Amendments to the EU ETS to recognize LULUCF
During a technical workshop held in Brussels on March 29, we proposed an amendment of the EU ETS Directive to allow for the use of temporary credits in the EU ETS.
This paper provides the rational behind the proposed amendment.
Proposed amendment text discussed
Directive 2003/87/EC is hereby amended as follows:
Amendment 1: Amend Article 3 on definitions to add para (o):
(o) “temporary certified emission reduction” or “tCER” means a unit issued from
afforestation or reforestation project activities and will expire at the end of the commitment
period following the one during which it was issued pursuant to Article 12 of the Kyoto
Protocol and the decisions adopted pursuant to the UNFCCC or the Kyoto Protocol.
Amendment 2: Delete Article 11a(3)(b) and renumber.
(Removes ban on use of LULUCF credits in EU ETS)
Amendment 3: Add new Article 11(a)(4):
1An operator that has used a tCER shall surrender a CER, [tCER] ERU, or allowance at
least 30 days before the tCER expires to cover the emissions which had been covered by the
expired tCER. If the operator has not replaced any tCERs it has used to cover its emissions
by the time they expire, the operator shall be held liable for the payment of the excess
emissions penalty in accordance with Article 16.
(Institutes operator liability for replacement of temporary credits).
Arguments for this type of amendment
1. General Considerations
In addition to the benefits to the global and local environment, developing countries, and rural communities, allowing LULUCF credits into the EU ETS can contribute to strengthening the effectiveness of the EU ETS. It is the temporary nature of the LULUCF CDM credits which provides operators of EU ETS installations with the additional flexibility which will benefit the system as a whole.
Allowing temporary LULUCF credits in the EU ETS will promote a cost effective way to implement the required reductions within Europe. The EU ETS recognizes that the most efficient way to reduce
1 The Kyoto Protocol rules allow an expired tCER to be replaced by another tCER. However, during the workshop it was proposed to limit replacement to “permanent” credits if this is preferred.
emissions in Europe is to set a cap on emissions and give operators the flexibility to determine whether it is more cost effective to reduce emissions now or purchase emissions rights from the market and reduce the emissions later. The prime rationale for providing additional flexibility is to minimize the costs of meeting the EU ETS emission reduction objective. However, if there is a credible signal that the constraint on emissions is not likely to go away, and in fact likely to become tighter in the future, firms have a strong interest in reducing their domestic emissions. Investing into JI and CDM in general, and into LULUCF CDM projects in particular, allows them to do so at the time it is more efficient, for example when long-lived capital is scheduled to be replaced. Allowing tCERs within the EU ETS will not be changing this or letting industry “off the hook” – rather, the
added flexibility combined with the obligation to replace the tCER once expired will keep industry “on the hook” while at the same time enabling industry to implement more cost effective emission
tCERs can only be used for compliance in the commitment period in which they have been issued and have to be replaced at the end of the commitment period following the one for which they were issued. tCERs do not represent a permanent reduction in the emissions of greenhouse gases. Instead they simply represent the environmental service of holding in place a stock of forestry carbon for the time they are valid. They have to be replaced upon expiry and their temporary nature makes it likely that they will be traded at a discount. This means that within the EU ETS:
; tCERs represent a cost-efficient way to buy time while still honouring reduction obligations;
; Use of tCERs lead to the accumulation of a carbon “debt”; and
; Operators can pay off this debt with permanent credits bought on the market – an option
which is unlikely to be cost-efficient taking into account the current predictions about future
carbon prices; or
; Operators can “make good” their promise to implement GHG reducing measures at their
installations thereby freeing up EU allowances when the “debt” becomes due.
Allowing tCERs into the EU ETS permits the industrial sector to develop long-term carbon strategies and make investment decisions for energy-efficient technologies with lower GHG emissions therefore countering the concerns of industry that the 5-year allocation periods under the EU ETS are too short.
2. Types of eligible credits
The amendment would permit the use of tCERs and ERUs from LULUCF projects in the EU ETS. It would not permit the use of lCERs.
Reasons for excluding lCERs:
Temporary credits come with a replacement liability. In the case of lCERs, there is an
additional risk which relates to the risk of replacement at an unpredictable time when the
carbon stock linked to a particular lCER is lost.
As all tCERs used in a particular commitment period expire at the end of the next
commitment period, all tCERs held by a Member State will expire at the same time. A
Member State will therefore know exactly how many tCERs are going to expire at the end of
each commitment period. tCERs are therefore easy to manage and to account for. lCERs on
the other hand may or may not expire every 5 years when the project they come from is
verified. Instead, lCERs may expire at different times (with just 30 days notice) throughout a
commitment period. Restricting the use to tCERs therefore minimizes administration
required by a Member State to ensure expired credits are replaced. Furthermore, it is
expected that over time lCERs will become obsolete as project developers appear to realize
that choosing tCERs instead of lCERS gives them greater contractual flexibility and more
readily lends itself to generating a constant income stream over the life of their project.
3. Replacement Liability for Credits from CDM-LULUCF projects
According to the proposed amendment, the Member State that allows tCERs to be used is not liable for their replacement – the operator that uses them becomes liable to replace the tCERs when they expire. tCERs can be replaced with CERs, [tCERs], ERUs, and allowances. If an operator does not replace the tCER the normal excess emissions penalty will apply.
Reasons for having the liability reside with the private sector:
Assessing and managing the replacement liability associated with a tCER involves an
assessment of the costs associated with the realization of energy efficiency and other GHG
emission reducing measures. The individual operator that chooses to use a tCER is in the
best position to carry out these activities. It will only choose a tCER if and when it is
economically advantageous. It will be able to factor the replacement liability into its
2considerations. On the other hand, Member States will find it difficult to conduct similar
assessment sector or nation wide. Calculations undertaken to quantify the replacement
liability for Member States have shown that it is difficult to quantify the liability in an
environment where carbon prices are likely to rise, but are difficult to predict. This makes it
costly to assume for a Member State to assume the replacement liability with acceptable risks.
Furthermore, the private sector benefits from the use of tCERs, so it is reasonable that it
bears the liability associated with the use of temporary credits. If an operator goes bankrupt
before a tCER is replaced, this would be treated like any other liability.
4. Replacement Liability for Credits from JI-LULUCF projects
In the case of JI, LULUCF projects will generate ERUs. Unlike tCERs the liability for ERUs non-permanence lies with the country hosting the project rather than the country that uses the credits for compliance
5. Limiting the use of LULUCF credits
An explicit amendment limiting the number of tCERs or restricting the use of credits from projects involving genetically modified organisms or invasive alien species is not necessary.
Reasons why limitation amendments are not necessary:
The Kyoto rules already oblige each Member State to limit its use of tCERs, so it is
unnecessary to restate this obligation in the EU ETS. A Member State may, for example,
choose to meet this obligation by setting limits in the national allocation plans. Similarly, the
2 For these reasons, the two other alternatives of engaging in tCER or lCER “swaps” with a Member
State, or the Member State assuming and managing the replacement liability, were considered to contain a number of technical and practical difficulties.
Kyoto rules already state that a Member State has the right to evaluate and restrict the use of
tCERs coming from projects that involve potentially invasive species or genetically modified
organisms. In practice, this may be done when a Member State approves a CDM project.