Global climate change - a Norton Rose Group newsletter

Publication November 2009 edition

Editorial

Welcome to the November edition of Global climate change. Our focus is on Copenhagen, and preparations for COP15.

Key players have begun speculating that a Copenhagen agreement may well be reached but not one that is legally binding. Binding commitments will have to wait until some future point. Given the constantly changing domestic markets which we report on in each edition of Global climate change, how far should we judge the success of Copenhagen against the metric of a comprehensive, binding treaty? What yardstick can we use to measure success? We posit our own set of success criteria pre-Copenhagen, which we will come back to in the next edition of Global climate change, post COP, to assess progress.

The central themes of the international negotiations at the moment seem to be distrust and uncertainty: distrust between industrialised and developing countries; uncertainty about the future share of a climate change regime. Though the EU  has agreed on levels of climate change financing, it has not been able to settle the details of its own contribution. Meanwhile, the EU ETS ’s growing pains continue in relation to the decisions on Member State National Allocation Plans and the implementation of legislation for Phase III. We examine these issues.

At the time of writing, rehearsals for COP15 are taking place in Barcelona; this edition of Global climate change will not reflect the outcome of those discussions.

As well as preparing for Copenhagen, there are other issues to pick up on, which we do through our regular regional survey. In our last edition, there were more optimistic signs of a brighter future: the cap and trade regimes in Australia, Japan, New Zealand and the US , linked to the EU ETS. We continue to follow the evolution of these schemes and we point to other messages of hope. Russia and Poland have not turned their backs on Kyoto’s flexible mechanisms and continue to roll out national implementing legislation. Japan’s new government has announced an ambitious target for reducing its emissions, provided that others do the same. Markets continue to evolve in Singapore and Thailand.

We would like to thank Deacons Australia (Simon Watt) for their contributions, and to remind you that, as from 1 January 2010 (when Deacons Australia joins Norton Rose Group) we will have over 1800 lawyers in 30 offices worldwide.

Bespoke negotiations coverage

We are offering a bespoke negotiations coverage service from the United Nations Climate Change Conference in Copenhagen, December 2009. This builds upon the service we provided during the Poznan negotiations in December 2008. We are also providing coverage of the UNFCCC ’s discussions leading up to the negotiations. If you wish to find out more about this service, please contact Anthony Hobley on anthony.hobley@nortonrose.com or +44 (0)20 7444 2350.

We look forward to all your comments and offer up this newsletter as a means of encouraging debate and shared knowledge in this vital area. The email for feedback is climatechange@nortonrose.com.

COP 15: a yardstick

In sum: whatever agreement is reached, the reality is now that the details will have to be filled in over the coming years. Significant amounts of political will and leadership will be required over the coming weeks for a deal, in any form, to be struck. We shall review the outcome of Copenhagen against this yardstick in our next newsletter.

“Noises off”

“Noises off” refers to a stage direction where something is heard but not seen. In the lead-up to Copenhagen we are hearing a great deal of noise but seeing little by way of action to combat climate change.

Legislative measures need a collective political will behind them if they are to succeed, and right now, as governments work to align their strategies, there is a degree of horse trading going on to achieve that level of support. The science behind climate change dictates that any global solution will be complex; governments, policymakers and the wider public are being deluged by scientific, economic, geopolitical and legal data.

We attempt below to make sense of all this noise.

Soon, international negotiators will convene in Copenhagen. Their task is to establish an agreement which must be in place when the Kyoto Protocol’s first commitment period expires in 2012. The scale of this task cannot be underestimated: Copenhagen represents the culmination of years of discussion. Progress during 2009, however, has been disappointing.

Against this background, many businesses have called for an ambitious, robust and equitable global deal on climate change.

Yardstick of success

There are growing signs that there will be no fully fledged, legally binding international agreement “with numbers” (legally binding emissions reduction targets). We have devised a yardstick by which to evaluate the success of the Copenhagen negotiations.

Goals

What goal is guiding the negotiations? Though ambitions vary, the EU is aiming for an agreement that will prevent global temperature rises of more than 2°C  above pre-industrial levels. Some argue that even this target is not sufficient.

In order to achieve the EU’s goal, scientific evidence tells us that industrialised countries need to cut their greenhouse gas emissions to 25-40 per cent below 1990 levels by 2020. Developing countries will also need to limit their emissions growth beyond 2020. By contrast, under the Kyoto Protocol, industrialised countries agreed to reduce their emissions by, on average, only 5 per cent below 1990 levels. This comparatively modest goal has proved too challenging for some (and, some would argue, too easy for others, whose emissions dropped significantly following the collapse of the Soviet Union).

Emissions targets currently on the table at Copenhagen are significantly below required levels. This must be addressed for a meaningful agreement “with numbers” to be reached.

Role of emerging economies

There are also questions over the extent to which major emerging economies which are not expected to take on binding emissions caps at this stage will agree at an international level to take concrete action to control their emissions.

London has been at the heart of the emissions trading markets for some years now. The Kyoto Protocol enshrined market mechanisms as a way of turning the right to emit greenhouse gases into a valuable, tradable commodity. This allowed emissions reductions to be achieved at the point of least cost and then sold to parties that need them to comply with the international climate change regime established under the Kyoto Protocol or with local emissions trading schemes such as the EU’s Emissions Trading Scheme (which restricts the emissions of a number of key industrial sectors in the EU).

The global carbon markets are an essential means of promoting investment into emissions-reducing technology in developing countries. A scaled-up international carbon market that creates financial support for developing countries and promotes cost-effective emission cuts, presents opportunities for business both in industrialised and developing countries. Up to 85 per cent of the funds required for adapting to and mitigating climate change are expected to come from the private sector. Carbon markets must be an important part of the Copenhagen agreement for this to be achieved.

Public finance

Public finance will have to be provided to developing countries to boost finance from the carbon markets and domestic investment. This contentious issue was one of the last parts of the EU’s collective Copenhagen position to be “agreed”.

Deforestation and forest degradation

With up to 20 per cent of greenhouse gas emissions resulting from the destruction of forests, an important development has been the widespread recognition that a new mechanism is needed to tackle deforestation and forest degradation. This is an area singled out for particular attention at Copenhagen, with good progress being made to agree the principles underpinning how to tackle this issue. There is likely to be significant cross-over of public and private finance as the tools to develop solutions evolve under this mechanism. Over time a market mechanism may develop which will reduce the cost to public finances, whilst facilitating real, sustainable and verifiable reductions.

Support for countries most affected by climate change

Any agreement at Copenhagen will have to recognise the fact that climate change is already presenting a need to adapt in many parts of the world and that this will increasingly be the case. Further temperature rises of as much as 1 degree are inevitable, given the level of historic and current emissions. A framework to help countries most affected by climate change including small island developing states, Bangladesh and many African countries adapt to the effects of climate change is required.

As part of the global transformation to a low-carbon economy, measures supporting cooperation and funding to accelerate the deployment of low-carbon technologies to developing counties will also be necessary.

The EU’s position on climate change

In sum: consensus on the principle of global funding but no commitment on EU contribution

EU leaders meeting at the end of October in the framework of the European Council tried to broker an agreement on the EU’s common position on the fight against climate change. After much debate, EU leaders (who had previously been split on the issue) agreed on the need to include a deal on financing climate change in developing countries as a central part of a future Copenhagen agreement.

The Council concluded that this global fund would need to provide around 100 billion euros annually to support climate efforts in developing countries, out of which 22 to 50 billion euros per year would be financed through international public support. All countries, except the least developed, should contribute to international public financing. The rest of the fund would be supplemented by the private sector.

The European Council also indicated support towards the establishment of a body or forum to provide, under the guidance of the UNFCCC, an overview of international sources for climate financing in developing countries.

The Council failed, however, to agree on the details for this future global funding. In particular, it failed to come up with a figure of how much it would be willing to contribute per annum. It referred to a “distribution key” to be agreed upon at the international level without providing specific details.

This failure both to agree a method of funding and to define the EU’s own contribution is linked to internal disagreements between Member States on how to allocate the burden. The proposal to link EU Member States’ contributions to levels of pollution has been opposed by some Member States, including Poland and Lithuania, in favour of linking contributions to gross national income. Lithuania’s President has declared that a working group will be set up to seek a concrete formula on how the bill will be divided.

The EU is also said to prefer waiting for other rich nations (such as the United States and Japan) to come up with precise figures before committing to anything concrete.

The EU now begins a series of bilateral meetings with the United States, China, India and Russia.

Decisions on Polish and Estonian National Allocation Plans

In sum: what price market certainty, given recent decisions by the European Court of First Instance on Polish and Estonian National Allocation Plans? Amidst all the furore of the international negotiations and ongoing recession, the last thing that Europe (including its market players) needs is for the emissions trading system to come apart at the seams. We hope that the Commission will be able to negotiate a compromise.

Market confidence in the EU ETS is based in part on the extent to which the market forms the view that there is a capable regulator whose decisions are not subject to political interference or likely to be consistently overturned by judicial challenges. On 23 September, that confidence took a blow when the Court of First Instance issued a ruling in favour of Poland’s and Estonia’s applications for the annulment of the European Commission’s decisions concerning their National Allocation Plans (NAPs).

The initial impact, a 3.9 per cent price drop in EU allowances, was less severe than expected, although much hinges on how this will be resolved.

Key points for the market

  1. The Court of First Instance has ruled on a number of pleadings. The most critical is the decision that the fixing by the Commission of the maximum level of the total quantity of allowances to be allocated by countries such as Poland exceeded its powers under the EU ETS Directive. Unless this is successfully appealed by the Commission (see below), there is a risk that Poland and Estonia will seek approval of their NAPs, enabling the increased allocation of allowances. Other countries Bulgaria, Czech Republic, Hungary, Romania, Latvia and Lithuania could follow suit.
  2. A ruling of the Court of First Instance can only be appealed to the European Court of Justice on a point of law. It is not yet known whether the Commission will do so. Appeals must be lodged within two months of the notification of the Court of First Instance’s decision. The lodging of an appeal does not, in general, have a suspensory effect (i.e. the Court of First Instance’s decision should take effect immediately); that general rule, however, is subject to the discretion of the European Court of Justice, which can order that the application of a contested act be suspended. It is not clear whether this discretion would be exercised.
  3. The amended ETS Directive requires that the Community-wide quantity of allowances from Phase III be based on the Commission’s decisions on NAPs for Phase II. Questions will now be raised as to how the Commission will deliver certainty under the EU ETS for Phase II and into future Phases.
  4. A best-case scenario for the price of allowances is that no additional allowances from Poland and Estonia come on to the market due either to perseverance of the Commission or the position of Poland, Estonia and the other countries which have challenged the trend whereby their NAPs become increasingly untenable because of the recession and depletion in economic growth rates. In a worst-case scenario, there will be a legal battle which results in Poland, Estonia and other countries being entitled to the full amount of European Union Allowances (EUA) originally proposed for Phase II. Looking just at Poland and Estonia, this would mean the total Phase II cap would increase by 439 million tonnes.

Background

The Commission’s decisions on the NAPs proposed for Phase II of the EU ETS demonstrate the importance for the ETS of a strong regulator and the difficulties of imposing effective regulation under a decentralised system.

When the Commission’s guidance to Member States failed to deliver proposals that included significant reductions, the Commission reacted strongly by stating that it would assess the proposed plans in a manner guaranteeing sufficient scarcity. In practice, this meant cuts to Member States’ proposed caps to ensure an overall cut of some 6 per cent below verified emissions for 2005.

To do so required the Commission to take a robust view of the scope of its mandate under the Directive1 . This was particularly the case for new Member States. A number of these applied to the Court of First Instance to have the Commission’s decision involving their proposed cap annulled2. Importantly, no expedited procedures were granted3. The relevant Member States therefore adjusted their caps to align with the Commission’s decision.

The majority of cases were not withdrawn creating a residual risk that has now crystallised.

Poland and Estonia’s grounds for review

In their challenges, Poland and Estonia requested the annulment of the Commission’s decision on the reduction of their caps. Poland and Estonia relied essentially on three grounds for review:

  • a violation of essential procedural requirements (such as a failure to consult and an insufficient statement of reasons)
  • an infringement of the EU ETS Directive
  • an excess of the Commission’s power of review under the EU ETS Directive.

Court of First Instance

The Court of First Instance largely upheld the pleas of both governments and annulled the Commission’s decisions on the basis of infringement of the principle of sound administration; infringement of the duty to state reasons; and misuse of powers.

The Court of First Instance clarified the distribution of powers between the Member States and the Commission under the then applicable EU ETS Directive, in particular by fixing the limits of the Commission’s powers when reviewing Member States’ NAPs4.

The Court of First Instance recognised that the Member States have a “margin for manoeuvre” in drawing up their NAPs, and found that the Commission was only entitled to “reject [the NAPs] on the grounds of incompatibility with set criteria and provisions, by reasoned decision”. It found that, in rejecting Poland’s and Estonia’s NAPs, the Commission had not confined itself to reviewing the legality of those decisions but had substituted its own analysis for that of the Member States, by using its own data and fixing maximum national ceilings.

In the case of Poland, the Court of First Instance upheld its argument that the Commission had infringed the EU ETS Directive by replacing Poland’s analysis of the data in its NAP with its own assessment, method and analysis. The Court of First Instance found that the Commission had exceeded its powers, as under the Directive it “did not have the power to replace data contained in the NAP with its own data”. The Commission was held not to have the right to impose a ceiling on the total quantity of allowances to be allocated: “It is for each Member State, not the Commission, to decide on the total quantity of allowances it will allocate for the period in question, to initiate the process of allocation of those allowances and to rule on the allocation of the allowances.”

The Court of First Instance set aside arguments that a failure to fix a ceiling on the total quantity of allowances to be allocated would risk a collapse of the EU ETS market, deciding that “even if that argument were well founded, it cannot justify maintaining the contested decision in force in a community governed by the rule of law such as the Community, since that act was adopted in breach of the distribution of powers between Member States and the Commission, as defined in the Directive.”

While a similar approach was adopted in the Estonia case, the decision raised a question about the purpose of the Commission’s review of NAPs. If the Commission is not permitted to fix a ceiling on the total quantity of allowances that a Member State is entitled to allocate, what then is the purpose of the Commission’s review of a Member State’s NAP?

The Court of First Instance found that “the Commission may usefully review a NAP and reject it if necessary, without having to fix such a ceiling”. It is therefore questionable, regardless of the procedure adopted by the Commission in the future, in the case of any resubmitted NAP, whether any attempt to revise a Member State’s cap downwards will be within its powers.

Whilst we can envisage the Commission adopting different approaches to achieve the same result, in light of the strength of the Court of First Instance’s views set out in these decisions, any such attempt may be fraught with the risk of additional challenges.

Interpretation: a matter of substance or procedure?

The rulings are marred by debate around the extent to which the Court of First Instance ruled against the Commission as a matter of procedure or as a matter of substance. In other words, was this a rebuke by the Court of First Instance for the Commission’s failure to assess the NAP and to communicate with the Member States in a fair and transparent manner or were the judgements predicated on the issue of sovereignty and “exclusive competence”?

It appears that the Court of First Instance had sympathy with the argument that the Commission had acted neither in a manner compatible with the Directive nor in the spirit of the Treaties; it had exercised its supervisory regulatory role of the ETS with a far too dictatorial approach. The Polish Environment Minister’s statement to the press following the Polish ruling noted that they “…take a moderate stance and see the verdict as a lesson on how to read European law”.

The Court of First Instance denied the Commission any ”power of uniformisation” in the task of implementing the allowance trading system, or any kind of “central role in the drawing-up of NAPs”. It added that the Commission “did not have the power to replace data contained in the NAP with its own data”; by doing so, it had “exceeded its powers”.

Although the grounds of annulment are based on procedural aspects (a failure to state adequate reasons; an exceeding of the powers of review; etc.), the two judgments may have a substantial impact on NAP decisions from here on in: they delineate the boundaries of the Commission’s authority to set a limit on each Member State’s cap and its ability to substitute its own preferred data to that used by a Member State.

Appeals and compromises

These decisions do not mean that the NAPs originally proposed by Poland and Estonia have been approved. There remain alternative grounds for the Commission to challenge any future proposed NAPs.

There is also the possibility of appeals. Appeals can be lodged at any time within two months following notification, but, at the time of writing, no appeal has been lodged by the Commission although it had initially indicated that it might do so. This leads to the possibility that compromises may be reached between the Commission and the relevant Member States. In the absence of a political solution, the rulings may well result in the Commission having to commit scarce resources to this issue for some time to come.

Further, while this is a legacy from a decentralised system of allocation, the EU ETS architecture of the future takes a substantially different form. From Phase III onwards, NAPs will no longer be used.

With the remaining six cases still left to be heard, we hope that the Commission will be able to negotiate a compromise. Any such compromise must not defeat the broader objective of sustaining confidence in the market mechanism established by the EU ETS.

Footnotes

  1. Particularly those aspects of Article III of the EU ETS Directive relating to a cap taking into account the potential to reduce emissions and specifying that it must comply with the rules on competition and State aid.
  2. Current cases pending are Bulgaria, Czech Republic, Hungary, Romania, Latvia, and Lithuania. Slovakia withdrew its case after reaching a resolution with the Commission.
  3. Poland applied to suspend operation of the decision: the application was dismissed by the European Court of First Instance on 9 November 2007 (Case T-183/07) and Poland launched legal proceedings on 25 May 2008 challenging the Commission’s decision to cut its proposed EUA allocation by 26.7 per cent.
  4. The provisions of the EU ETS Directive including the powers of the Commission in phase III have since been amended.

Across Asia Pacific

Australia

In sum: an agreement on the Carbon Pollution Reduction Scheme Bill is looking more likely, either before or after COP 15. The CPRS Bill has been passed in the House of Representatives and is now being debated in the Senate. If the Bill were voted down a second time in the Senate, this could be the prelude to a double dissolution of Parliament and an early election.

Suggested changes to the proposed Carbon Pollution Reduction Scheme Bill were released by the Coalition on 18 October 2009 along with indications that key export industries, including coal mining, food processing, natural gas and aluminium would be better protected. The Coalition continues to advocate an intensity-based cap and trade approach to the electricity sector stating that this will more than halve the initial increase in electricity prices and reduces the economic cost of achieving emissions cuts. Their view is that, under the CPRS, retail electricity prices will rise by close to 20 per cent in the first two years, while under an intensity approach, retail electricity prices would rise by less than 5 per cent in the first two years.

Coalition’s proposed amendments to CPRS

The key amendments and commitments sought by the Coalition are as follows:

Trade exposed industries

  • amend the CPRS to provide a single level of assistance for emissions intensive trade exposed (EITE) industries at 94.5 per cent until 2015 and 90 per cent thereafter
  • lower the threshold for assistance from the proposed 1000 tonnes of CO2 per AU$1 million of revenue to 850 tonnes
  • continue to assist Australian EITE industries at 90 per cent until 80 per cent of their international competitors have also implemented carbon abatement measures
  • include primary food processing such as dairy and meat in the EITE scheme
  • allow industries that include a series of sequential or parallel production processes to have these assessed as a single activity in determining assistance.

Agriculture

  • permanently exclude agricultural emissions from the CPRS
  • obtain Government agreement to the introduction of an agricultural offset scheme in line with similar schemes to be introduced in the US and EU.

Coal mine emissions

  • exclude coal mine fugitive emissions from the CPRS
  • empower the Minister to use regulation to control fugitive emissions to achieve a 30 per cent reduction by 2025 within the limits of technology and international best practice.

Lower electricity prices

  • adopt an intensity-based cap and trade model for generators

Note: If the Government continues to refuse to consider the intensity model, the Coalition will negotiate for an alternative approach to cushion near-term electricity price increases for small businesses.

Compensation for electricity generators

  • grant coal-fired generators better compensation for loss of value, to ensure security of electricity supply and enable them to transfer to lower emission energy sources
  • increase assistance to coal-fired generators to 390 million permits over 15 years (about AU$10 billion) (cf CPRS limit of 130 million permits over five years, worth AU$3.6 billion)
  • allocate assistance to all generators in proportion to the losses they suffer.

Energy efficiency and voluntary action

  • introduce a national ‘white certificate’ energy efficiency scheme so that households and businesses earn credits for efficiency measures
  • create a voluntary offset market before the introduction of the CPRS
  • amend the CPRS to ensure voluntary abatement leads to a lower national level of emissions.

Second Reading Speech

The CPRS Bill was reintroduced in the House of Representatives on 22 October. In its second reading speech, the Government repeated that there was no need to wait until after Copenhagen to introduce the CPRS Bill. Going to Copenhagen with the CPRS Bill in the bag would improve Australia’s chances of playing a constructive role in negotiations and guarantee that the targets Australia signs up for will be achieved at the lowest possible cost. The CPRS had, anyway, been designed to accommodate the full range of possible outcomes from Copenhagen; important details like scheme caps will not be set until after Copenhagen.

Concessions

On 15 November, the Government announced that it would concede one item on the Opposition’s wish list, and agreed to exclude agriculture from the CPS. Discussions will now continue on the role that agriculture can play in the domestic offsets market.

Vote

The CPRS Bill and associated legislation has been passed by the House of Representatives and is now being debated. Debate in the Senate will follow. If the Bill were to be voted down a second time in the Senate (it was rejected by the Senate on 13 August 2009), this would form the basis for a double dissolution of the Australian Parliament, and allow the Government to call an early election.

Japan

In sum: a new government in Japan presents a headline-grabbing emissions reduction target. We await an implementation plan and the outcome of the Copenhagen negotiations, before deciding whether it is realistic.

Even before taking office as prime minister, Japan’s Yukio Hatoyama vowed to stand by his party’s pre-election pledge on climate change. Speaking at a Tokyo environmental forum on 7 September, Yukio Hatoyama committed Japan to a target of cutting its greenhouse gas emissions by 25 per cent from 1990 levels by 2020. This is a significant step beyond the 8 per cent reduction pledged by Yukio Hatoyama’s predecessor, Taro Aso.

Yukio Hatoyama reiterated Japan’s commitment to tackle global warming in a speech at the UN climate change summit on 22 September, saying: “I am resolved to exercise the political will required to deliver on this promise by mobilising all available policy tools.”

The announcement of Japan’s new target was well received. Yvo de Boer, the UN’s chief climate change official, stated: “this ambitious commitment by Japan will help to move the negotiations forward”; Greenpeace described the move as “the first sign of climate leadership we have seen out of any developed country in quite a while”. And a recent survey5, conducted across 38 countries, found that 70 per cent of Japanese people support a greenhouse gas reduction target of 25 per cent to 40 per cent for developed countries.

Japan will need to overcome a number of hurdles in order to achieve its target. In 2005, Japan’s emissions were 7.8 per cent higher than in 1990, despite its commitment under Kyoto to cut emissions by 6 per cent from that level by 2012. Japan is already seen as a relatively energy-efficient country, so mechanisms to achieve the 25 per cent target (which would amount to a reduction of one third on 1990 levels) will place a burden on the Japanese economy.

Japanese business leaders have voiced concerns about the cost, citing one estimate that a 25 per cent reduction would place an annual burden of 360,000 Yen (US$ 4,000) on each person in Japan. Yukio Hatoyama has responded by pointing out the new employment opportunities that will follow.

Caveat

Yukio Hatoyama noted that the target would stand only so long as a global deal was reached through the UN framework, with developed countries pledging reductions of a similar magnitude and developing countries committing to marked improvements as well. Japanese efforts alone would not be sufficient: “Our country can’t stop climate change even if we achieve our reduction targets. The world’s leading nations must strive for an international framework that is fair and effective.”

Implementation

No implementation plan for the reduction target has been issued.

A climate bill is scheduled for publication in January 2010. In his 22 September speech, Yukio Hatoyama indicated that the proposed bill would probably include “a domestic emissions trading mechanism and a feed-in tariff for renewable energy as well as the consideration of a global warming tax.”

The Democratic Party of Japan (Yukio Hatoyama’s party) has called for energy generated from renewable resources to comprise 10 per cent of Japan’s capacity (currently only 1.3 per cent) by 2020.

It is widely expected that forestry abatement methods and the purchase of foreign carbon credits will play a role in any implementation plan.

Despite Yukio Hatoyama’s commitment, the introduction of a mandatory ETS may be difficult to achieve. A trial ETS was launched by the previous government in October 2008. As this scheme was only voluntary, there remains significant and potentially powerful opposition to the idea of mandatory emissions caps within industry and business bodies as well as the Ministry of Economy, Trade and Industry (METI).

Key players

Yukio Hatoyama has appointed allies to government posts likely to be influential in the domestic and international debate. Japan’s international climate change negotiation team will probably be led by Katsuya Okada, foreign affairs minister and previously chair of the Democratic Party of Japan’s Global Warming Countermeasures team, and Tetsuro Fukuyama, a key figure in the design of the Japan’s climate change policy and now a senior vice minister.

On 7 October, the cabinet committee on climate change established two working groups, one of which will cost the initiatives which will allow Japan to reduce its emissions. The working group will cost a range of scenarios, including where the headline target is to be achieved entirely through a reduction in domestic emissions; and where domestic reductions would form only part of a 25 per cent cut, with the remaining reductions met through the purchase of carbon credits and other measures. The working group will report back before Copenhagen.

New Zealand

In sum: proposed changes to timings for the New Zealand Emissions Trading Scheme will affect stationary energy, industrial processes, agriculture and liquid fossil fuel sectors and moderate its initial impact on business.

The New Zealand Emissions Trading Scheme was established in 2008 by the Climate Change Response (Emissions Trading) Act. Plans are under way to change it, primarily by moderating its impact on business in the first few years, at least. On 24 September 2009 the Government introduced the Climate Change Response (Moderated Emissions Trading) Amendment Bill (the Amendment Bill) to Parliament.

Changes to sector entry dates

The Amendment Bill delays the entry of the stationary energy and industrial processes sectors into the NZ Emissions Trading Scheme by six months, to 1 July 2010. The delay was recommended by the review committee in order to complete the allocation plan for trade-exposed businesses. Officials will still be hard pressed to have a final plan in place before the proposed entry date.

The delay is good news for firms in those sectors who would otherwise have faced uncertainty over the impact of the Scheme on their cost of production. It is not welcomed by foresters and other prospective vendors of emissions units (including international trading banks and traders selling units into New Zealand), who would have expected stationary energy and industrial sector participants to be strong early purchasers of their emissions units.

The entry date for agriculture has also been delayed, from 2013 to 1 January 2015, with the point of obligation placed at the processor rather than farm level thus decreasing the number of prospective purchasers of emissions units from that sector. For those looking to trade units into New Zealand, this can be seen as good news as it is easier to target bigger bundles of emissions units toward a smaller and more readily identifiable number of buyers.

The liquid fossil fuel sector’s entry date has been brought forward six months; this sector will now enter the Scheme at the same time as the energy and the industrial sectors.

Transition

A major change is the proposed introduction of a transition phase to operate until 31 December 2012; this moderates the impact of the NZ Emissions Trading Scheme on businesses with compliance obligations in the energy, liquid fossil fuel and industrial sectors.

The transition phase, if implemented, will have an impact on demand from these sectors for emissions units in the short term, with the imposition of a 50 per cent obligation (to surrender only one unit for every two tonnes of CO2  emitted) and a NZ$25 fixed-price option (whereby businesses can opt to pay the Government NZ$25 for emissions units that would be surrendered immediately as opposed to buying emissions units from the market).

To make sure that the NZ$25 fixed-price option does not result in the Government in effect subsidising businesses or governments in other countries to meet their compliance obligations, the export of New Zealand Units (NZUs) – converted to AAUs for the purposes of export – will not be permitted during the transition phase (unless they are NZUs awarded to forestry participants under the Scheme or the Permanent Forest Sink Initiative.

This restriction, along with the 50 per cent obligation and NZ$25 fixed-price option, is unlikely to be welcomed by prospective purchasers of NZUs (including international trading banks and traders purchasing units from New Zealand) as it reduces the number of emissions units available for sale and delivery in the short term.

Although the transition is due to end on 31 December 2012, response to the Amendment Bill and other reports suggest that, should the Scheme and the Australian Carbon Pollution Reduction Scheme (CPRS) align, then a price cap and associated prohibition on trading outside of New Zealand and Australia could be implemented during an initial period of such alignment. With the CPRS far from settled, this remains a possibility only, but one which international traders are likely to oppose and therefore something to watch with interest.

Allocation to emissions-intensive trade-exposed businesses

Under the current model of the NZ Emissions Trading Scheme, allocation to trade-exposed business is made on an absolute emissions basis (similar to but more restrictive than the current EU ETS model). The Amendment Bill proposes the introduction of an emissions-intensity basis of allocation, which would closely align the free allocation models in the Scheme and CPRS. An eligible business would then be allocated emissions units to cover up to 90 per cent of its emissions in the first couple of years, with the percentage of Government-allocated emissions units reducing slowly over time. While the newly proposed emissions-intensity model allows for allocations to increase or decrease in line with production levels, there is still an incentive to improve energy efficiency, as allocations will be based on an “industry average” for energy intensity.

Impact on foresters

The Amendment Bill seeks to change little in the forestry sector, which entered into the NZ Emissions Trading Scheme with effect from 1 January 2008. Whilst the transition phase 50 per cent obligation applies to the energy, liquid fossil fuel and industrial sectors, the forestry sector still has a 100 per cent obligation to surrender one unit per emission for any deforestation of pre-1990 forests, or net carbon stock decrease for those foresters who opt in to the Scheme in relation to post-1989 forests.

The transition phase price cap of NZ$25 is not welcomed by the forestry sector, although the prohibition on international trading of non-forestry NZUs does support domestic trading to an extent (despite the fact that it effectively caps the price at NZ$25). We expect foresters to focus on international trading, particularly to international trading banks, businesses in Japan and the United States, as well as governments in Europe.

Will the Government need to buy units?

While the Amendment Bill seeks to moderate the impact of the NZ Emissions Trading Scheme on businesses with compliance obligations, it results in the Government and, ultimately, the taxpayer carrying the slack. With an emissions-intensity-based allocation model with no fixed pool of units and a transition phase that reduces compliance obligations for energy intensive sectors by 50 per cent, the Government bears a greater risk of having to front up with emissions units should New Zealand as a nation not meet its Kyoto target for the first commitment period, CP1.

Without detailed reporting from emissions-intensive trade-exposed entities together with evidence of renewed forestry planting, it will be difficult for officials to forecast the Government’s needs. There is a possibility that the Government will seek to purchase units to meet any shortfall arising in CP1 as a result of a moderation of the Scheme.

Linking with Australia

If the Amendment Bill is adopted, many of the changes are designed to enable the NZ Emissions Trading Scheme and the CPRS to link in the short to medium term. Whilst there are benefits in linking with Australia, not to mention wider benefits in reducing the possibility of carbon leakage to Australia, there is a danger of mimicking aspects of the proposed CPRS to enable alignment at a time when the legislation in Australia is by no means certain. New Zealand may end up with a Scheme that differs significantly from the final shape of the CPRS.

Enactment due

It is the Government’s intention to have the Amendment Bill passed in time for Copenhagen, and it appears to have sufficient support to do so (as well as a further seven sitting days up its sleeve in December). It would strengthen New Zealand’s negotiating hand to show up at the table in Copenhagen with a legislated plan to deliver on its targets.

Singapore

In sum: the Singapore Mercantile Exchange is about to start trading. This is all part of Singapore’s plan to become a regional hub for carbon trading.

Singapore’s Senior Minister of State for Trade and Industry, S. Iswaran, told delegates to the Carbon Forum Asia conference in October that the Singapore Mercantile Exchange will start trading in carbon credits by year-end. The Mercantile Exchange is part of Singapore’s plan to become a regional hub for carbon trades; an existing package of climate change measures, including tax-breaks and the setting-up of a clean-energy industrial park, is another part of the same plan.

The Singapore Mercantile Exchange will provide an electronic trading platform for futures and options trading on a range of commodities, including energy, metals, agricultural commodities, currencies, commodity indices and carbon credits. It sees itself as a pan-Asian Exchange for a broad base of products and whose purpose is to increase trading transparency and risk mitigation for commodities derivatives products, filling the gap between equity and single-product commodity exchange in the region. It will differentiate itself from the Malaysia Bourse, the Agricultural Futures Exchange of Thailand (which specialise in palm oil and rice respectively) and the energy-based Dubai Mercantile Exchange.

The Mercantile Exchange will be headed by Leo Melamed, CME Group Chairman Emeritus; Thomas McMahon will act as its chief executive. It has appointed Standard Chartered Bank as its Clearing and Settlement Bank and has been in discussion with other banks. It aims to have at least 29 clearing and trading members. All settlement will be in US dollars, but additional currencies will be added based on member demand.

The Singapore Government is reported to be picking up a stake in the venture through the Economic Development Board. It already holds stakes in the Joint Asian Derivatives Exchange and the Singapore Commodity Exchange (Sicom). It plans to provide financing and development services for CO2-reduction projects and has set aside close to S$700 million (US$500 million) to build R&D and manpower capabilities in various clean tech areas, including clean energy and environmental and water technologies. This initiative is designed to persuade companies to use Singapore as a test-bed for emerging technologies (such as smart grids and green building techniques).

According to government estimates, 70 per cent of UN-backed clean development mechanism carbon offset projects are located within the Asia Pacific region; it is poised to be the largest supplier of CERs to the global carbon market.

Financial Technologies Group

Financial Technologies Group based in India has set up the Singapore Mercantile Exchange. It also runs the Multi-Commodity Exchange in India and the Dubai Gold and Commodities Exchange and is just setting up a multi-commodity exchange in Africa and in Mauritius. Its span of operation covers Africa, the Middle East, India, China and other Asian countries.

Thailand

In sum: the Thailand Carbon Fund is due to be up and running in 2010 and telecommunications are campaigning for environmental change

Thailand Carbon Fund

The Securities and Exchange Commission of Thailand is reviewing the regulations to facilitate the establishment of a Thailand Carbon Fund. This should be completed by the end of 2009, with the fund set up and in operation within the first quarter of 2010.

The Commission will almost certainly allow the fund to be established as “a high net worth trust” and will seek investment from institutional or high-profile investors interested in carbon business (so no retail investors). The Thailand Carbon Fund, once established, will enjoy a number of investment options not available to traditional mutual funds. These could include investment by means of equity investment in CDM projects, straightforward purchase of CERs generated from CDM projects and investment in CDM projects under a build-operate-transfer (BOT) structure.

Target investors are overseas investors with the binding commitment to reduce their emissions and Thai corporations interested in the purchase of CERs to reinforce their corporate social responsibility. To date, several overseas investors in Japan and Europe have expressed an interest in the Thailand Carbon Fund.

Telecoms go green

The largest mobile phone operator in Thailand, Advanced Info Services Public PLC, has recently launched the “green network”, an environmental campaign to reduce the emission of carbon dioxide through the use of energy from renewable sources for its cellular base stations and reduction of power usage. AIS, was the first telecoms operator in Thailand to install a wind turbine for its cellular base stations (generating 5 kilowatts per day at a wind speed of 21.6 km/h). The company has also introduced 16 solar-powered cellular base stations across its network.

Footnotes

  1. Conducted by World Wide Views on Global Warming, a global alliance of individuals, government agencies, nongovernmental organisations and universities supported by the Danish Board of Technology, which operates under the Danish Parliament.

Across Europe

Czech Republic

In sum: will we see the free allocation of emission allowances post 2012 to Czech companies? Maybe, maybe not.

In December 2008, the European Parliament agreed certain principles regarding the allocation of emissions allowances post 2012; these have been implemented in Czech legislation (through an amendment to the Czech Act on Excise Duties) and have been effective from 1 October 2009.

How does the Act on Excise Duties a tax legislation relate to emissions? It contains a legislative “add-on” regarding emissions allowances, under which several major players in the Czech energy sector can obtain emission allowances of up to a value of CZK  68 million, free of charge. The add-on is not related to the scope of the tax legislation in which it is included and presents a number of possible problems.

Timeline

The add-on was inserted into the Act on 17 June 2009, during the third reading of the amendment to the Act in the Chamber of Deputies, by politicians close to the Czech energy sector.

Purpose

Its purpose was to implement the climate and energy package passed by the European Parliament last December. The European Union undertook to reduce emissions by 20 per cent and increase the share of renewable energy by one fifth by 2020. The amendment puts into practice a provision that allows countries, after 2012, to give power companies with high emissions (producing more than 30 per cent of energy from solid fuels mainly coal) emissions allowances free of charge. In return, the companies must use the benefits gained from the allowances to reduce emissions and invest in renewable electricity sources.

Deadlines

In western Europe these producers will have to buy all allowances post 2012. The Czech Republic has negotiated an extension of this period until 2020.

Under the Czech add-on, free emissions allowances will only be available to companies that submit an investment plan for technological modernization by the end of March 2010. A significant part of the investment must be made before the end of 2011. These principles are not popular with all market players, who argue that companies will not have time to prepare an investment plan.

Points of contention

Subsequent debates in the Chamber of Deputies and the Senate have centred on two points: should the profit from allowances be attributed to the State or to energy companies; and is using the add-on as a legislative technique consistent with the Czech Constitution?

A previous decision by the Constitutional Court had declared other legislative add-ons as unconstitutional because there had been a lack of consultation and governmental input, no explanatory report had been produced, and the impact on the state budget had not been quantified.

A group of Senators are considering a constitutional complaint calling for annulment of the emissions allowances add-on; if the complaint is filed, there is a good chance that it will succeed.

Once the constitutional complaint is filed, companies will not be in a position to benefit from the free allocation of emissions allowances. The quorum for filing a complaint is 17 senators; in July, 23 senators did not support the proposal and 11 others were not present.

Further amendments

The Senate has meanwhile in addition proposed further amendments of the Act on conditions of the emission trading scheme, which aims to eliminate technical deficiencies contained in the original add-on.

The Senate draft proposes to extend the term of submitting an investment plan for technological modernization to the end of June 2010. The final version of the emission limits directive and final amount of emission allowances for whole European Community will be known on this date. These additional amendments also shorten the period for obtaining the emission allowances from until the end of 2020 until the end of 2019 only. The reason for such change is that emission allowances will not be allocated free of charge in 2020.

Another relevant change is that the investment must be made before the end of 2019 and simultaneously at least one of the projects from the investment plan must be commenced on 31 December 2013 at the latest.

The Senate draft was submitted to Chamber of Deputies to discussion on 10 November 2009.

To sum up, uncertainty prevails over the post 2012 emissions allocation regime in the Czech Republic.

Germany

In sum: there is an absence of any concrete strategy.

On 26 October 2009, the Christian Democrats (CDU/CSU) approved the policy platform of the new coalition government with the Free Democrats (FDP) for the next four years, designating Norbert Röttgen (CDU) as Germany’s new environment minister. The platform is described as a comprehensive package to boost growth as Germany emerges from its worst recession in years; it also sets out Germany’s position on climate change in the run-up to COP 15 but does not make clear any concrete strategy or projects.

Aims and targets

Germany’s aim for Copenhagen is to agree a new international treaty on climate change, including a request to emerging countries to contribute and commit, with the support of the German government and other countries.

Germany’s own target is to reduce emissions by 40 per cent from 1990 levels by 2020.

Constituent elements of a new treaty

The Government will push for fair burden sharing, entailing comparable competition conditions and barriers to carbon leakage (by which industry relocates to countries with no strict climate policy). It takes the view that emission reduction targets can only be achieved by using market-based instruments (CDM, emissions trading, etc.) and that these have to be adapted and improved. The Government will not accept the imposition of new taxes on carbon emissions at an EU  level.

Nuclear extension

The Government agreed to prolong the life of nuclear reactors (due to be phased out by 2020) until they can be “reliably replaced” by renewable energy sources. This overturns a policy adhered to by Merkel's previous coalition.

Poland

In sum: we track the process once a Joint Implementation project is proposed in Poland.

On 17 July 2009, the Polish parliament passed the Act on the Emission Management System; this became binding law as of 18 September. The Act covers the establishment of registries and emissions trading institutions, green investment schemes and the implementation of Joint Implementation projects.

The execution of a JI  project in Poland requires a letter of endorsement and a letter of approval. Both documents are only issued after a review by the National Centre for Balancing and Management of Emissions; they take the form of an administrative decision by the Minister of Environment.

Letter of endorsement

A letter of endorsement is granted if the following conditions are met by the JI project:

  • it does not involve completed and finished investment
  • it falls into a category of eligible project types to be carried out as JI projects on the territory of the Republic of Poland
  • it has no effect on reduction of greenhouse gas emissions from installations covered by the EU Emission Trading Scheme
  • it is not a result of implementation of a commitment under Community or national legal provisions.

The request must include a declaration by the applicant that the project will have no effect on the reduction of emissions from installations covered by the EU ETS  as well as a report (from an accredited independent entity or other authorised entity in the case of Track 1 projects) confirming this.

Letter of approval

The next step is the letter of approval. The applicant has one year to request this (from receipt of letter of endorsement); thereafter, the letter of endorsement will expire.

A letter of approval is granted if the JI project has a valid letter of endorsement and the following conditions are met:

  • the reduction or avoidance of greenhouse gas or carbon dioxide emission removals achieved are additional to those that would have occurred in the absence of the project
  • it causes no deterioration of environmental quality
  • it provides for reduction of adverse environmental effects
  • it assures the use of solutions in accordance with criteria of the best available techniques
  • it meets the detailed conditions set out in secondary legislation.

The request must include:

  • project documentation (project description, financing sources and methods, project baseline level and determination method, estimate of amounts of emission reduction or avoidance or carbon dioxide emission removals, methodology, project monitoring plan)
  • a project documentation assessment report
  • an environmental impact report -- where the project sits in the category of projects having permanent significant environmental impact; or a project data sheet -- where the project has potentially significant environmental impact
  • the letter of approval for the project, issued by a competent authority in the eligible State purchasing the ERUs .

Where Track 2 is chosen, the project documentation assessment report must be assessed by the JI Supervisory Committee when the letter of approval is issued. The project entity (the entity executing the JI project) must submit the report to the Committee through an accredited independent entity. The results of the Committee’s assessment must be submitted by the project entity (within 14 days from receipt) to the Minister. If in the Committee’s view the report is negative, the Minister will declare the letter of approval expired.

Monitoring

The project entity must monitor the project as set out in the monitoring plan (part of the project documentation). Using subsequent data, it must produce a monitoring report declaring the amount of greenhouse gas emissions reduced or avoided, or carbon dioxide emissions removed, and the number of ERUs acquired during the reporting period resulting from the completed JI project.

The reporting period must not be longer than one year.

Under Track 2, the number of ERUs is subject to verification by an accredited independent entity; under Track 1, by an accredited independent entity or other authorised entity.

Verification

The verification report sets out the number of ERUs acquired from implementation of the JI project. It must be submitted by the operator of the JI project to the National Centre for Balancing and Management of Emissions within six months after the end of the reporting period.

Under Track 2, the verification report is subject to assessment by the Supervisory Committee. If it is considered negative, the project entity may not apply for the transfer of ERUs.

Transfer

After monitoring and verification the ERUs may be transferred.

Transfer takes place on request of the project entity. The request must be submitted in writing and in electronic form to the Minister within six months from the end of the reporting period covering the verification report.

The following documents are needed:

  • the purchase agreement for ERUs or other document setting out the method for disposal of the units or their transfer
  • the authorisation of the purchaser to participate in JI projects (issued by a competent authority, where the purchaser is not an eligible State)
  • the verification report.

Under Track 2 (and following approval of the verification report by the JI Supervisory Committee) the Minister will, within 21 days from receipt of request, grant consent for the issuance of ERUs, by virtue of an administrative decision.

The total number of ERUs issued to the purchaser must not be greater than the number of ERUs as set out in the verification report, and in the letter of approval for the project.

The transfer will be carried out by the National Centre within 21 days from receipt of the Minister’s decision.

Russia

In sum: we outline proposed changes to JI legislation in Russia. The first JI project could be approved by the end of 2009.

The Russian Government is currently reviewing amendments to Regulation 884-r (adopted 27 June 2009); this paved the way for AAU  trades and affected JI projects in Russia.

It has approved new JI guidelines in the form of Regulation “On Implementation of Article 6 of the Kyoto protocol to the UN Framework Convention on Climate Change” (Resolution No. 843, 28 October 2009).

Any further outline of developments in Russia (see below) is to be read with caution as the facts cannot be confirmed.

Key players

The Ministry of Economic Development, together with Russia’s largest bank, Sberbank, is authorised (Regulation 884-r) to propose changes to the JI guidelines (Resolution 332, 28 May 2007) which govern the approval and implementation of all JI projects in Russia. The new JI guidelines put Sberbank (as the operator of carbon units) at the centre of all activities leading to the receipt, transfer or acquisition of ERUs and should simplify the approval procedure for JI projects. Approval of JI projects will be at the behest of the Ministry (as opposed to the Government as was the case in the old guidelines).

Review of submitted projects will no longer require the involvement of federal authorities, which under the former guidelines had to produce a response within 30 days of receipt of documentation from the Ministry. Instead, Sberbank will select applications on the basis of rules for selection through a tender process established by the Ministry, to be taken into account by the Ministry at the final approval stage.

Applicants and investors must be Russian legal entities; approval of a sponsor country is therefore not required for the JI projects in Russia.

If the JI project is approved, the Ministry will decide regarding the transfer of AAUs (within the limit allocated to the tender) to the Sberbank account in the Russian register of carbon units.

The project investor will report on progress in implementation to the Ministry and to Sberbank each year (and not later than 30 September of the year following the reporting one).

ERUs

In the case of a positive expert opinion on the implementation report, the Ministry, in compliance with international requirements, will, within five working days from receipt of application (from the project investor), decide on the adoption of ERUs (deciding on quantity, bearing in mind limits laid down in the project design documentation) and will credit the specified ERUs to the Sberbank account in the Russian registry.

Sberbank will deliver the agreed quantity of ERUs to the carbon accounts of third parties, based on:

  • the written request of the investor to transfer ERUs
  • an annual verification report approved by AIE
  • an agreement between the investor and a third party approved by Sberbank.

Sberbank will transfer the ERUs on the basis of an agreement for services related to the transfer of ERUs. Service fees will be due to Sberbank as part of this agreement. The procedure to determine the maximum fees will be established separately by the Ministry.

Cutting limits in greenhouse gas emissions

In addition, a proposal to cut the limit for the reduction of greenhouse gas emissions for the period 2008 to 2012 from 300 million tonnes of CO2e (carbon dioxide equivalent) to 100 million is currently under discussion.

Distribution of allowances among industry sectors will also be revised.

Sberbank will be at the centre of this review process.

Green Investment Scheme

The Government has decided to develop a Green Investment Scheme alongside its JI initiative. Sberbank, acting as the agent of the Russian Federation, will be authorised to enter into agreements assigning rights to AAUs with other states.

No preference will be shown about which sectors to implement GIS projects in. The emphasis will be on the energy efficiency of the proposed projects.

Implications

The approval procedure of JI projects in Russia may now be postponed for some time. However, these latest changes of JI legislation in Russia are likely to satisfy the Russian authorities and the first JI project will probably be approved by the end of 2009.

Report from the United States

In sum: we take another look at provisions around deforestation following the issue in the US of the draft Kerry/Boxer Senate Bill (in response to Waxman/Markey). If it (or something like it) goes through, the United States will become a significant force in tackling deforestation.

Background

A draft bill was released on 31 March 2009 by Henry Waxman and Edward Markey in the US House of Representatives. After various adjustments on its way through the Sub-Committee on Energy and the Environment and the Committee on Energy and Commerce, the Waxman/Markey House Bill was approved by the House on 26 June 2009. Senators John Kerry and Barbara Boxer then issued (30 September 2009) a Senate bill derived from that approved House Bill.

Consistency

Core elements of the Kerry/Boxer Senate Bill relevant to REDD (Reduced Emissions from Deforestation and Degradation) remain in line with the approved Waxman/Markey House Bill.

These elements (described in more detail below) include establishing the principles for a long-term commitment to reducing deforestation via bilateral or multilateral agreements with selected developing countries, under which a US body will issue international offset credits for emission reductions measured against a national deforestation baseline. These credits will be capable of use by entities with compliance obligations under the cap and trade scheme.

A second consistent element is a near-term programme focused on developing the standards, tools and capacity to deliver on these aspirations. That programme will attempt to achieve emission reductions of 720 million tonnes of CO2e in 2020 and a cumulative total of 6 billion tonnes of CO2e by the end of 2025. There is a particular focus on developing national deforestation baselines. Importantly, there is also recognition that pilot projects during this period may be sub-national. To assist this, emission allowances from the domestic US scheme will be reserved for use as incentives for developing countries that enter into an arrangement with the US and implement programmes and pilot projects.

A third element is the creation of a financing mechanism that will generate funds from the start of a domestic US cap and trade scheme that may be used to acquire, amongst other types of offset credits, the international offset credits mentioned above.

The mechanism involves:

  • placing as yet unspecified volumes of the US emission allowances to be used in the US domestic cap and trade scheme into a reserve that will be auctioned regularly
  • using the monies raised from these auctions to purchase offset credits
  • retiring the purchased credits and replacing them with an equal volume of US emission allowances (which will then be available for further auctions).

International offset credits

The draft bill provides key principles regarding a scheme whereby international offset credits can be issued by the administrator of the US cap and trade scheme. Those international offset credits can be used by entities with compliance obligations under the scheme.

Among those principles are:

  • there is a bilateral or multilateral agreement between the United States and the host country
  • the host country is a developing country
  • the agreement ensures the requirements of the relevant part of the Senate Bill are met and provides for the appropriate distribution of international offset credits
  • the type of project has been listed by the US administrator of the scheme as an eligible project type.

Critically, there are additional requirements relating to how the relevant developing country is categorised by the administrator. This categorisation will influence how international offset credits will be issued.

The three categories of developing country are:

  • one which is capable of establishing a national baseline against which emission reductions can be measured
  • one that cannot yet establish a national baseline but contains states or provinces which are capable of establishing a baseline in respect of such a state or province
  • one which is responsible for less than 1 per cent of global GHG emissions and less than 3 per cent of global forest-sector and land use change GHG emissions and is thus eligible for issuance of international offset credits against individual project baselines.

The House Bill and the Senate Bill represent an attempt to create incentives to move to national baselines for the purpose of issuing international offset credits.

In terms of creating suitable conditions for private sector investment in REDD projects in developing countries, there are a number of issues around the current approach of the Senate Bill. The only clear mechanism for direct issuance of international offset credits against project level baselines is not targeted at countries such as Indonesia with extremely high deforestation rates but at countries responsible for less than 1 per cent of global GHG emissions and less than 3 per cent of global forest-sector and land use change GHG emissions. There is no specific provision providing clear comfort that emission reductions achieved through early action (for instance under voluntary projects meeting appropriate methodological standards) could receive international offset credits once the US scheme becomes operational. And the amount of time international offset credits are proposed to be made available under the Senate Bill (generally five years from the start of the scheme in 2012 with the possible extension for Least Developed Countries) is limited.

For early stage investors considering the Senate bill, these issues will need to be tracked carefully as they will affect the location and nature of such investments. They might also bear in mind that it may not be possible to implement all the requirements of the Senate bill with any one developing country. The Senate bill does provide an administrator with the capacity to not apply all the requirements if it considers implementation to not be feasible.

Supplemental emission reductions

The Senate bill establishes a near-term goal of using reserved US emission allowances to achieve the reduction of emission from deforestation in developing countries. The supplemental emission reductions sought to be achieved through this program are 720 million tonnes of CO2e in 2020 and a cumulative total of 6 billion tonnes of CO2e by the end of 2025.

Under the approved House Bill the amount of allowances to be reserved for this purposes was specified (generally, in the period 2012 to 2025, 5 per cent, decreasing to 3 per cent for 2026 to 2030, and 2 per cent for 2031 to 2050).

The Senate Bill no longer provides for specific percentages, instead leaving it to the US administrator to determine the amount required to achieve the objectives of the supplemental emissions programme.

Programme activities include:

  • sub-national deforestation reduction activities, including pilot projects
  • development of measurement, monitoring and verification capacities
  • development of governance and enforcement capacities
  • development of standards to ensure supplemental emission reductions are additional, measurable, verifiable, permanent and account for leakage and uncertainty (including the requirements for national deforestation baselines).

Although there is limited detail, the Senate Bill intends that the reserved US emission allowances that can be used as an incentive for this program can only be provided after supplemental emission reductions are achieved and verified. The Senate Bill does not clarify how recipients will monetise US emission allowances received through achieving supplemental emission reductions.

Comment

If a US cap and trade scheme becomes law this year or next which contains provisions similar to those discussed here, then it is likely that the United States will become a significant force in tackling deforestation.

Progress at the level of international climate change negotiations on creating a mechanism to tackle deforestation and forest degradation is moving forward. However, that progress remains at the level of principles, with much work to be done to make such a mechanism operational. This creates the possibility that the approach taken by the US administrator in implementing the agreements, regulations and methodological tools necessary to implement the US scheme discussed here could be very influential.

Whilst the provision of the Senate bill discussed here remain a positive intervention, the Senate bill does contain issues that will need to be assessed carefully by investors.

Contacts

For further information, please contact:

Africa

Richard Metcalf

China

Tom Luckock

Czech Republic

Milana Chamberlain

Germany

Jochen Terpitz

Greece

Elena Tsohou

Italy

Stefano Maria Zappala  

Japan

Chris Viner

London

Anthony Hobley

Andrew Hedges

Middle East

Martin Preston

Paris

Anne Lapierre

Poland

Rafal Hajduk

Russia

Chris Owen

Singapore

Nick Merritt

Thailand

Somboon Kitiyansub

The Netherlands

Weero Koster

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