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Key principles to determine any potential restrictions on carbon credits eligibility in the 3rd trading period of the EU ETS

Date

29 Sep 2010

Sections

Energy

29th September 2010

The European Commission is currently considering the question of eligibility of carbon credits for use in the third period of the European Union’s Emissions Trading System (ETS) from 2013. The European Federation of Energy Traders (EFET)1 welcomes the Commission’s invitation to contribute to this debate.

If there is to be any change to the eligibility of CERs/ERUs during the third trading period, EFET strongly recommends that any restriction should be designed and implemented according to the following key principles.


1. Safeguarding market integrity and confidence in regulatory stability is critic
al
When looking at the possibility to restrict use of certain credits starting 2013, the EU shall seek to safeguard market integrity. In particular, the possible market distortions and unintended consequences from the anticipation or implementation of any restrictions should be carefully assessed and prevented.


2. The process initiated by the Commission shall address the eligibility of any CER or ERU as per article 11a(9) of the revised EU ETS directive – not exclusively potential restrictions on industrial gas credits – and this process should be conclusive to lift the existing uncertainty

The current situation of complete regulatory uncertainty is unsustainable for ETS operators and market participants. The current commitology process should address the eligibility of all credit types and, ideally, be final and conclusive. At the very least, the EU should establish a “positive list” of unrestricted credit types.


3. The liquidity in the market for any EU ETS compliance instrument is critical to its efficiency and integrity

The EU should ensure that any future restriction to the use of CERs/ERUs leaves sufficient volumes to allow for a liquid market. Extensive restrictions could prevent the formation of a liquid secondary market

with a reliable price signal, thus making investment in underlying activities extremely risky and the use of such credits for compliance effectively out of reach for ETS operators.

4. Qualitative restrictions on CERs/ERUs shall not be meant to modify the EU ETS supply-demand balance

The supply of carbon credits is shaped by the quantitative restrictions embedded in the directive. In addition, modifying the supply – i.e., the cap – is a policy decision that should not be decided through commitology, a process only suited to “amend non-essential elements” of the EU ETS directive.

5. The objective criteria that will be used in the selection of credit types that may be restricted should be clearly identified and correspond to understandable and commonly accepted policy objectives

In order to safeguard the credibility of what is a purely regulatory market, the selection of carbon credits that may be restricted should not look unpredictable or the result of arbitrary decisions.


6. Carbon credits from pre-2013 reductions should be eligible for use in the 3rd trading period

If certain credits from reductions achieved until end of 2012 become ineligible in phase III, ETS operators will be incentivised to use them within phase II. This will artificially increase the swapping activity in the current period, forcing additional length in the system with the risk of further depressed prices in the transition towards 2013.


7. Any restriction or eligibility criteria shall be self explanatory and subject to no interpretation

EFET is concerned that market participants should not in the first instance have to subjectively determine whether a given CER or ERU is eligible. Any regulation on the matter should be clear enough so as to leave no room for interpretation as to the meaning or timing of any restrictions.

For further information, please contact:

Maria Popova, EFET Junior Communication Officer:

Maria.Popova@efet.org, Tel: +32 (0) 2 737 11 01
Alexandre Marty, Chairman of EFET Task Force Emissions Trading: Alexandre.Marty@edftrading.com, Tel: +44 (0) 20 7061 4366

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