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International Carbon Offsets in EU Climate Legislation – A Historical Concept? (Newsletter #4)

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EU policy makers are currently debating the design of the EU’s Climate Framework for the period of 2020-2030. Under the current Climate and Energy package, the use of international offset credits has undermined domestic mitigation action significantly both under the EU’s Emissions Trading Scheme and the Effort Sharing Decision. International offsets should therefore no longer be eligible for compliance under the 2030 EU Climate Framework.

The EU’s Climate Framework for the period of 2020-2030 will include a comprehensive policy package to that defines climate and energy targets and policies for the period from 2020-2030. In December 2013 the European Commission is expected to publish a White Paper and Member States are scheduled to decide on EU targets for 2030 in March 2014.

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International Carbon Offsets In EU Climate Legislation – Time to Say Good-Bye?

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The EU will have to reconsider the use of international offsets for the period post 2020. The use of Kyoto offset credits in the EU ETS and under the ESD was originally meant to make mitigation action cheaper both for companies in the EU ETS and for countries to comply with their reduction goals in the non-ETS sectors.  However, the quantity limit of international credits in the period 2008 to 2020 turned out to be much too generous. Offsets have been a major driver for the build-up of surplus. According to the European Commission report “The state of the European carbon market”, the use of international offsets in the EU ETS has almost doubled the oversupply in the period 2008-2011 and is estimated to amount to three quarters of the oversupply by 2020.

In addition, a significant number of offsets have proven to be of low quality. We outline in this article why offsets should not be allowed under the 2030 EU Climate Framework.

The quality of offset credits remains limited

Offsetting does not lead to emission reductions per se, it only allows for the geographical or sectoral shift of the emission reductions to enhance cost-effectiveness of emissions reductions. Additionality, the concept that only projects that are beyond business-as-usual receive credits is therefore essential for ensuring that offsetting does not lead to a net global increase in emissions.

There have been serious quality concerns over the environmental integrity of some project types in the Clean Development Mechanism (CDM) and Joint Implementation (JI). Research conducted for the CDM Policy Dialogue estimates that the CDM may have delivered less than half of the emissions reductions it sold. Under JI, the achieved climate benefits are likely to be even lower. Despite these findings, countries have shown little willingness to tighten the CDM and JI rules to address the blatant quality flaws.

The use of non-additional international offsets directly undermines EU climate goals. Non-additional offset credits also undermine the economic effectiveness of climate policies by making it more expensive to actually meet the necessary reduction targets to stay within the 2 degree limit.

Currently countries are discussing establishing rules and procedures for new market mechanisms that could generate internationally tradable units eligible for compliance under the UNFCCC. Given that many countries are advocating for even weaker rules for such new credits than under the CDM, It is far from likely that such new market mechanisms will deliver international credits with higher environmental integrity than the current Kyoto mechanisms.

Double counting here we come

The post-2020 climate treaty will include commitments from developing countries. The risk of double counting of emission reductions that are sold as offsets is technically and politically difficult when both the host and buyer countries have reduction targets. Double counting undermines mitigation goals and economic efficiency and must therefore be avoided.

Double counting is already a reality of emissions reductions sold under the CDM that originate in Non-annex 1 countries with a reduction pledge for 2020.  Research shows that double counting of international offsets could reduce the ambition of international climate pledges (developed and developing countries) by up to 1.6 billion tons CO2e in 2020, equivalent to roughly 10 percent of the total abatement required in 2020 to stay on a 2°C pathway.

Offsetting hampers domestic abatement efforts

Experience with the EU’s Emissions Trading Scheme (EU-ETS) and the Effort Sharing Decision (ESD) has shown that the use of international offsets has hampered domestic abatement efforts.

The use of offset credits from the CDM and JI in the EU ETS and the ESD was originally meant to be a cost containment tool to allow countries and ETS operators to choose the most cost effective way of complying with the ESD and EU-ETS respectively. But the economic crisis together with the oversupply of international offsets has made it unnecessary for many EU countries and entities covered under the EU-ETS to actively cut their own GHG emissions.

Eliminating access to international credits will help ensure a stronger focus on domestic abatement and spur investment in low carbon technologies in EU industry. Currently, the very low EU ETS allowance prices do not facilitate a low carbon path for European industry. In the long term, it is necessary to eliminate the use of international credits to encourage more ambitious domestic cuts, trigger more investment in low carbon technologies and enable EU industry to reach its de-carbonising goal of 80%-95% by 2050.

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