Emissions trading is set for a key role in UN negotiations (Source: UN Climate Change)

With the United Nations Climate Change Conference due to start on 28 November, emissions trading is a key topic due for discussion in Durban. As one of the three Kyoto market-based mechanisms seeking to reduce greenhouse gas emissions, emissions trading has emerged as a crucial weapon in the arsenal of climate change mitigation at the international level. It needs to be decided whether the tradable units (called assigned amount units, or AAUs) remain valid beyond 2012, or whether the surplus of AAUs currently in existence should be reduced in line with emissions reductions targets. An investigation is also necessary into possible solutions to link the various existing and emerging national and regional trading schemes.

Continued validity of AAUs and linkage

[long_ad_left]The first commitment period of the Kyoto Protocol runs from 2008 until the end of 2012. Carrying over an unlimited amount of unused AAUs into a second commitment period is permitted under the current formulation of the Kyoto Protocol. However, there is a considerable surplus of AAUs, principally due to over-allocation to former Eastern bloc countries, whose industries shrank significantly in the 1990s. In order to pursue the targets of emissions reductions set by the Kyoto Protocol it is necessary to establish whether the surplus could be cancelled or otherwise retired from the market.

The number of national and regional emissions trading schemes is on the increase. The European Union Emissions Trading System (EU ETS) is the largest mandatory scheme currently in existence. California and Australia have announced plans to implement emissions trading in their respective jurisdictions. China and South Korea have also publicised their intention to run such schemes in the future. The possibility of establishing a means of linking these different schemes to one another would help establish a truly worldwide emissions market.

Reconciling conflicting interests

Countries holding surplus AAUs understandably wish to bank them into a second Kyoto commitment period. EU Member States could use these AAUs to help their industrial installations comply with the EU ETS (as AAUs are equivalent to EU emissions allowances). Unused AAUs can also be sold in the market to make substantial windfall profits.

Other countries are taking a more restrictive approach. Denmark is lobbying for AAUs not to be bankable, in line with continuing emissions reductions. As a compromise, South Africa, the host country for the UN conference, has suggested a compromise consisting of a limited 1% carry-over of spare AAUs.

AAU allocations and emissions reduction targets

The Kyoto Protocol sets caps for countries with emissions reduction commitments (Annex B Parties). These caps consist of AAUs, which are allocated to each country on the basis of historical levels of emissions. If a country requires more AAUs than provided in its initial allocation, it can buy additional ones in the market from other countries who hold excess AAUs, and vice versa.

The surpluses of AAUs held by some countries call into question the validity of their emissions reductions, which have been achieved incidentally due to economic decline, rather than actively through the development of greener technologies.

Emissions trading as an effective pillar of climate change mitigation

A firm decision on the treatment of the AAU surplus is overdue; the issue of unlimited banking was noted, but not amended at the Cancún conference in 2010. Ideally the conference in Durban would provide a clear statement regarding the extent to which AAUs are bankable into the following commitment period, as well as a plan for addressing the problem of the surplus. The international emissions market would also greatly benefit from a proposal for a system of linkage between national and regional emissions trading schemes. A variety of opinions has already surfaced on how this would work, ranging from a centralised mechanism to a decentralised network of trading links.

Tying the loose ends of the Kyoto emissions trading mechanism is vital for its continued success in the fight against climate change. The validity and internal workings of this mechanism beyond 2012 are areas which would particularly benefit from direct attention by the negotiating parties at Durban. A further step in the direction of improving interconnectivity with other emissions trading schemes would provide additional support. These important issues will therefore form the focus of coverage as the conference progresses.

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