Demand for CERs/ERUs under the EU ETS

07Feb09

I thought it would be instructive to look at the treatment of CERs/ERUs under the EU ETS, with a view to the light this sheds on demand and supply within the EU ETS.

CERs and ERUs are eligible under the EU ETS – but the quantity of CERs/ERUs that can be used for compliance are limited in order to comply with the stipulation under the Kyoto Protocol that their use be ‘supplemental to domestic action’.

The limits that apply to the use of CERs/ERUs during the second phase of the EU ETS (2008-12) are specified in the individual Second Phase NAPs – and amount to about 1.4 billion CERs/ERUs.

The limits that apply to the use of CERs/ERUs during the third phase of the EU ETS (2013 – 2020) are specified in the European Commission Memorandum of Dec 2008, which is still to be formally accepted by Member States. In this memorandum the quantity of CERs/ERUs that can be used for compliance over the second and third compliance period is limited to 50% of the emission reduction task over that same period.

This is interesting. Firstly, because it means that the limit cannot be stated with precision as it will fluctuate depending upon the business as usual emissions forecast. Secondly, because the limit is defined for the combined second and third phase, meaning that the more CERs are used in the second phase the less they can be used in the third phase. And finally, because it potentially establishes a precedent for the definition of supplementarity under the Kyoto Protocol – with potential implications for other trading schemes.

There are some exceptions to the limits stated above. There is no limit on CERs sourced from least developed countries and there is no limit on credits that are sourced from within the EU-27, which presumably would make use of the JI mechanism (though this is far from certain). There is also the provision to increase the limit on the use of CERs/ERUs in the event that an international agreement is reached to succeed the Kyoto Protocol.

If we look at what this means from a quantitative point of view, we have the following:

CER/ERU Demand & Supply Under EU ETS

Notes:

Bau emissions – exclude Iceland, Norway, Liechtenstein and aviation.

Low – based upon 2.1 billion tCO2 pa

Mid – based upon 2.3 billion tCO2 pa

High – based upon 2.5 billion tCO2 pa

cap – in billions from Ph 2 NAPs & from EC Memo Dec 2008.

cer/eru limit – in billions from Ph 2 NAPs & from EC Memo Dec 2008.

supply cers – in billions from UNFCCC/Risoe CDM Pipeline


What does this signify?

1./ The EU ETS allows for the use of a significant quantity of CERs/ERUs contrary to what has been suggested – 80% of available supply up to 2012 and 32% of available supply up to 2020 under the ‘MID’ scenario.

2./ It probably won’t be necessary to achieve any domestic reduction within the EU during the second phase in order to comply with the cap. The second phase cap can be met with a combination of EUAs and CERs – this is due to the relatively large quantity of CERs that are permitted and to the reduction in CO2 emissions arising from the current economic downturn.

3./ If the maximum permitted quantity of CERs/ERUs are used in the second phase, this will significantly reduce the quantity that can be used in the third phase.This presumably is the source of the statement that the use of CERs/ERUs has been severely limited in the third phase. The limit will be tightened further if business as usual emissions remain depressed.

4./ There is a strong relation between the bau emissions projection and the CER/ERU limit – and this relation is not linear. Any increase in bau emissions will have a profound effect on the limit applied to the use of CERs/ERUs; every 1tCO2 increase in bau emissions would increase the CER/ERU limit by 6.4tCO2. In contrast, every 1tCO2 decrease in bau emissions would decrease the CER/ERU limit by 6.4tCO2.

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