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Proposed restriction on carbon ERU damages investment - JIAG

29 Oct 2012 18:28:43 | edcm

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Project developers of the Joint Implementation (JI) mechanism, which falls under the Kyoto Protocol and generates emission reduction units (ERUs), have condemned a European Commission proposal to ban this type of offset from the EU from projects registered after 31 December 2012, warning that the move will harm investment in clean energy.

The JI Action Group (JIAG) said in a statement that it was "alarmed" by the proposal, which was leaked in a draft document last week, and that it would violate the EU ETS' legal framework in a number of ways.

Under the EU proposal, the Commission is mulling the possibility of restricting the use of ERUs as offsets within the EU emissions trading system (ETS) further, by not only limiting how many offsets may be used for compliance - as is currently the case - but also stipulating that those credits generated from projects registered as of phase III (2013-2020) will not be eligible for use within the EU ETS.

"The political message could not be worse," the statement said. "The fact that at a time of deep insecurity of European citizens towards European integration, a rights-sensitive matter has silently been prepared in a EU technical committee over the summer, with no transparency of the process whatsoever, reflects poorly on the European Commission."

The JIAG warned that if the Commission should adopt the proposal in its current form, it could spark legal challenges in court, because it would violate the powers deferred on the European Council and Parliament as well as basic democratic principles.

"The measure, if adopted, would be contrary to mandatory provisions of the EU ETS Directive; it would impinge on the rights of individuals holding any of the ERUs concerned; and it would create additional market disturbances to a market already subject to plentiful risk factors," the statement went on to say.

Alternative proposals

The JIAG also made recommendations to safeguard the future of ERUs, saying:

• Existing Kyoto Protocol rules suffice to regulate ERUs, making separate EU legislation redundant;

• If the EU "has no faith in the Kyoto Protocol", it should set technical regulations that comply with the law adopted by the European Council and Parliament.

The first recommendation stressed that where JI host countries which decide against joining the second Kyoto commitment period, the UNFCCC should suspend the country's right to issue and transfer ERUs.

"Likely therefore all parties including the EU partner countries, the Russian Federation and Ukraine, indeed only issue ERUs on the basis of verification reports issued by the Accredited Independent Entity by the JI Supervisory Committee."

The second recommendation highlighted that the Registry Regulation could simply require that ERUs entering the EU registry as of 2013 are supported by verification reports that have vintage identification. "That way ERUs from countries without new commitments, and in respect of post-2012 emission reductions, can be effectively blocked from entry into the EU registry."

Market impact

Since the start of the month, ERUs have shed a significant share, with the drop accelerating when news of the EU's proposal hit early last week.

The ERU benchmark has declined 70%, from an already low price level of €2.00/tonne of CO2 equivalent (tCO2e) on 1 October, to €0.60/tCO2e on 26 October.

This is a stronger drop than the equivalent certified emissions reduction (CER) benchmark - another type of offset - has shown. The equivalent CER contract closed at €2.15/tCO2e on 1 October, but at €0.85/tCO2e on 26 October, translating to a 60% drop over the same period.

The JIAG is a consortium of JI practitioners. Its members include Global Carbon, Core Carbon Group, Climate Focus, Vertis, Carbon Trade and Finance, Greenstream, Future Camp and the Atlas Environmental Law Advisory. MLDB

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