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	Linking Kyoto with the EU Emissions Trading Scheme
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Linking Kyoto with the EU Emissions Trading Scheme

Vienna, Austria 15 - 16 September, 2005

A two-day seminar on Linking the Kyoto Project-Based Mechanisms with the European Union Emissions Trading Scheme (EU ETS) took place from 15-16 September 2005, in Vienna, Austria. Organized by UNIDO in cooperation with UK Trade and Investment and the Government of Hungary, the event featured 40 speakers (view or download agenda) and more than 200 participants, with panel presentations followed by question-and-answer sessions (view or download statements and presentations). Participants included representatives of governments, business, industry, international and intergovernmental organizations, academia, research institutes and non-governmental organizations.

The seminar was convened to provide a forum for business and industry to advance their understanding of emissions trading within the EU and its linkages with the project-based mechanisms of the UN Framework Convention on Climate Change’s (UNFCCC) Kyoto Protocol, namely Joint Implementation (JI) and the Clean Development Mechanism (CDM).

The international political response to climate change was formalized with the adoption of the UNFCCC in 1992, which created a framework for action aimed at stabilizing atmospheric concentrations of greenhouse gases (GHG). The gases controlled by the UNFCCC include methane, nitrous oxide, and, in particular, carbon dioxide. The UNFCCC entered into force on 21 March 1994 and currently has 189 Parties.

The Kyoto Protocol was finalized in December 1997 in Kyoto, Japan, when Parties to the UNFCCC agreed that developed countries and countries with economies in transition to a market economy were to reduce their overall emissions of six greenhouse gases by at least 5% below 1990 levels between 2008 and 2012, with specific targets varying from country to country. The Protocol entered into force on 16 February 2005 and has 155 Parties, including 35 Parties that account for 61.6% of the total carbon dioxide emissions subject to reduction targets.

The Kyoto Protocol establishes three flexible mechanisms to assist those countries with emission reduction targets (known as Annex I Parties") in meeting their obligations cost-effectively: an emissions trading system which will become operational in 2008 (Article 17) and two project-based mechanisms, Joint Implementation (JI) (Article 6) and the Clean Development Mechanism (CDM) (Article 12).

JI allows Annex I Parties to implement emission reduction projects (e.g. an energy efficiency scheme) or projects that increase GHG removal by sinks (e.g. a reforestation project) in the territory of another Annex I Party, and count the resulting emission reduction units (ERUs) against its own target. In practice, JI projects are most likely to take place in countries with economies in transition, where there tends to be more scope for cutting emissions at low cost. Projects starting from the year 2000 may be listed as JI projects, although ERUs may only be issued in relation to commitment periods from 2008 onwards. There are two possible procedures for carrying out a JI project. The first procedure (often called Track One) applies when the Annex I Party hosting the project meets the eligibility requirements to participate in the mechanism. The second procedure (Track Two) applies when the host Party does not meet all eligibility requirements and requires a specific verification process to determine the quantity of ERUs the project generates.

The CDM allows Annex I Parties to implement projects that reduce emissions in any developing country and use the resulting certified emission reductions (CERs) to help meet their own targets. The issuance of the first CERs delivered by four CDM projects is expected in the coming weeks.

In an effort to ensure collective compliance with the spirit of Kyoto by all EU member States, the EU created its own cap-and-trade emission reduction system, the EU Emissions Trading System (EU-ETS) in 2003 (Directive 2003/87/EC). The EU’s “Linking Directive” (Directive 2004/101/EC) creates the conditions to use credits generated by emission reduction projects certified by the Kyoto Protocol within the EU ETS market. It allows member States who obtain such credits to convert them into allowances and use or trade them within the EU ETS.

The EU ETS commenced operations in January 2005 becoming the largest GHG emission trading scheme currently operating. The scheme is based on the allocation of GHG emission allowances (EUAs), which may be traded, to specific industrial sectors through national allocation plans (NAPs) with oversight by the European Commission (EC). NAPs set out the overall emissions cap for the country and the allowances that each sector and individual installation covered under the Directive receives. These NAPs need to comply with criteria contained in Annex II of the Directive.

The first phase of the EU ETS covers the period 2005-2007, while the second phase coincides with the Kyoto Protocol’s first commitment period, from 2008 to 2012. The first phase of the EU ETS applies to some 7,300 companies and 12,000 installations in six major industrial sectors across the enlarged EU. These industrial sectors include: utility combustion plants; oil refineries; coke ovens iron and steel plants; energy-intensive industry, such as cement, glass, lime, brick and ceramics production facilities; and the pulp and paper industries. The trading system allows emitters who reduce emissions beyond their obligations to save unused allocations for future use or sell them to other companies that need a cost effective way of achieving their emission reduction targets.

The seminar sessions explored the current state of the EU carbon market and the possibility for linkages with JI and CDM. Key issues addressed include the status and prospects of EU ETS from regulatory and market perspectives including options and strategies to meet compliance obligations; the status of the EU market infrastructure, including monitoring and reporting, registries, transaction logs, and trading exchanges; and perspectives for the post-2008 period. The seminar provided a valuable networking and knowledge-sharing opportunity for business, industry, government experts and other stakeholders involved in the implementation of the EU ETS, in emission trading and in the project-based mechanisms of the Kyoto Protocol.

Each day of the seminar had a theme. The theme of day one was Regulation and infrastructure: how linked and ready to trade is the EU ETS? This theme was covered by three panels: Panel 1 - What is the status of regulatory implementation?; Panel 2 - Regulatory issues surrounding the use of the Linking Directive to meet EU ETS compliance requirements; and Panel 3 - Corporate decision-making and compliance management.The theme of day two was Market infrastructure on the corporate, trade / exchange and regulatory level. This theme was covered by the following four panels: Panel 4- Monitoring, reporting, verification and accounting: issues at installation and company level; Panel 5 - Registries and Transaction Logs – information exchange and reporting;Panel 6 - Trading infrastructure, market depth, current participants, trends and implications; and Panel 7 -  Beyond 2008: linking to non-EU schemes and new instruments.

The major issues noted at the concluding session by the coordinators of the various panels are as follows: Bill Kyte of the UK Emissions Trading Group, highlighted that the panel on the status of regulatory implementation had shown the emission trading process to be up and running. He recognized there are still obstacles to overcome, but noted that they will be streamlined and harmonized over time, leading to positive outcomes in GHG emission reduction and sustainable development. Peter Pembleton said that the panel on registries and transaction logs highlighted the urgency of putting in place and linking registries, noting that in 18 months the international transaction log will have to be implemented, generating a need for additional financial and human resources to adequately operate it. Edwin Aalders noted that the panel on trading infrastructure indicated that the young carbon market presents both opportunities and risks for companies with its evolution remaining yet to be seen. Ingo Puhl highlighted that the panel on monitoring, reporting and verification identified various problems, suggesting a “learning by doing” approach. He said the Panel also acknowledged industry’s constructive role, calling for further experience- and information-sharing at all levels. Jürgen Salay, coordinator of he panel, beyond 2008, linking to non-EU schemes and new instruments, highlighted the increasing number of players in the carbon market and expressed satisfaction at the wide range of seminar participants. József Feiler said that the panel on regulatory issues sent a clear message against member States playing by different rules in the ETS implementation. He noted that a lot of questions exist on JI after 2008 since there is no clear international set-up so far.  Jeff Chapman said that the panel on corporate decision-making and compliance management raised a serious question about industry’s competitiveness in relation to ETS, suggesting the importance of continued consideration of this issue to ensure that industry becomes more competitive through ETS implementation. In her concluding remarks, Marina Ploutakhina said the seminar highlighted the overall complexity and uniqueness of the EU ETS as well as its linking with Kyoto Protocol’s mechanisms. She called for continued information-sharing and exchange among countries and reemphasized UNIDO’s commitment to facilitating industry’s participation.

A summary of the seminar, prepared by the International Institute for Sustainable Development (IISD) is available at www.iisd.ca/sd/euets

Statements and presentations made at the seminar are available for download on the UNIDO site

Marina Ploutakhina, Tel: +43 1 26026 / 5051  E-mail: M.Ploutakhina@unido.org
Peter Pembleton, Tel: +43 1 26026 / 3705  E-mail: P.Pembleton@unido.org
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