The Market for CDM/JI-Generated Carbon Credits

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.

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.

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.