See Newsletter #1, November 2012

The gigantic surplus of emissions permits under the Kyoto Protocol threatens the viability of a second commitment period and any future climate deal.   The EU has been unable to advocate for a strong solution because of the opposition of Poland. Russia will also push for being able to sell their gigantic surplus. Parties must find a solution in Doha, otherwise full carry-over of these units will be allowed. This would undermine environmental integrity and stifle political progress.

The surplus of emission permits from the first Kyoto commitment period (CP1) is estimated to be 13 billion tonnes of CO₂. Russia (5.8), Ukraine (2.6) and Poland (0.8) and Romania (0.7) are the largest surplus holders.

This so called “hot air” surplus is the result of extremely weak CP1 reduction pledges well above what these countries were projected to emit. “Hot air” therefore does not represent real emissions reduction efforts. Poland, for example committed to a 6% reduction from their 1988 emission levels, despite the fact that in 1997, when the Kyoto targets were set, Poland’s emissions were already about 20% below 1988 levels.

Kyoto Trading Units Assigned Amount Units (AAUs) are the tradable emission permit under the Kyoto Protocol. One AAU allows a country to emit 1 tonne of CO2e. Current Kyoto Protocol rules allow countries to carry over all unused emission allowances into the next commitment period. Parties are also allowed to carry over emission reduction credits from the Clean Development mechanism (CDM) and Joint Implementation (JI). The carry-over of CDM credits (CERs) and JI credits (ERUs) is limited to up to 2.5% each of the total amount of AAUs a country received for the first commitment period. Carry-over from these offsetting mechanisms could lower actual emission reductions by 2020 by roughly 6%.

Large surplus-holding countries have nevertheless been firm about keeping the right to sell their surplus of emissions permits. However, because the total surplus is over a thousand times higher than the estimated demand, surplus-holding countries will not be able to earn any significant revenue from the sale of their surplus. Prices for Assigned Amount Units (AAUs) have dropped from 13 EUR in 2008 to less than 0.5 EUR in 2012.

Even without this surplus from CP1, countries will likely accumulate another surplus of 3 to 10 billion tonnes of CO₂ by 2020. This is because developed countries have made very weak emissions reduction pledges for a second Kyoto commitment period (CP2). Together with lenient rules on the use of offsets, they will be able to emit 3-10 billion tonnes of CO₂ more than they are projected to emit under business-as-usual emissions projections until 2020.

Because the pledges for CP2 are so weak, it is unlikely that much of the surplus from CP1 will be used, even if full carry-over was allowed. This is why some have argued that this “hot air” is not really a menace at all. We strongly disagree, and here is why.

Why Action Is Needed To Tackle The Phantom Menace

The surplus issue threatens the very existence of a second Kyoto commitment period. Although the EU and a few other countries have stated they will join a CP2 from 2013 onwards, it is far from clear if such a CP2 will actually happen. There are several vital issues that need to be resolved in Doha, including how to deal with the gigantic surplus of emissions permits from CP1. In other words, the surplus issue threatens the very existence of a second Kyoto commitment period.

Yet it is vital that CP2 comes into effect. Otherwise the multilateral process will completely disintegrate. This would play into the hands of those countries that are refusing to take any binding actions. We would lose much of the treaty infrastructure that was built under the Kyoto Protocol. This would not bode well for the new climate treaty that aims to include all countries and that is to be negotiated by 2015 and come into force by 2020. It is difficult to see how developed countries could convince developing countries to commit to meaningful emission cuts under a new climate deal without immediate action from developed countries to significantly raise their reduction pledges and to eliminate ’hot air.’

Last but not least, if countries were to increase their pledges for CP2 and the surplus had not been eliminated, countries could meet their more stringent targets by simply buying more surplus without actually cutting their emissions.  This is why higher reduction pledges and the elimination of the surplus have to go hand in hand.

Proposed Solutions to the Kyoto Surplus

At COP 17 in Doha in November 2012 Parties will need to come to an agreement, if the surplus issue is to be resolved. Either a compromise that would restrict the carry-over of AAUs can be agreed on, or the existing Kyoto rules, which allow for full carry-over will remain in effect.

At the UNFCCC negotiations in Bangkok in August 2012, the G-77 group of countries and China had presented a proposal to effectively contain and minimise the use of these surpluses. It allows for only limited domestic use of the surplus and does not allow for trading. All left over surplus would need to be cancelled by the end of CP2.

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Poland teams up with the Phantom Menace

The  European Union (EU) has been unable to advocate for a strong solution on the surplus. Environment Ministers from EU Member States met in October to agree on the EU positions for COP18.  Despite a heated debate, Member States were unable to agree on a strong and explicit position to address the Kyoto surplus.  Several Member States — Poland as the largest surplus holder in the EU being most adamant — insisted that there should be no limitation on the carry over or use of the surplus. The final Council statement does not mention the G-77 proposal at all. Not having a clear negotiating position puts the EU at a disadvantage during the upcoming climate negotiations in Doha.

SUMMARY OF THE G-77 PROPOSAL All CP1 surplus AAUs and Joint Implementations offsets (ERUs) can be carried over into the next period and are placed into a Previous Period Surplus Reserve (PPSR). Units in the PPSR cannot be traded and only be used for domestic compliance under certain conditions. Parties can use PPSR units for compliance if their emissions are higher than their initial assigned amount (as defined in article 3.7 and 3.8 KP). They can only use as many PPSR units in as far as their emissions exceed the initial assigned amount. In other words, they cannot sell their CP2 units and then use PPSR units for their own compliance. The proposal aims to prevent the creation of new surplus from weak pledges for CP2: If a party has an assigned amount that allows, on average, higher emissions than the 2012 emissions, the difference between the CP2 assigned amount and the 2012 emissions times the length of the commitment period is cancelled. Of the Parties with the largest surpluses (Russia, Ukraine, EU) only the EU has a pledge below projections for CP2 and that only if ambition is increased above the 20% target. It is therefore very unlikely, that Russia and Ukraine would use surplus domestically and the EU can only do so if they increase ambition or have emissions above current projections. By the end of CP2 the remaining surplus in the PPSR will be canceled. The proposal is currently silent on what will happen to the surplus from the second commitment period. The rules for CERs remain as they are under current Kyoto rules: The carry-over of CER is limited to up to 2.5% each of the total amount of AAUs a country received for CP1 (thus before trading and before acquisition of CERs, ERUs, see Decision 13/CMP.1 AMMEX I.15.(b)). The proposal would likely lead to a very low use of CP1 AAU surplus units because currently pledged targets are very weak. CERs carried over from CP1 would make up the bulk of the surplus used in CP2 (see last bullet). A ball park estimate shows that approximately 1 Giga tonne of CP1 surplus would be used, 800 million of those from CDM credits.

What to Expect in Doha

In Doha, Parties opposed to restrictions of the carry over will likely try to water down the G-77 proposal or oppose it. Ways to water down the proposal include removing language referring to the 2012 reference level and removing language about the cancellation of CP1 surplus units in 2020. This is dangerous.

We are now on an emissions path that could lead to warming of 4oC or more. In addition, impacts associated with even 2oC of warming have been revised upwards and are now considered “dangerous” and “extremely dangerous”.  A world beyond 2o will threaten the very existence of civilization as we know it. The urgency and importance of this matter cannot be overemphasized.

Carbon Market Watch urges:

•  All countries to significantly increase their emission reduction commitments to ensure the world has a reasonable chance to stay at below 2o Celsius of warming.
• All Annex 1 countries to join a second commitment period under the Kyoto Protocol with reduction commitments that are well below their 2012 emissions.
• Annex B countries to agree to a solution of the surplus issue in line with the G-77 proposal and ensure that:
  • No new “hot air” AAU surplus is accumulated in the second commitment period. To be eligible to use any surplus AAUs, CERs and/or ERUs at all, a Party must have a reduction target for the second commitment period that is lower than its 2012 emissions.
  • The already insufficient pledges are not further weakened through the use of surplus. The use of surplus must be severely restricted. Furthermore, any surplus should only be used for domestic compliance and should not be traded.
  • All surplus is cancelled permanently by the end of the second commitment period.