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Cap for phase III offset use set at lowest level, but no impact seen

06 Jun 2013 21:26:33 | edcm

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The European Commission on Wednesday proposed to set the limits for the use of offsets credits in phase III of the EU Emissions Trading System (ETS) as low as current legislation allows. The move was expected, and is unlikely to impact compliance behaviour or the scheme's oversupply problem.

The ETS directive requires the Commission to specify limits for operators' use of credits from the Kyoto Protocol's project based mechanisms certified emissions reductions (CERs) and emissions reductions units (ERUs) over the course of phase III.

The Commission did so on Wednesday by submitting a draft regulation to the Climate Change Committee for scrutiny in June, putting the caps at the lowest possible limits provided by the directive.

The focus on offset limits follows record use of these credits for compliance in 2012, as they are significantly cheaper than EU allowances (EUAs). On Wednesday, for instance, the CER benchmark closed at €0.40/tonne of CO2 equivalent (tCO2e) only a fraction of the equivalent EUA benchmark's €4.00/tCO2e closing price. Despite the low price, the supply of CERs remains high.

An abundance of offsets has contributed to the 2bn EUA oversupply of the ETS and helped push prices to record lows in recent months. In 2012, offsets represented 26% of total units surrendered, compared with 11% in phase II (see EDCM 16 May 2013).

In detail

The ETS directive states that operators already active in phase II could use offsets during the period 2008-2020 up to either the amount allowed to them in phase II; or a percentage amount exceeding 11% of their allocation over the phase II period "whichever is the highest". The Commission on Wednesday proposed the cap to be up to the amount allowed in the period 2008-2012, or to "an amount corresponding to a maximum of 11% of its allocation during the period from 2008 to 2012, whichever is the higher".

For new entrants in phase II or operators in new sectors included in the ETS after 2012, the directive stipulates an amount of offsets equalling no less than 4.5% of their verified emissions during phase III. The Commission proposed 4.5% to be the maximum limit.

For airlines, the directive allows for the use of offsets equalling no less than 1.5% of their verified emissions during phase III. Again, the Commission proposed 1.5% to be the maximum limit.

The Commission also set out special provisions for operators with a "significant" capacity extension.

Impact

As the ETS directive already provided for these limits on offsets, companies most likely assumed these numbers when planning their compliance, German analytics firm Tschach Solutions' Jan Frommeyer said.

"The proposed numbers will therefore likely not trigger any change in the offset limit expected by companies," Frommeyer said. ICIS has agreed to acquire Tschach Solutions, a specialist carbon market analytics company based in Karlsruhe, Germany, the company said on Thursday in a press release.

The Commission proposal will enter into force subject to a positive opinion by the Climate Change Committee and after a three months scrutiny by the European Parliament and Council. EU countries will then have one month from the entry into force of the rules to notify to the Commission of each installation's offset credit entitlement. Silvia Molteni

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