf

Piris, Pedro (2010) The European Union Emissions Trading Scheme: A Succinct Review, by Pedro Piris-Cabezas 2010.

UNFCCC Website, (Last updated March 2014) Clean Development Mechanism. Retrieved 31 March 2014 from:
http://cdm.unfccc.int/index.html

 


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