As Environment Ministers meet in Luxembourg today the issue of whether the EU should take on more challenging climate targets, moving from a 20% to 30% emissions reductions by 2020, is firmly on the agenda. The EU has already legally capped half of its carbon dioxide emissions and so meeting higher targets in these sectors would be relatively easy to achieve by simply tightening the caps. However, the Commission has warned that the divide between the traded and non traded sectors is growing and there is a fear that the non-traded sectors will miss their emission reduction goals. This fear is shared by some influential industry lobbyists – most recently Shell who support tighter caps in the traded sector but currently oppose the move to 30% for fear that the step up will be impossible for uncapped sectors. Much of the problem with these sectors (mainly transport, agriculture and commercial and household heat) is that they lack an efficient and effective policy to drive down emissions.
With this in mind the EU needs to clarify how it intends to reduce emissions in these uncapped sectors and through which policy instruments it wishes to do so. There are a range of options available to policy makers including use of trading mechanisms, taxation or legislation. Sandbag recommends the EU explore the further use of traded mechanisms in these sectors, including the use of Joint implementation (JI) and the potential to extend the scope of the existing ETS to cover these sectors.
[Our report](/site_media/pdfs/reports/Sandbag_2010-10_ERWho.pdf “”) issued today looks in more detail at the little talked about JI which allows for offset projects to take place between two capped counties and produces credits called emission reduction units (ERUs). Through the Linking Directive these credits are allowed to be used for compliance in the EU ETS. Like the Clean Development Mechanism (CDM) and the international emissions trading (IET) JI is one of the mechanisms of the Kyoto Protocol. JI is largely overshadowed by the more prolific CDM, however, with almost a hundred-fold increase in the number of ERUs surrendered into the EU ETS between 2008 to 2009, it appears that the JI market is maturing and credits are starting to make their way into the international emissions trading market. So far only 3.2 million credits ERUs have used for compliance in the EU ETS, a figure that is dwarfed by the some 159million CERs that have been surrendered over the same period.
Despite a relatively small number of ERUs being surrendered into the ETS in 2009 the origin and type of these credits proved interesting. We observed that the majority of credits were from district heating and N2O projects, with the Ukraine originating 73% of all ERUs surrendered in 2009. But we also found that 36% of all ERUs surrender were originated in the EU, a clear sign that despite JI’s relative obscurity it is being used as a community offset. This flexible use of trading is something the EU may wish to explore further and actively encourage.
Offsetting through the CDM is currently sending large sums of money to competing industries overseas. So far approximately €1.3bn is estimated to have been distributed amongst 18 HFC projects (the majority of which are in China and India) which do little to enhance the local sustainability of the host country and divert fund away from areas that are in need of investment. Our new JI report shows that it is also possible to use offsetting through Joint Implementation to generate savings at home in uncapped sectors, directing investment into Europe during a time of recession and potentially helping to drive a transition to a low carbon economy.
That said JI does not come without its problems, the most overarching being that it’s unlikely to exist without a renewal of the Kyoto Protocol. Other issues range from the threat of ‘hot air’ or, unearned credits, making their way to market from countries who have experienced economic collapse; to the risk that greater use of offsetting in the EU would potentially conflicting with Copenhagen Accord commitment by developing countries to provide $100bn of climate funding to developing countries. A large part of this is expected to be delivered by the carbon market. Nevertheless, as our report shows JI already is being used as a community offset tool and should not be overlooked as a policy tool to help uncover low cost emissions reductions in the EU’s non traded sectors.
Our report highlights an example where the chemical company [Rhodia](http://www.rhodia.com/ “”) is generating ERUs in two of its French installations, not covered by the ETS, to be used to meet its ETS emissions reduction targets in another of its French installations. This is the clearest example yet that a market mechanism such as JI is already being used as a form of community based offset. Where this particular form of industrial chemical offset will soon be phased out, and the JI would not necessarily be appropriate for sources of emissions reductions in non traded sectors, Ministers should not overlook this flexible mechanism and its potential to uncover some Member States’ low hanging fruit.