See Newsletter #1, November 2012

International offsets account for ¾ of the overall surplus in the EU ETS. The real impact of offset credits becomes clear when looking at the new findings of research papers commissioned by the high-level panel on the CDM policy dialogue. CDM projects could generate up to 3.6 billion spurious offset credits by 2020. Join us and Sandbag to discuss this issue in joint events in London and Brussels. Action is needed!

Currently, the European Emissions Trading Scheme (EU ETS) is estimated to be oversupplied by about 2 billion allowances. Albeit heavily disputed, efforts to address the enormous over-supply in the EU ETS are under way. Yet, the role that international offsets have played in the build-up of the surplus remains unaddressed.

To reduce emissions more cost-effectively, international offsets can be used for compliance in the EU ETS. Quantity limits of international offsets in the second (2008-2012) and third (2012-2020) trading periods were set at about 1,6 billion tonnes each. An international offsets that is used for compliance frees up one allowance that does not need to be used for compliance. This means that international offsets are responsible for about ¾ of the overall surplus in the EU ETS.

Despite the large role of offset credits, the review of the ETS legislation does not include means to address the oversupply due to the import of spurious offset credits. This is worrying if we look at the types of offsets that are used for compliance in the EU ETS. Although the EU has made an important step to ban offset credits from industrial gas projects, new research reveals that more needs to be done when looking at the environmental integrity of international offsets:

Up to 3.6 billion spurious CDM offset credits by 2020

Over the past year, the high-level panel on the CDM policy dialogue analysed the CDM and recently released a series of research papers. A research paper on the CDM’s impact, finds that, to a large extent, the assessment of the net mitigation impact of the CDM hinges on judgments regarding the additionality of CDM projects in the power sector, especially wind and hydro, but also natural gas, coal, waste-gas capture and biomass energy power projects. These project types are projected to be the source of over half of the CERs issued by 2020. Researchers have expressed concerns that a substantial portion of these projects should be considered non-additional, leading to a significant net increase in global GHG emissions.

The report finds that under a pessimistic scenario, up to 3.6 billion offset credits could come from business-as-usual projects by 2020. Hydro and wind power projects alone could cause a net emission increase of 1.3 billion tCO₂ each.

Fossil fuel CDM projects not consistent with goals of ETS

Currently there are more than 40 coal power projects in the CDM pipeline of which 6 have already been registered. Over the next 10 years they will receive about 90 million undeserved carbon credits. These projects have been registered on the basis of flawed crediting rules and are expected to be severely over-credited. Another 26 projects are currently under validation and can apply for registration any time. Together, they could potentially add another 220 million carbon credits over the next ten years. Despite evidence about non-additionality and over-crediting of these projects, the CDM Executive Board has re-installed new crediting rules for large coal fired power plants at their last CDM Executive Board meeting.

The research paper of the CDM policy dialogue panel comments “unlike renewable power projects, the additional challenge for non-additional fossil fuel projects is that they lock in developing countries to relatively high-carbon growth trajectories”.

The danger of non-additional carbon offset needs to be addressed in the debate around the over-supply of the EU ETS. There is ample evidence that the eligibility of large scale power sector CDM projects needs to be re-assessed and ultimately excluded from the EU ETS.