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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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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