Policy Brief: The EU’s hot air – lifting the fog

Summary

A key consideration for the Paris treaty is how to incentivize real additional climate action while avoiding the laundering of bogus hot air credits. Under the Kyoto Protocol the lack of environmental integrity in market mechanisms has resulted in an 11 gigatonne hot air loophole. These hot air units are called AAUs which will not pose a problem for the Paris climate treaty since they cannot be used after 2020. However, the fate of the hot air units of existing domestic emissions trading systems still hangs in the balance.

Currently all the carbon markets around the world are over-allocated with surplus emission allowances. In the EU by 2020 a surplus equal to up to 4.5 GtCO2e is expected to accumulate in the EU’s Emissions Trading System (EU ETS). Under current policies, this hot air could be carried-over into the post-2020 period and significantly undermine the environmental integrity of the EU ETS.

The EU has committed to reducing its overall emissions by at least 40% below 1990 levels by 2030. While in theory this will result in about 4 GtCO2e emission reductions, the carry-over of the EU’s hot air could reduce this 2030 climate action commitment to as little as 1.6 GtCO2e. This would reduce the EU’s 2030 target to merely 32% effective emission reductions.

Unfortunately nothing currently prohibits Parties to use and trade hot air allowances to comply with the post-2020 commitments submitted to the UNFCCC.

Recommendations how hot air can be avoided in the future:

  • In the context of the EU ETS revision and the 2030 Effort Sharing Decision, the EU should set a global example and not allow the carry-over and use of hot air allowances towards meeting the EU’s 2030 target. This can be implemented by permanently cancelling at least 2 billion EU allowances at the end of 2020 and by not allowing pre-2020 reductions to be used in the 2030 ESD.
  • As part of the Paris climate negotiations, there should be the a robust international accounting system and strict eligibility criteria to ensure that only parties with adequate carbon budgets are allowed to use international market mechanisms.

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