REDD seen as risky approach for EU ETS

The EU Emissions Trading Scheme (ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. According to the European Commission, the ETS accounts for 67% of GHG by volume and 81% in terms of value of the global carbon market. It has been operational since January 2005 and encompasses all EU member states. However the impact of the ETS on the forest sector has been limited to date, the EC having decided that the science on carbon sequestration from forests and systems of measurement are not yet sufficiently well developed to allow trade in forestry related credits.

The ETS operates by capping the amount of CO2 that can be emitted from large installations, such as power plants and carbon intensive factories and covers almost half of the EU's CO2 emissions. If companies miss their target, they are forced to buy permits from companies that have undershot their allowances, or they face financial sanctions. Companies may also buy validated credits from the developing world through Kyoto's CDM. In 2006, around USD8 billion of the total USD32 billion of carbon credits traded by the EU ETS were generated through the CDM.

The first phase of the ETS (2005 - 2007) was heavily criticized due to oversupply of allowances and the
distribution method of allowances (i.e. by government negotiation rather than by auctioning). As a result carbon prices remained too low to drive any significant reduction in carbon emissions. However, these issues are being progressively resolved and there are high hopes for the second phase of the ETS which runs from 2008 until 2012.

The EC has been tough on European countries plans for emission reductions during this period. The number of permits to be allocated has been cut by around 9% between 2008 and 2012. The EC is now proposing to toughen the scheme further by increasing the proportion of permits companies will have to buy, rather than giving them for free. Compliance with the scheme is already improving and confidence is rising alongside increases in carbon prices.

The EC has great ambitions for the ETS, with evolving plans to link the system with similar schemes in other regions of the world after 2012 to lay the foundation for a global carbon market. Unfortunately, greater linkage with the evolving debate over credits for REDD is unlikely in the immediate future. Only weeks after the UNFCCC Bali Agreement in December 2007 effectively gave the go ahead for far-reaching international REDD programs, the EC was proposing to exclude forestry credits from the ETS until 2020.

According to an article in the March 2008 edition of Nature, the EC made this decision based on concerns that easy REDD credits would undermine efforts to reduce its own industrial emissions. It feared that credits for deforestation, which annually accounts for roughly 5-6 Gigaton or 20% of world carbon dioxide emissions, would swamp the nascent ETS carbon market. As the Nature article puts it, an endless stream of deforestation credits will simply allow companies in the developed world to pay a little extra and pass costs on to consumers without otherwise changing their policies. We want to see real emissions reductions in Europe, said Artur Runge-Metzger, Head of Climate, Ozone and Energy at the EC.

In line with this view, the EC proposal for a European Directive to improve and extend the ETS scheme issued in January is quite explicit is stating that emissions from forestry and agriculture should not be included in the ETS. The proposal notes that the ETS trading system should only be extended to emissions which are capable of being monitored, reported and verified with the same level of accuracy as applies under the monitoring, reporting and verification requirements currently applicable under the Directive. This is .not the case for emissions from agriculture or forestry, although the EU ETS considers the combustion of biomass to be emission-neutral. The proposed Directive does allow that the ETS may support REDD projects indirectly, noting that The European Parliament and the Council have endorsed the use of
proceeds from auctioning of allowances within the EU ETS to be used for reducing emissions, in particular by avoiding deforestation. However companies will not be able to benefit under the ETS from credits derived from REDD projects.

This does not mean there will be no trade in REDD credits in the European market. Consumers wishing to purchase forestry-related carbon offsets can do so through the small voluntary market for carbon credits. This is demand that is not forced through government regulation but is instead generated by environmentally concerned companies and individuals. Compared to the ETS the voluntary market is
tiny, currently valued globally in the region of USD100 million. The prices paid for carbon credits on voluntary markets are also low compared to regulated markets. For example credits on voluntary markets like the Chicago Climate Exchange (CCX) currently trade at an 80-90 percent discount compared to EU allowances (EUA). On the other hand, forestry off-set projects have been particularly popular in voluntary markets as they are amongst the most visible of offset types and are therefore attractive to buyers. They are believed to account for about a third of voluntary offsets. New voluntary deals are being announced regularly. For example, earlier this year the Indonesian province of Aceh signed a deal to protect the forests of Ulu Massen in exchange for 100 million tons of carbon credits in the voluntary market.


edited:06/08/2008
uploaded:06/08/2008