The Market for CDM/JI-Generated Carbon Credits

Market for CDM/JI certificates The opportunities to use CDM/JI-generated emission certificates (carbon credits) in Germany and other EU Member States are largely driven by national and EU legislation. There are three main options available:

  • Responding to demand generated by the EU Emissions Trading Scheme
  • Responding to demand created under the carbon acquisition programmes run by the various EU Member States
  • Voluntary demand from private agents
Demand Generated by the EU Emissions Trading Scheme

Most non-state demand for CERs and ERUs is generated by the caps placed on industrial emissions in the EU Emissions Trading Scheme. Under the EU Linking Directive (transposed in Germany’s Project-Based Mechanisms Act (ProMechG)), carbon credits generated from CDM/JI projects may be used in the EU Emissions Trading Scheme as follows: 

  • CDM/JI project developers complete their respective project cycles and receive a quantity of CERs or ERUs.
  • CDM/JI project developers sell their carbon credits to operators of industrial installations or combustion facilities that must participate in the EU Emissions Trading Scheme (ETS). Project developers and operators of facilities covered by the ETS may be identical.
  • These operators request that the CERs or ERUs be exchanged for EU allowances by surrendering their CERs/ERUs to the DOE in their own EU Member State. Technically speaking, operators receive the corresponding number of EU allowances which they must immediately use to prove they are in possession of EU allowances.
  • If operators are in a position to substitute more CERs/ERUs than the EU allowances needed to meet their obligations, they may use the remaining EU allowances to meet subsequent obligations under the EU Emissions Trading Scheme; alternatively, they may sell their EU allowances to other market players.
  • An EU Member State which exchanges CERs/ERUs for EU allowances can use the CERs/ERUs to comply with their Kyoto Protocol commitments.

Exchange and substitution of emission reduction certificates is limited by the setting of a facility-related upper limit for the use of CDM/JI as prescribed by the EU Linking Directive. In its National Allocation Plan II (NAP II), Germany has set this upper limit at 22 percent of assigned EU allowances. Thus, for the ETS second trading period from 2008 to 2012, industries participating in the scheme may use up to 90 million CERs or ERUs per year or 450 million for the entire trading period. The amount can be surrendered in varying quantities throughout the trading period. Alternatively, CERs/ERUs can be carried over to the period after 2012.

The setting of the cap for the third ETS trading period did not increase the amount of certificates that can be surrendered by German installation operators. Additional quantities are, however, available for new facilities. The same will apply to aviation once its integration into the ETS is implemented. The limited increase is partly a result of the overall review for the period 2008 to 2020, i.e. the overall review of the second and third ETS trading periods, and also in light of the EU’s 20 percent reduction target. Should the EU increase its emission reduction target to 30 percent, it is expected that use of CDM/JI-generated certificates will be allowed to cover a portion of the additional reductions required.

Interested businesses can generate emission reduction certificates from their own CDM and JI projects, purchase CERs and ERUs on the carbon market, or use a carbon acquisition programme to obtain carbon credits. One such programme is the KfW Carbon Fund, which is one of the few funds designed not to generate credits for states obligated to reduce their emissions under the Kyoto Protocol, but for businesses participating in the EU Emissions Trading Scheme.

Qualitative  EU demands

Not all CDM and JI certificates are recognised in the EU ETS. For example, the EU has excluded the use of certificates generated by afforestation and reforestation projects. Certificates from large-scale hydropower projects may only be used if the criteria laid down by the World Commission on Dams are adhered to during project development. As of 2013, certificates from industrial gas projects registered after 2012 will no longer be eligible for use in the ETS. This notably affects projects in which trifluoromethane (HFC 23) is destroyed in the production of chlorodifluoromethane, and also projects to abate nitrous oxide (N2O) from adipic acid production.
To foster development in Least Developed Countries (LDCs), the EU has also determined that certificates from projects registered after 2012 will only be eligible if the projects are actually conducted in LDCs. The official UN list of LDCs can be viewed here (PDF).

Demand from EU Member States

Independent of the ETS, the EU Member States may create opportunities to use CERs and ERUs at national level. The simplest method involves direct purchase of emission reduction certificates by the state and many such programmes have already been implemented. 

Another option would be to allow CERs and ERUs to be counted towards obligations under other policy instruments (e.g. voluntary agreements, eco-tax). None of the EU Member States appear to be considering such action at present, however. The overarching aim of the EU Member States in both cases is to obtain CERs and ERUs in order to use them to comply with their Kyoto Protocol commitments.  

Voluntary Demand from Private Agents

In addition to the two demand segments outlined earlier, a third is emerging in which no state intervention occurs whatsoever. This involves voluntary offsetting, which is as yet unregulated at international, EU or national level.

As the chart above shows, the main feature of this demand segment is that the CERs and ERUs purchased by private agents are not used by the state to comply with Kyoto commitments. Rather, the private agents cancel them voluntarily.