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Assessment of supply-demand balance for Kyoto offsets (CERs and ERUs) up to 2020 Anaïs Delbosc, Nicolas Stephan, Valentin Bellassen, Alain Cormier, Benoît Leguet To cite this version: Anaïs Delbosc, Nicolas
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Assessment of supply-demand balance for Kyoto offsets (CERs and ERUs) up to 2020 Anaïs Delbosc, Nicolas Stephan, Valentin Bellassen, Alain Cormier, Benoît Leguet To cite this version: Anaïs Delbosc, Nicolas Stephan, Valentin Bellassen, Alain Cormier, Benoît Leguet. Assessment of supply-demand balance for Kyoto offsets (CERs and ERUs) up to [University works] auto-saisine. 2011, pp.19. hal HAL Id: hal https://hal.archives-ouvertes.fr/hal Submitted on 15 May 2015 HAL is a multi-disciplinary open access archive for the deposit and dissemination of scientific research documents, whether they are published or not. The documents may come from teaching and research institutions in France or abroad, or from public or private research centers. L archive ouverte pluridisciplinaire HAL, est destinée au dépôt et à la diffusion de documents scientifiques de niveau recherche, publiés ou non, émanant des établissements d enseignement et de recherche français ou étrangers, des laboratoires publics ou privés. CDC CLIMAT RESEARCH WORKING PAPER N Assessment of supply-demand balance for Kyoto offsets (CERs and ERUs) up to 2020 Anaïs Delbosc, Nicolas Stephan, Valentin Bellassen, Alain Cormier and Benoît Leguet, June 2011 Abstract The purpose of this document is to estimate the supply and potential demand as regards Kyoto carbon credits (CER and ERU) up to Two distinct periods have been pinpointed: , the first commitment period of the Kyoto Protocol, and , the phase when the climate-energy package will be implemented in Europe, and the period for compliance with international commitments agreed in Cancún. Demand for Kyoto credits is estimated at between 2.2 and 4.4 billion for the period. The large spread reflects 1) uncertainty about the size of European demand (EU ETS and Member States), which could rise from 1.3 to 2.2 billion credits if Europe s 2020 emissions reduction target were increased from 20% to 30%; and 2) uncertainties regarding the use of Kyoto credits by other actors. The estimate of Kyoto credit supply by CDC Climat Research is 1.3 billion between now and 2013 (1.1 billion in CER and 0.2 billion in ERU). By 2020, Kyoto projects could generate up to 4 billion credits. All in all, we estimate that the credit market will be in deficit by 2013 and should be in surplus by 2020, unless there is an increased European commitment, or new sources of demand appear throughout the world. CDC Climat Research is the research department of CDC Climat, a subsidiary of the Caisse des Dépôts dedicated to the fight against climate change. CDC Climat Research provides public research on the economics of climate change. Contents 1 Carbon credit demand Pré-2012 demand for Kyoto credits EU ETS European Member States Japanese demand Post demand for Kyoto Credits EU ETS European member states Other countries Assessment of Post-Kyoto credit demand Comparison with other analyses Carbon credits supply Estimates of expected amount of JI carbon credits Estimates of the actual quantity of expected CDM credits Methodology Results Impacts of the main Cancun decisions relating to credits supply Estimate of supply compatible with the EU ETS Phase 3 ( ) Current typology of CDM credits Estimate of the EU ETS compatible supply, from 2013 onward Comparaison with other analyses Evaluation Estimation in volume Price estimates References 18 2 1 Carbon credit demand The potential demand for carbon credits comes from players involved in greenhouse gas emission reduction systems on an international scale (Kyoto and Cancún agreements), regional scale (EU ETS) and national scale up until It is estimated in two steps: - the technical demand: the maximum demand constituted by the ceilings for use imposed by various legislations; - the actual demand: the technical demand less credits that cannot be used due to market constraints. This must factor in the economic situation and the real carbon constraint in existing or future commitment systems in order to estimate any arbitrage between carbon assets. 1.1 Pré-2012 demand for Kyoto credits The pre-2012 demand for Kyoto credits corresponds to the total demand for EU ETS installations, countries in Annex B of the Kyoto Protocol (European Union states and Japan) and Japanese businesses participating in voluntary agreements EU ETS The European directive governing the EU ETS stipulates that industrial installations can use Kyoto credits between 2008 and 2012 to ensure part of their compliance. The ceiling for use of Kyoto credits is set on average at 13.5% of allowances, i.e. a maximum import of Kyoto credits of 1,418 Mt. To this is added the possible use of credits for operators in the aviation sector, to enter the EU ETS in January Their use of credits is limited to 15% 1 of their verified emissions in 2012, i.e. an estimated use of 31.9 Mt. Thus, the maximum demand for Kyoto credits through the EU ETS comes to 1,451 Mt between 2008 and However, some of the industrial installations of the EU ETS should ignore this possibility, particularly the smallest ones, for which the transaction costs would be too high. If we assume a non-use rate of 20%, the actual demand for Kyoto credits between 2008 and 2012 is estimated at 1,160 Mt European Member States The deployment of the Kyoto Protocol imposes on each State in Annex B of the Protocol an emissions objective, to be complied with by the holding of equivalent carbon assets (assigned amount units: AAU, together with CDM (CER) or JI (ERU) and removal units: RMU). To respond to the additional requirement laid down by the Marrakech Agreements of 2001, the European Union decided only to authorise the use of Kyoto credits to 1 3 the order of 50% of the emission reduction effort. In line with this decision, the European countries, led by Spain, Italy, the Netherlands and Austria, announced their intention to use 117 million credits per year, i.e. 584 Mt, during the period (Source: EEA, 2010). In principle, this amount should be considered a maximum: the economic crisis of limited countries' need for cover, and prompted them to cover their possible residual deficits by AAU purchases. The World Bank's estimate of credits contracted to date, 238 Mt thus seems more realistic (source: World Bank, 2010), even if it remains considerably higher than the 53 million credits held on 31 December 2010 by European public entities Japanese demand In Japan, the demand for Kyoto credits has been stimulated by voluntary agreements between the government and major industries. The total volume of credits contracted by private and public Japanese players is estimated by the World Bank at 372 Mt for the period (source: World Bank, 2010). On 31 December 2010, private and public Japanese players as a whole held 105 million credits (source: SEF report transmitted to the UN on 26 April 2011). Assuming that purchases continue at the same pace during the last years of the Kyoto period, their demand could lie between 175 and 245 million credits. This estimate will need to be revised with regard to recent events, which may well affect the energy mix and economic growth in Japan, and thus its emissions. Although it is not envisaged that Japan will bring the Kyoto protocol into question, a number of private/public Japanese actors could seek to reduce the cost of their compliance: - by selling off credits to buy AAUs, thus benefiting from the difference in price between these two assets: around 4 at present. This possibility, which would reduce the demand for Kyoto credits, remains to be confirmed. - by selling their high quality primary CER positions to become purchasers of CER not eligible in EU ETS phase 3 (see below). In view of this information, we estimate the low range of credit use by Japanese actors at 200 Mt over the period. 1.2 Post demand for Kyoto Credits EU ETS a) Quantitative restrictions, 20% reduction (with no international agreement as regards the climate and energy package) 2 Source: SEF reports transmitted by the countries to the UN on 20 April 2011; not all the reports are yet available, but those of the principal requesters are (Spain, Italy, the Netherlands and Austria). 4 Only the balance of unused credits authorised for the period (phase 2) can be used between 2013 and If the national limit is lower than 11% of the total national allocation, a number of credits will be added, corresponding to the difference between the use rate of phase 2 and this rate of 11%, multiplied by the number of phase 2 allowances 3. These provisions will raise the ceiling for use of Kyoto credits in phase 3 by 93 Mt, bringing the ceiling for the entire 2 and 3 periods ( ) to 1,511 Mt for EU ETS installations (1 543 Mt by adding potential demand from airline companies in phase 2). This ceiling is further increased by: - the possibility for the newly included sectors in EU ETS phase 3 (production of organic chemicals, hydrogen, ammonia and aluminium) of using credits of at least 4.5% of their verified emissions during With the conservative assumption that verified emissions will correspond to the allowances distributed, we estimate the potential for credit use at a minimum of 36 Mt. - the possibility for new entrants 4 in phase 3 to use credits of at least 4.5% of their verified emissions between 2013 and With the conservative assumption that verified emissions will correspond to the allowances set aside for the reserve to new entrants, we estimate the potential for the use of credits at a minimum of 34 Mt. - the possibility for airline companies to use credits of at least 1.5% of their verified emissions. Assuming that their emissions correspond to their allowances, the minimum potential for the use of credits could be 25 Mt in phase 3. We should note the existence of disputes between non-european airlines and the public authorities in charge of transposing the aviation directive. These could result in the cancellation of part of the demand for credits. All in all, in a 20% reduction, the technical demand coming from EU ETS over the entire period is estimated at 1,638 Mt (188 Mt more than in the phase). In practice, we still estimate (see section 1.1.1) that around 20% of this technical demand might not materialise for the installations of EU ETS phase 2; however, we assume that the other sectors of phase 3 will use their entire potential: in the end, the lower range of credit demand between comes down to 1330 Mt. 3 This minimum of 11% could be raised (according to conditions to be verified) for installations that received only a few free quotas in phase 2. However, the impact of this measure on total demand should remain a minor one. 4 Including the new entrants of phase 2 benefiting from neither free allowances nor the option of using credits in phase 2. We are making the conservative assumption that the corresponding credit demand is zero, as the number of installations concerned should be very low, and will not significantly change the overall demand. 5 b) Quantitative restrictions, 30% reduction (with international agreement as regards the climate and energy package) The percentage of credits authorised can be revised to cover up to 50% of the additional emission-reducing efforts demanded. The Directive only stipulates this provision for industrial installations present in phase 2. However, we have applied this reasoning to all sectors and installations in phase 3, estimating that a further effort to reduce emissions would give rise to a political negotiation during which all the sectors would demand to be treated identically. But we have not raised the technical constraint on the use of credits by the aviation sector. This is considered separately in European texts, essentially because of its separate status in international climate negotiations. We therefore consider that even if Europe increases its internal efforts to reduce emissions, it cannot politically go any further as regards the constraint imposed on this international sector. In the end, this results in a further potential use of credits of 771 Mt, implying a maximum total use of 2,222 Mt for the entire period. In the same way as with the 20% reduction, we estimate an actual demand lower than the technical demand for the industrial installations covered in phase 2. In this conservative, we also consider that a higher credit import ceiling should not apply to the installations not included in phase 2 (and thus that it is maintained as regards the technical constraint imposed in the 20% reduction ). All in all, our low estimate for the use of credits in the period comes to 1,774 Mt. c) Qualitative restrictions, 20% reduction (with no international agreement as regards the climate and energy package) Only the following can be used in phase 3: - credits (CER or ERU) arising from projects registered before 2013 and compatible with the conditions of use in phase 2. The corresponding emission reductions can take place in phase 2 or 3. In practice, credits must be converted into phase 3 quotas at the request of the competent authority. The request for conversion is only possible up to 31 March 2015 for credits corresponding to emission reductions before 31 December CER credits (only) arising from projects launched (sic) as from 2013 in the least developed countries (LDCs) 5, which concern the same type of projects accepted in phase 2, until the ratification of an agreement between these countries and the European Union or 2020 at the latest. - credits whose use is defined by possible bilateral agreements between the European Union and third countries. It is specified that these agreements could stipulate only the issue of credits to projects whose reference integrates 5 See the list on: 6 emission levels as least as stringent as the benchmarks chosen for the free allowance in the EU ETS or the standards imposed by European legislation. - credits or quotas arising from domestic projects (art. 24b of the EU ETS Directive), with no limitation as to quantity laid down at this stage. To date, the European Commission has not drawn up a schedule for introducing bilateral agreements and domestic projects. On 25 November 2010, the European Commission also proposed limiting the types of credits that can be used in the EU ETS from Credits arising from projects to reduce HFC 23 and N 2 O linked to the production of adipic acid will no longer be accepted for the compliance of installations, as from 1 May d) Qualitative restrictions, 30% reduction (with international agreement as regards the climate and energy package) As from 1 January 2013, CDM credits accepted within the EU ETS can only come from countries that have ratified the international agreement European member states a) Quantitative restrictions, 20% reduction (with international agreement as regards the climate and energy package) Each year, Member States can use credits to the order of 3% of their verified 2005 emissions excluding the ETS and excluding forestry emissions, i.e. 740 Mt over the period. Twelve Member States can use a further 1% but only for credits arising from projects developed in LDCs or small island developing states (SIDS) 6. These 52 million in additional credits help to bring the potential demand of States to 792 Mt over Credits arising from potential domestic projects are subject to no limitations. We believe that as in the period, States will seek to limit their credit purchases to ensure their compliance, so as not to dig into their budgetary resources. Their real demand will depend on the gap between their objectives and their real emissions. As an initial calculation, we estimate an actual demand 50% lower than the potential, i.e. 396 Mt over the period. b) Quantitative restrictions, 30% reduction (with international agreement as regards the climate and energy package) The Directive indicates neither the additional quantity of usable credits, nor the procedure that might possibly fix it. However, we can assume that a higher emission reduction target will entail the authorisation to use additional credits. If, as with the EU ETS, half the effort can be covered by credits, additional demand would come to 373 Mt, i.e. a total of 1,165 Mt over the period. 6 See the list on: 7 As with the previous 20% reduction, we have considered that part of this potential will not be used: the actual demand is estimated to be lower by 50% i.e. 396 Mt over the period. c) Qualitative restrictions, 20% reduction (with no international agreement as regards the climate and energy package) The credits used by the Member States could arise from: - projects registered before 2013 and compatible with the rules for use in EU ETS phase 2, - projects carried out in LDCs and compatible with the rules in phase 2 until the signature of an agreement with these countries (by 2020 at the latest), - projects developed as part of possible agreements with third countries. - reforestation or afforestation projects (temporary CER credits), if these credits are renewed or replaced by credits with permanent validity when they expire. In the absence of an international agreement on 31 December 2010, the Commission was tasked with studying the inclusion in community objectives of the land-use and forestry sector. Its report is expected before 30 June The options discussed included a specific mechanism for forest sector emissions, which can be extended on an international scale (sector-based mechanism) or their inclusion in the objectives of Member States apart from the EU ETS. The qualitative restriction of usable credits in EU ETS phase 3 does not apply to Member States. Some States have nevertheless announced, on a voluntary basis, that they will not use credits forbidden in the EU ETS (Denmark, Austria, Belgium, Estonia, Germany, Greece and the UK). Furthermore, States using credits not authorised in the EU ETS must provide detailed reasons in their annual report to the Commission on their emissions and the achievement of their objectives. d) Qualitative restrictions, 30% reduction (with international agreement as regards the climate and energy package) In the event of an international agreement, as from 1 January 2013, credits used by Member States could only come from countries that have ratified the international agreement Other countries The use of Kyoto credits by other countries after 2012 remains uncertain. Among the existing quota exchange systems, the Japanese voluntary systems could help to maintain demand, but one that is lower, because the Japanese government is seeking to develop bilateral agreements to supply itself with credits. The New Zealand quota exchange system is the only compulsory system to authorise Kyoto assets (AAU, CER, ERU and RMU) 7. It also accepts the use of national forestry credits, limiting the demand for Kyoto credits. 7 Except for temporary forestry credits arising from CDM and ERU projects and CER arising from nuclear projects and non-recognised foreign AAU/RMUs (sic). 8 We thus estimate the range of use for Kyoto credits in the Japanese and New Zealand markets to lie between 0 and 12 Mt per year i.e. 0 to 96 Mt over the period. All the other systems currently being developed stipulate the possible use of not only Kyoto assets but also domestic project mechanisms, which could enter into competition with the use of Kyoto credits. There are two notable exceptions: Australia, whose current project (not approved) only authorises CER; this position seems difficult to maintain, as it is isolated among the Asia-Pacific zone projects. California, which does not authorise Kyoto credits and is planning for positive lists of labelled projects, with a predilection for projects developed on the American continent. Some quota exchange systems projects include the possibility of using forestry credits, particularly those arising from projects for combatting deforestation. It is also possible that NAMA (Nationally Appropriate Mitigation Action) systems, which issue carbon credits, could be used
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