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.  

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This week, amidst the dislocations flowing from the global financial markets, lawmakers in the US and EU advanced legislation requiring geological sequestration of CO2 emissions from future coal-fired plants.  It remains to be seen how the unfolding economic landscape may affect the viability of any significant movement on new climate change legislation.  For the moment, however, these proposals are signs that some lawmakers realize that implementing a comprehensive climate change framework in five (or twenty-five) years means laying the legal and regulatory foundation now. 

On Wednesday, October 7, the EU Parliament’s Environment Committee added carbon capture and sequestration (CCS) provisions to the comprehensive climate package scheduled for a vote by Parliament in December 2008.  The provisions establish an “emission performance standard” of 500 grams CO₂ per kilowatt hour for large power plants constructed after 2015 and establish a comprehensive scheme for regulating the carbon capture and sequestration (CCS) sites that likely would be required to meet such a standard.  As part of that scheme, CCS project developers would contribute to a CCS fund during the active life of a sequestration site, and remain liable for a 50-year period after the CCS site is closed.  

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After continued delay and controversy, the European Commission (EC) will not connect the Community International Transaction Log (CITL) to the UN’s International Transaction Log (ITL) until the second half of October. The EC, Member States and the secretariat of the United Nations Framework Convention on Climate Change (UNFCCC) are working on the last stages before establishment of a live connection between the CITL, the ITL and Member State registries. It is expected the final connection process between the ITL and CITL will commence on October 6 and take at least 10 days.

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A key component of the EU’s plan to achieve at least a 20% reduction of greenhouse gas emissions by 2020, as compared to 1990 levels, is curbing auto emissions.  A proposed European Commission directive on auto emissions, currently under review by the European Parliament, would, starting in 2012, limit average allowable emissions for new autos in the EU to 130g CO2/km.  Under the proposed directive, additional measures, including the increased use of biofuels, would be imposed to reduce auto emissions further by 2012, to 120g CO2/km.  The proposed directive also specifies a long-term auto emissions target of 95g CO2/km, to be reached by 2020.

The current level of auto emissions in the EU is roughly 160g CO2/km.  Auto emissions in the EU account for about 12% of overall EU CO2 emissions, and constitute the second-largest greenhouse gas emitting sector in the EU.  Further, as the proposed directive notes, greenhouse gas emissions from the EU transport sector continue to rise.

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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.

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On July 8, the European Parliament voted to expand the European Union Emissions Trading Scheme (EU ETS) to cover aviation emissions as of January 2012. Based on a 2006 European Commission proposal, the approved legislation will require all commercial airlines, regardless of country of origin, to purchase and surrender carbon emissions allowances for all flights within the EU or departing from or arriving at EU airports. Total emissions for the civil aviation industry in 2012 will be capped at 97% of historical emissions, defined as average emissions from 2004-2006. The cap will decrease in 2013 to 95% of historical emissions, with the option of further tightening after 2013. Initially, the EU will provide 85% of permits for free and auction the other 15%; the percentage of auctioned permits may rise in subsequent years.

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On June 26, 2008, the European Parliament and EU Member State negotiators agreed to expand the EU’s Emissions Trading System (ETS) to include emissions from civil aviation as of January 1, 2012. The Proposed Directive would include all flights by any airline to and from any EU airport, with limited exceptions. Total EU-wide aviation emissions for 2012 would be capped at 97% of average emissions from 2004-2006, with the cap reduced in successive years. 15% of total aviation emissions permits would be auctioned, and 85% would be allocated for free, although this ratio could also be adjusted in the future.

Last week’s agreement is the product of a series of compromises between the European Commission, the EU Parliament, and EU environmental ministers, resulting from intra-EU negotiations over the past several years. In order to become binding law under the EU’s “Co-Decision” procedures, the Proposed Directive must be supported by the EU Parliament (scheduled to vote on July 9), as well as Member State governments. Generally, these steps are a formality. Read the rest of this entry »

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In its annual report to the UN Framework Convention on Climate Change Secretariat, the European Environment Agency (EEA) highlights Member States’ progress greenhouse gas (GHG) emissions reductions. The report reveals that emissions within the EU-27 were reduced by 0.3% in 2006, the most current year for which data is available. EEA estimates that, overall, emissions have fallen 7.7% below 1990 levels.

The report found that the EU-15 Member States cut emissions by 0.8 % in 2006 — 81 % of the total EU reductions — but that some Eastern European countries reported emissions increases over the 2005-2006 time frame. In a press statement, EU’s Environment Commissioner Stavros Dimas noted that “a continuous effort will be required by all Member States to achieve [GHG targets].” The 12 newer EU countries “cannot rely on the successes of the past,” he said.

The report seems to point to the need for significant further work for the EU to achieve its proposed “20% by 2020″ target, since much of the reductions originated from incidental shifts in demand. The report revealed that the main contributor to the emissions decrease in the EU-27 was lower consumption of gas and oil in households and services, due to a warmer weather between 2005 and 2006. Other greenhouse gas reductions came from a decreased rate of nitric acid production, mainly in Germany, and from decreased CO2 emissions from manufacturing mainly due to depressions in France’s and Hungary’s chemical industries.

Sectors with substantial increases in GHG emissions in the EU-27 included CO2 from public electricity and heat production, CO2 from road transportation, and CO2 from iron and steel production. These findings suggest that there may be a future increase in regulation of vehicle and truck emissions and building efficiency standards, similar to Germany’s decision this week to “increase truck tolls and raise energy standards for buildings,” as reported by the AP.

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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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