After significant delay and controversy, the European Commission (“EC”) once again has promised to connect the EU’s Community International Transaction Log (“CITL”) to the United Nation’s International Transaction Log (“ITL”) in the first half of October. The ITL will track the trade and transfer of all Kyoto Protocol units, including European Union Allowances (”EUAs”), which effectively become Kyoto Protocol Assigned Amount Units (“AAUs”) from 2008 to 2012. Until now, there has been no software link between the EU and UN schemes allowing delivery of the cheaper Certified Emission Reductions (”CERs”), a link expected nearly 18 months ago.

Market participants have criticized this failure widely, sparking major jitters, as December 2008 is a key delivery date for the 2008 vintage CER contract. The contract cannot be delivered without the connection, although most contracts allow settlement to roll over until the link is complete. The delay is also considered to have contributed to the volatile EUA and CER price spread, and more generally, reduced liquidity, transparency and confidence in the market.

This market shakiness was further compounded by the failure of many EU countries to issue EUAs on time earlier this year due to the ITL delay. A number of governments, including the United Kingdom and Germany, refused to issue EUAs by the February 28 deadline, citing key reasons as incomplete installation level allocation plans and the lack of a CITL-ITL link. Without such a link, the Kyoto registry cannot record trades within the EU Emission Trading System (ETS), as intended. On the one hand, all Kyoto Protocol instrument trades must go through the ITL from 2008, but Member States must also issue EUAs by February 28 every year. As such, Member States face a dilemma: they can issue EUAs now and reconcile them once the link occurs (a logistical nightmare that is open to error); or they can wait until the connection is made. However, this second option leaves them vulnerable to infringement proceedings by the EC (albeit unlikely that the EC would exercise this right).

So far the national registries of Japan, New Zealand and Switzerland have been linked to the ITL and CERs have been transferred to the registries of Japan and Switzerland.

For further information about this topic, please contact Akin Gump.