After significant delay, the United Nation’s International Transaction Log (ITL) and the EU’s Community International Transaction Log (CITL) were finally connected on October 16.  The ITL tracks and trades the transfer of all Kyoto Protocol units, including Assigned Amount Units (AAUs), Certified Emission Reductions (CERs) and Emission Reduction Units (ERUs), while the CITL, its European counterpart, tracks the trade of European Emission Allowances (EUAs) under the EU ETS. 

The linking was significant not only because of the delay in its implementation, but because it allows Kyoto credits to be transferred directly into EU installation emissions accounts.  The delay caused considerable market shakiness, as, until the link was complete, the key December 2008 CER contract could not be physically delivered and most Member States, most significantly Germany and the UK, refused to issue EUAs by the February 2008 deadline.  As such, the completion of the link eases the collective concern of traders and Member States alike, as it avoids the risk of contract default, a major concern, and encourages Member States to promptly issue EUAs.  It will also simplify contractual negotiations between counterparties, as provisions, which have been included for the lack of a connection, are no longer necessary.  All these factors will encourage a flourishing spot market, which will grow alongside the exchange and OTC markets.  The resulting increased volume and liquidity should smooth out price volatility and increase opportunities for arbitrage.  

It is likely that the EUA/CER price spread will increase initially, as sellers rush to market to raise cash.  But looking forward through 2009, it is likely that there will be shortage of CERs and the gap will narrow.  This is largely a result of administrative bottlenecks, as the United Nations secretariat has currently issued less than 200 million CERs since 2005, while demand is predicted to reach 2.4 billion by the end of 2012.  In addition, the EU proposed directive increases in the amount of Kyoto credits a Member State can use to satisfy their liability compliance, which will boost demand for the cheaper credits even further.

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