EU could get even tougher on UN CERs

11 February 2008

Brussels has threatened to limit severely the trade in Certified Emission Reduction credits (CERs) after 2012 if the world fails to agree a successor treaty to the Kyoto Protocol and one that creates a wider market for carbon.

The CERs are issued to companies by the UN's Clean Development Mechanism (CDM), a scheme that emerged from the Kyoto climate change treaty. Kyoto imposes an obligation on developed countries to reduce carbon emissions but requires no restrictions on poor countries. However, rich countries can use the CDM to get “credit” for clean power projects built in developing countries and can use those credits in the developed world to meet their own carbon reduction targets.

Carbon market experts believe that the EU's plans could strike a crippling blow to the CDM because the ETS is the world's only functioning market for carbon and the only place where CERs have a monetary value. If no new CERs are admitted into Europe after 2012, then the pipeline of UN-approved carbon-reduction projects will dry up, according to Emmanuel Fages, a carbon market analyst for Société Générale.

“This is a tough negotiating signal [by the European Commission],” Mr Fages said. “They are trying to lead the way but they see leadership from other countries. The CDM depends on the EU's trading system, but the EU is saying: ‘We will not be the only promoters of CERs.'”

The EU's attempt to throw down the gauntlet over carbon emissions emerged last month, when José Manuel Barroso, the President of the European Commission, announced reforms to the ETS in its third phase, after 2012. In addition to tough targets to cut greenhouse gas emissions by 20percent by 2020 and raise to 20 per cent the proportion of power generated by renewables, he said that Europe would not allow other countries to exploit its virtuous stance on carbon.

Mr Barroso said: “There is no point in Europe being tough if it just means production shifting to countries allowing a free-for-all on emissions.” He said that an international agreement was the best way to tackle the problem, but he added that the EU would take tough measures if other nations did not rally to the cause. These include forcing importers to buy carbon permits on the ETS and restrictions on the import of additional CERs after 2012 unless “a satisfactory international agreement is reached”.

Without a wider successor agreement to Kyoto that incorporates the United States, Japan, China and the emerging markets, the price of European carbon permits will soar, Kris Voorspools, an environmental analyst for Fortis, the Belgian bank, said. The carbon price is trading at about €21 (£16) a metric tonne, but Mr Voorspools reckons that the price in the present phase of the ETS, which lasts until 2012, could rise to €48 if there were no international agreement. He said: “This proposal is a very smart move ... it underlines Europe's determination to take on an ambitious target.”



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