Carbon Market Watch

For fair and effective climate protection.

Doha on AAUs: The Future of the Phantom Menace (Newsletter #2)

04 Mar 2013

A real hot issue in Doha at COP18 was how countries would deal with the 13 billion left over emission permits from the first Kyoto commitment period. After tense negotiations, countries decided to restrict how much of this surplus can be used for compliance with emission reduction targets. With the aim to avoid the build-up of new surplus, countries also decided to restrict the number of emission permits a country can use for the second Kyoto commitment period. This decision was heavily contested by Russia, Ukraine, Belarus and Kazakhstan because it essentially makes it impossible for countries to accumulate new ‘hot air’ by choosing a weak target.

Assigned Amount Units (AAUs) are the tradable emission permits under the Kyoto Protocol. One AAU allows a country to emit 1 tonne of carbon dioxide equivalent (CO2e). Existing Kyoto Protocol rules allow countries to carry over all unused emission allowances into the next commitment period.

The AAU surplus from the first Kyoto commitment period (2008-2012) is estimated to be over 13 billion tonnes of CO2. This surplus is owned mostly by countries of the former Soviet bloc. Russia (5.8), Ukraine (2.6) and Poland (0.8) are the largest surplus holders, followed by Romania (0.7), the UK (0.5) and Germany (0.5). (Point Carbon, 2012)

This AAU surplus is often called ‘hot air’ because it is the result of accounting dealings and not actual emissions reductions. Because former Soviet countries chose very weak reduction targets under the first commitment period it has meant they received millions of these AAUs they did not need. This is why they own most of the surplus AAUs. In Doha these countries made it very clear that they wanted to keep their ‘hot air’ and use it in the new commitment period either for their own commitments or to sell the permits.  Yet if the 13 billion surplus was fully used, countries with a Kyoto reduction target would basically not need to do anything to protect the climate until 2026 and would still, on paper at least, meet their targets (for more on this see a recent analysis by Climate Analytics).

If the 13 billion surplus was fully used, countries with a Kyoto reduction target would basically not need to do anything to protect the climate until 2026

In Doha, countries also decided to restrict the number of emission permits a country can receive for the second Kyoto commitment period, in order to avoid the build-up of new surplus. This change was heavily contested by Russia, Ukraine, Belarus, Kazakhstan and others because it essentially makes it impossible for countries to accumulate new ‘hot air’ by choosing a weak target.The compromise decision adopted in Doha doesn’t limit the carry-over of AAUs but puts limits to their use in the second commitment period. It also makes it impossible for countries not participating in the second commitment period to sell their surplus to countries with a reduction target in the same period. To underline their climate commitments, several countries made political declarations that they will not buy such AAU surplus in the second commitment period.

Although we did not get full cancellation of ‘hot air’, the Doha outcome on the surplus can be seen as a success. Parties decided that some, but far from all, ‘hot air’ will be used until 2020. Also, countries have to take a commitment for the second commitment period that de facto does not allow them to increase their current emissions. This sets an important precedent for future decisions.

Doha Decisions on ‘hot air’ from the first commitment period

An agreement at COP18 depended on the support from the European Union. However, the EU had tried to come to an internal agreement on the issue over the last three years but was unable to do so because of staunch opposition from Poland to put any kind of limitation on the surplus.

Together with Russia and Ukraine, Poland threatened to stop any meaningful decision in Doha. This was dangerous because an unresolved surplus issue would have threatened the viability of the second commitment period.

It was only on day 10 of the 2-week negotiations that the EU finally came to an internal solution. It was a compromise between those EU countries that had fought hard for very strict limitations on the surplus (e.g. Germany, UK, DK) and Poland and some other Eastern European countries on the other hand.

The final Doha decision that was passed in Doha is very similar to the EU’s internal decision and includes the following:

Full carry-over of AAUs

Existing Kyoto Protocol rules on carry-over of AAUs were not changed. Countries with surplus AAUs from the first period of the Kyoto Protocol can carry them over fully to the second commitment period.

Limitation on use of carry over

Although countries can carry over their surplus in full, there are some limits on how they can use it:

  • Countries that take a reduction target under the second commitment period of the Kyoto Protocol can use their own AAU surplus to meet their own targets.
  • Countries that have a reduction target under the second commitment period can buy up to 2% of the number of AAUs they received under the first commitment period from other countries.

An unclear Status for surplus units of countries not participating in the second commitment period

Some countries have surplus from the first commitment period but are not participating in the second period, most notably Russia with close to 6 billion surplus AAUs. The Doha decision does not allow those countries to sell their surplus to a country with a target in the second commitment period. But the decision is unclear on what exactly happens to that surplus during and after the second commitment period (see below). The views differ on this and depend on the technical and legal interpretation of the texts (see our more in-depth policy brief on the AAU Doha decision).  We would argue that AAUs were created as a policy tool to reduce emissions under the Kyoto Protocol and that they have no intrinsic value outside the Kyoto system.

An unclear Status on the Kyoto surplus after 2020

The final Doha agreement does not mention what will happen to any surplus at the end of the second Kyoto commitment period. In other words, there is no explicit cancellation of surplus in 2020. It therefore remains unclear what will happen to any of the remaining surplus of emission permits at the end of the second commitment period. Again, the views on this issue also depend on the legal interpretation on what constitutes an AAU. Surplus holding countries will likely try to bring their permits into a new post-2020 agreement.

Political statements on surplus use

EU, Japan, Australia, Norway, Switzerland, Lichtenstein, and Monaco made political statements not to use AAU surplus from other countries to meet their commitments.

The EU declaration is weaker than the rest of those made which explicitly stated that they will not purchase surplus AAUs for compliance with their second commitment period targets. For details on this see our new policy brief.

Doha Decisions on ‘hot air’ from the second commitment period

In Doha, countries also decided to restrict the number of emission permits a country can receive for the second Kyoto commitment period, in order to avoid the build-up of new surplus.  The new amendment of the Kyoto Protocol (see Doha amendment paragraph 3.7ter (p.10)) ensures that commitments made by countries for the second commitment period are stringent enough that they are unlikely to create new ‘hot air’. A country that takes a reduction commitment can only use new AAUs equivalent to the average of its emissions between 2008 and 2010 multiplied by 8 (the length of the commitment period). The rest will be cancelled and can thus neither be used for domestic compliance nor for trading.

The amendment makes it impossible for countries to take a new commitment that is so weak that it creates new ‘hot air’. Ukraine, Belarus and Kazakhstan have all since threatened to withdraw from the second commitment period because of this paragraph. Russia had always said that it would not join.

Next steps

The solutions on ‘hot air’ taken in Doha are complex and it is still unclear how exactly the Doha decisions on the surplus from the first commitment period and the amendment on the limit of AAUs in the second commitment period will work together. Legal clarifications are needed and it is likely that countries will have to take further implementing decisions to clarify the operationalization of the rules.