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Ukraine has been suspended from trading carbon credits following a preliminary UN decision made late on Thursday. The delivery of the market's biggest stream of emission reduction units (ERUs) could now be put on hold.
The enforcement branch of the UN framework convention on climate change (UNFCCC) took the decision at a meeting due to end later on Friday.
A decision whether to block Romania from carbon trading as well is expected during Friday's session.
The preliminary suspension is due to become final at a UN meeting scheduled for October, unless new information from Ukraine emerges before then.
Oleksii Khabatuik, the head of Ukraine's emissions inventory, told the hearing Ukraine would appeal the decision to the conference of the parties, the highest body within the UNFCCC.
The full suspension would remain in place until Ukraine has filled in gaps in its reporting of greenhouse gas emissions in order to become compliant with Kyoto Protocol rules.
During that time, Ukraine would not be able to transfer any ERUs or assigned amount units out of the country. That would block delivery from projects expected to generate 78.4m credits by 2012, according to data on the Ukrainian carbon registry website.
Ukraine would have three months to report back to the UN on measures to improve its greenhouse gas reporting.
That implies that a final ban is unlikely to be lifted before January 2012 at the earliest, after the December 2011 expiry of many forward over-the-counter contracts and exchange futures.
"For sellers that have sold track I ERU on a guaranteed basis, this could for sure be a problem," Lennard de Klerk, director or ERU investor Global Carbon and chair of the JIAG action group told ICIS Heren in an email.
Track I ERUs are approved by Ukraine, rather than by the UN. Out of an expected 2008-2012 103.9m ERU supply, 75% are generated under Track I.
The reason for the ban is that Ukraine has under-reported its greenhouse gas emissions. Experts advising the enforcement branch said Ukraine had failed to act on earlier warnings it was in non-compliance. The Ukraine argues that many of its actions have stalled due to lack of funding since the recession.
A previous ban on Bulgarian emissions trading was not lifted for seven months. IS