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Trading Carbon : November 2011
22 JOINT IMPLEMENTATION Carbon markets are in a rollercoaster this year. There were rising prices at the beginning of the year, after Germany's decision to phase out nuclear energy, and a free fall more recently on the back of the European debt crisis and fears of another recession. Questions over Europe's commitment to carbon markets and doubts over a post-Kyoto Protocol global agreement add to price volatility. It has reduced market confidence and raised questions about whether this is the "end game" for carbon. Quoting political scientist Roger Pielke Jr's "iron law": "When policies focused on economic growth confront policies focused on emissions reductions, it is economic growth that will win out every time." Carbon markets are the cornerstone of the EU's climate policy and the main tool for reducing industrial greenhouse gas (GHG) emissions cost-effectively. For that to work, prices need to go up. At current prices of about ¤10 ($14) to ¤11 a tonne of carbon dioxide in the EU Emission Trading Scheme (ETS) the incentive for abatement action within the system is marginal. The prices also affect abatement action outside the EU ETS. This is because the so-called Linking Directive has Durban to the rescue? November 2011 www.pointcarbon.com 90 80 70 60 50 40 30 20 10 0 2006 Q4 2007 2008 2009 2010 2011 Q3 Graph: JI PDDs made public at ji.unfccc.int Number of PDDs for determination made demand from the EU ETS one of the pillars of Kyoto's project-based flexible mechanisms. Current price levels in the EU ETS are thereby also detrimental to demand for carbon credits from Joint Implementation (JI) and the Clean Development Mechanism (CDM). Furthermore, a lack of demand for such credits, as well as uncertainties over the future framework for project-based mechanisms, will impact the str uctures created around these schemes over the last few years. Here policymakers see the adverse impact of indecisiveness at the UN level. Investors are already in a "Kyoto gap" period since the one-and-a-half years left until the end of the protocol's first commitment period do not justify investments in new JI and CDM projects. The impact of this on the uptake of new projects under JI is stunning. The figure shows the amount of new Project Design Documents being published for determination (approval). Without clarity from UN climate talks in Durban on the future of JI this mechanism will be the first victim of the stalemate in international negotiations. Why are JI and project-based mechanisms important? JI is important because of the mitigation potential it represents. To date, 30 Track II JI projects have been determined and 268 more are registered under Track I. Track I JI projects are approved by the host country, while Track II projects are approved by the UN-appointed JI Supervisory Committee (JISC). JI has delivered 64 million Emissions Reduction Units (ERUs) so far. The suspension of Romania in August from UN emissions trading, the October suspension of Ukraine and current low prices might provide some headwind. But, taking into account recent developments in Russia, it is still expected that JI will generate approximately 300 million ERUs in the 2008 to 2012 period. Furthermore, it is important to recognise that JI has contributed significantly to the development of future INGO RAMMING EXAMINES THE ISSUES SURROUNDING THE FUTURE OF JOINT IMPLEMENTATION
December - January 2011