The UNFCCC Compliance Committee recently suspended Greece from trading carbon credits under the Kyoto Protocol. The Committee determined that Greece does not reliably observe and measure greenhouse gas (GHG) emissions, as required by Kyoto. This marks the first time that a country has been sanctioned under the UN system for inadequate GHG reporting.

Greece is now ineligible to participate in the Kyoto Protocol’s flexibility mechanisms, meaning it cannot buy credits to meet its own emissions targets or sell credits from domestic projects that generate excess emissions allowances.

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The European Climate Exchange (ECX) opened trading yesterday for emissions credits that extend beyond the Kyoto compliance period. The Kyoto Protocol, which went into force in 2005, will sunset in 2012. International negotiations are currently underway for a successor agreement that will run from 2013-2020.

ECX opened the futures markets for the December 2013 and 2014 settlement periods, with credits for 10,000 tons of carbon emissions being purchased by an undisclosed party for 27.7 Euros (approximately $42) per ton. These credits may be used in the European Union Emissions Trading System (EU-ETS) for compliance with future emission reduction obligations to which the European Union is expected to commit. The European Commission recently issued proposed Directives for governing the next phase (Phase III) of the EU-ETS, beginning in 2013, with the intent that the market will continue even if there were no post-Kyoto agreement in place.

London is, in many respects, the center of the carbon trading market. As recently as six weeks ago, publications such as the Financial Times and the Times of London published articles expressing doubts about the market. Two of the most critical problems facing the carbon market relate to the process for issuing credits under the United Nations process and uncertainties over the structure of the post-Kyoto regulatory system. While the inefficiencies of the Clean Development Mechanism certification process remain, this trade reflects confidence that, at least in the EU, there will likely be a functional carbon market beyond the expiration of the Kyoto Protocol.

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At yesterday’s hearing before the House of Representatives Select Committee on Energy Independence and Global Warming, Administration officials and representatives of civil aviation organizations leveled strong criticism against European Union (EU) plans to bring civil aviation into its Emissions Trading System (EU-ETS). Under proposed directives issued in December 2007 and January 2008, the EU has laid out a plan to cap and reduce the greenhouse gas emissions of air carriers operating in the EU – including foreign-based carriers flying into or out of EU airports.

As noted by Committee Chairman Ed Markey (D-Mass.), civil aviation accounts for 12 percent of U.S. transportation CO₂ emissions and three percent of U.S. total CO₂ emissions. According to the U.N. Intergovernmental Panel on Climate Change (IPCC), civil aviation represents at least three percent of the total anthropogenic impact on climate change.

Witnesses at yesterday’s hearing – entitled “From the Wright Brothers to the Right Solutions: Curbing Soaring Aviation Emissions” – described a range of technology and policy measures, centered around increasing fuel efficiency, that are best-suited to curb aviation emissions. But the witnesses were uniform in condemning the EU plan to subject aviation to mandatory emissions reductions.

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This past weekend, the Guardian reported on a “green ultimatum” from the EU that could force US airlines to either capture the environmental costs of carbon emissions from aircraft or to face restrictions on flying permissions to EU airports.

According to the Guardian, EU Transportation Commissioner Jacques Barrot intends for the issue of carbon credits to play a significant role in the negotiation of a second phase of the EU-US Open Skies Agreement, a treaty that permits any EU airline and any US airline to fly between any point in the EU and any point in the US. The first phase of the agreement goes into effect on March 30, 2008, and discussions on the second phase are scheduled to begin in May 2008.

The Guardian notes that, under the Open Skies policy, “EU states can suspend flights from the US to Europe if insufficient progress is made on a second phase by 2010.” European air carriers have expressed competitiveness concerns over an EU Directive designed to progressively incorporate aviation emissions into the European emissions trading scheme — beginning with flights between EU airports in 2011 and expanding to any flight arriving at or departing from EU airports in 2012. The announcement by Mr. Barrot suggests that the EU may try to level the playing field for European carriers through multilateral treaties, in the absence of an international agreement on carbon emissions from civil aviation.

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Last month, the European Union announced its proposal for Phase 3 of the European Union Emissions Trading System (ETS), an expanded emissions cap and trade program that will add chemical manufacturers to its list of regulated industries by 2013. EU officials have declined to estimate the likely cost to newly-captured chemical manufacturers, but considering the government’s estimate that the larger proposal may cost €60 billion ($88 billion US) by 2020, chemical executives and investors have a strong incentive to monitor the progress of this proposal closely to ensure that any final decision is workable for an industry already struggling with record-high hydrocarbon feedstock and energy prices.

Perhaps more importantly, the Proposal gives no attention to the fact that under the current ETS implementation schedule, many chemical manufacturers will face ETS requirements for the first time, while simultaneously struggling to comply with yet another multi-billion dollar regulatory program known as “REACH” (Registration, Evaluation, Authorization and Restriction of Chemicals).

Individually, these programs may make policy sense. In combination, however, these two new programs, if not implemented carefully, may damage one of the EU’s most important industries. In today’s global economy, that would be bad news for the EU and for its trading partners.

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With its Emissions Trading System (ETS) covering more than 12,000 installations, the European Union (EU) has been a global leader in establishing mechanisms that compel industries to pay for the right to pollute. But the EU has struggled with whether and how to bring Europe’s civil aviation sector into this system. According to the U.N. Intergovernmental Panel on Climate Change (IPCC), civil aviation accounts for at least two percent of all CO₂ emissions, and represents at least three percent of the total anthropogenic impact on climate change.

Over the past three months, the EU has proposed two major Directives which seek to incorporate aviation emissions into the ETS. The first, released in December 2007, would pull air transportation emissions into the ETS as early as 2011, beginning with all domestic and international flights between EU airports, then extending in 2012 to all international flights arriving at or departing from EU airports. The Directive would apply to both EU-based and foreign carriers. During the ETS “Phase II” (through 2012) period, the majority of emissions allowances to aviation would be issued for free on the basis of each operator’s historical share of traffic.

The second proposed Directive, released in late January, addresses the structure of “Phase III” (post-2012) of the ETS and proposes to further decrease the permissible emissions from civil aviation. Under this proposed Directive, civil aviation would, as of 2013, be subjected to declining annual emissions caps. Like many other industries covered by the proposed Directive, civil aviation would receive 80% of its emissions allowances for free in 2013, and would have to purchase the balance at auction or on the market. The free allocation would decrease annually by equal amounts until 2020, when free allowances would no longer be provided.

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The European Commission released a proposal this week for the governance structure of Phase 3 (2013 to 2020) of the European Union Emissions Trading System (EU ETS).

The EU ETS proposal, which was published as part of a “climate action and renewable energy package,” must be approved by the Council of the EU and the European Parliament before it becomes law. The European Commission hopes that this will take place by 2009, which could coincide with the adoption of a new international climate change agreement.

The proposal calls for an 20% reduction in emissions across the European Union compared to 1990 levels. The Commission proposes a 30% reduction if other countries agree to take similar measures under a global agreement- i.e., if a meaningful successor to the Kyoto Protocol is negotiated and implemented.

The distribution of emissions reductions is based around the concept of “effort sharing.” Member States are assigned emissions limits along a range according to the country’s “relative wealth.” Denmark and Ireland fall at the high end of the spectrum (20% reduction from 2005 emission levels by 2020), and Bulgaria at the low end (a 20% increase from 2005 levels by 2020).

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Amidst the fanfare surrounding the launch of Phase 2 of the European Union’s Emission Trading System, little attention is being paid to litigation that has the potential to upset the balance of emissions allowances. In late December, Romania became the ninth European country to challenge the Commission’s annual allocation of emissions allowances for the 2008 through 2012 trading period on grounds the decisions are discriminatory and will unduly harm their growing economies.

The difference between the number of allowances requested by Poland, Hungary, the Czech Republic, Estonia, Latvia, Lithuania, Bulgaria, and Romania and the final allocation adopted by the Commission is 163 million allowances annually — if even a quarter of these allowances flowed back into the market it would represent a substantial number of additional emissions permissible under the cap. (The ninth country, Slovakia, dropped its suit on January 16.)

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British Prime Minister Gordon Brown recently required that all Ministers account for the cost of carbon when making policy and investment decisions. This new policy covers the transportation, construction, housing, planning, and energy sectors.

As a way to internalize the costs of environmental damage caused by large-scale projects, the price of carbon has been set by government economists for every year through 2050. For 2008, one ton of carbon equivalent emissions must be factored at a cost of £26.0. By 2050, that price will increase to £59.6. This means that, for a construction project with a cash cost of £100 million, which is calculated to emit £20 million of carbon, the government will treat the project as it if actually cost £120 million.

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The ongoing World Trade Organization (WTO) Doha Round process includes negotiations toward an agreement that would reduce or eliminate tariff and non-tariff barriers to international trade in “environmental” good and services. While the mandate for these negotiations is the 2001 WTO Doha Declaration, the United States now views these negotiations as “complementing and supporting the objectives of and the process under” the UN Framework Convention on Climate Change process. The fundamental goal of a WTO agreement on trade in environmental goods and services is to harness trade liberalization to encourage the global distribution and deployment of environmentally friendly technologies that, among other things, help mitigate climate change.

As in other areas of the ongoing WTO Doha Round negotiations, substantial differences have emerged between developed and developing countries – and in particular, between the United States and the European Communities (EC), on the one hand, and Brazil, on the other.

Currently, one of the principal areas of contention is whether to include biofuels in the definition of “environmental” goods. Brazil argues that the inclusion of biofuels is critical in order to increase exports of environmental goods from developing countries. The United States and the EC have rejected Brazil’s proposal, contending that trade liberalization in biofuels should be negotiated as part of the separate WTO market access negotiations for agricultural goods. Further, in a recent joint proposal, the United States and the EC argue that the environmental goods and services negotiations should be divided into two phases – the first and more urgent phase addressing trade in goods and services directly linked to addressing climate change, and the second phase covering the remaining substantial body of environmental goods and services.

Negotiations are currently scheduled to resume in February 2008. It is widely accepted that Brazil and other developing countries will object strenuously to the recent joint US/EC proposal because it excludes biofuels, and it seems unlikely that it will be easy to bridge this divergence of views. Unlike other areas of the WTO Doha Round negotiations, it does not seem that these negotiations will soon advance to the stage of discussions based on a draft text for an agreement.

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