The European Commission shows its hand on industrial gas offset restrictions (and much more in the process)
posted by Rob on 26th Nov 2010
With the release of the European Commission’s draft proposal on the restriction of certain offset credits from the EU emissions trading system (ETS), the EU has come one step closer to resolving the lingering debate over industrial gas credits eligible for compliance in the EU ETS.
This hotly anticipated draft proposal on the restriction of HFC-23 and N2O credits from the EU emissions trading system (ETS) is released against the backdrop of intense discussion about the effectiveness of the EU ETS, currently overwhelmed by a large surplus of credits and lack of ambition. One way of reducing the slack in the EU ETS as well as increasing its environmental integrity is to limit the use of industrial gas offset allowed into the scheme. To date (2008-2009) a staggering 134million (costing €1.7bn) HFC and N2O credits have been used for compliance, representing 80% of all offsets used.
Prior to this draft proposals release rumours of increased lobbying from industry have been rife. Energy groups such as Enel, RWE AG and E.ON AG raised their concerns about the date from which any restriction might be implemented and well as the need for an ‘appropriate transition period’. The European Confederation of Iron and Steel Industries (Eurofer) in a letter to Vice-President Tajani, (DG Enterprises), went as far as to suggest that DG Climate Action’s aim was to ‘de-industrialise Europe’. Sandbag duly responded to these accusations in a letter of response, we are still eagerly awaiting a reply.
Despite this pressure DG Climate Action remained firm and the resulting draft proposal is a bold document advocating a full use restriction as of 1st January 2013 on hydro-fluorocarbon (HFC-23) and nitrous oxide (N20) adipic acid credits from both Joint Implementation (JI) and Clean Development Mechanism (CDM) projects. The core reasons given for needing to adopt the new restrictions on HFC-23 and N2O adipic acid credits included: the questionable additionality of these CDM projects, that they were creating obstacles to development of sectoral crediting mechanisms, that they were creating obstacles to phase out of gases under the Montreal Protocol and an imbalance in the geographical distribution of projects, clearly evident by the fact that 60% (97 million credits costing around €1.2bn) of all credits surrendered into the EU ETS to date originate from 18 HFC CDM projects the majority of which are in China and India . While these were pinpointed as some of the main reasons there are a range of other issues that cannot be overlooked. Excessive revenues generated by HFC-23 projects, up to 78 times the initial capital investment, represent poor value for money for European consumers, a point championed by Theodoros Skylakakis MEP amongst others. There are also worries about carbon leakage, in the form of European manufactures moving abroad where business conditions are more favourable and alleged gaming of the system by these projects which is currently being investigated by the UN executive board (EB).
This draft proposal is bold and is designed to have a big impact ahead of the impending UNFCCC climate change conference in Cancun. At its heart is the urgent need to address the issue of the restriction of industrial gas offset credits eligible for use within the EU ETS. Yet it offers more: it echoes a more ambitious and more decisive European voice.
The Commissions clearly sets out its desire for a phase out of JI, an overhaul of the CDM (focusing on Least Developed Countries), a move toward advanced developing countries adopting sectoral market mechanisms with the long term goal of adopting linkable emissions trading systems (ETSs).
The Commission knows that Europe’s ETS is the role model, far larger than any other emissions trading scheme to date and the driver of global carbon trading and clearly wants to demonstrate that it can succeed – hence the importance of upholding the integrity of the type of credits that it will recognise.
Sandbag strongly commends the strength of the proposal. However, it is just a draft and now awaits consideration by Member States in the Climate Change Committee on the 15th December 2010, with a vote following thereafter. The Commission might have put forward a bold and ambitious proposal, yet some Member States continue to have reservations. Italy and Spain, with considerable exposure to HFC credits, remain concerned about their liability. Similarly France worries how this will effect its investments in N2O joint implementation (JI) projects and Sweden still frets that it should be down to the UN executive board (EB) to take the lead. The EU is definitely one step closer, but there is still a long way to go.