1. Overview of EU offset provisions
Unit B3 – International carbon market, aviation and maritime
DG Climate Action
European Commission

2. Significant emission reductions need to be made globally
EU objective: 80 to 95% reductions largely through domestic measures:
around -80% internal reductions in 2050 compared to 1990
Developed Countries: similar effort
Developing Countries:
-5% compared to 1990
Equivalent to -80% compared to business as usual 2
All sectors need to contribute (or other countries/ sectors do more)

3. “Offsetting” alone cannot solve climate change threat
If EU and other industrialised countries stop all emissions
Red line indicates what emissions would be if Annex I stops emitting by 2050
Global emission path fitting 2°C scenario

4. Move to new (sectoral) market mechanisms
CDM was successful to help countries meet Kyoto targets, generate financial flows to DCs, engage private business and for DCs to learn about carbon market and setting up an infrastructure,
But CDM also:
Suffers from methodological problems that complicate the assessment of additionality and the exact quantity of emission reductions
May create disincentive for own action in emerging economies
Cannot generate required scale of international reductions and carbon finance flows to DCs. High Level Group on Climate Change Finance estimated that $30 – $50 Bln annually could be generated through a broader and deeper carbon market.
Sectoral market mechanisms would:
offer a more comprehensive price signal that also stimulates domestic climate policy action in DCs across broad segments of the economy, through a crediting threshold to reflect own action by the country and so net benefits to the atmosphere.
Avoid cumbersone and subjective project-based additionality testing

5. A vision: carbon market transition
Reformed CDM
Sectoral crediting applied
Emissions not covered by cap and trade
Bilaterally linked cap and trade
TIME
Relative share of global emissions
From CDM as we know it (with quantitative and qualitative constraints)
Via sectoral crediting
Towards (robust) cap-and-trade with full mutual recognition
Emissions in some sectors will remain outside of cap-and-trade
Increasing focus on LDCs
Strengthen governance
Strengthen environmental integrity
Means
Through UNFCCC supply-side where possible
Through EU demand-side where necessary

6. Progress at UNFCCC supply-side
CDM EB
Many efforts undertaken to improve objectivity and transparency, incl.
further clarifications of additionality tool (investment analysis guidelines, FOIK and CP)
development of alternatives to the additionality tool (standardised baselines)
modalities and procedures for direct communication
etc.
Cancun outcome and prospects for Durban
Cancun decision to consider establishment of new market mechanisms in Durban
Two lines of action emerging for decision in Durban (agreement that both are needed):
establishment of specific market mechanism (sect crediting and trading)
general framework for Parties to develop and use market mechanisms
African group, China, Ecuador stating explicit conditions for establishing new market mechanisms, e.g. KP2

7. EU demand-side: More selective use of credits
Provisions in EU ETS
CDM projects registered prior to 2013 can continue to generate eligible credits
Credits from CDM projects registered after 2012 can only come from LDCs
No ERUs after 2012 without new QELROs
Exceptions:
Provision to restrict use of specific credits from project types decided in CCC with scrutiny by Council and European Parliament
Provisions for bi- or multilateral agreements for supply of credits (sectoral credits) if no international agreement concluded by Dec 2009
Provisions for Community projects
If there is an international agreement
only credits from projects in third countries that have ratified agreement
types of credits agreed will be subject to a common EU approach

8. More selective use of credits: Use restrictions
Projects should bring real emission reductions, benefit SD and have no significant adverse social and environmental impacts
Ban on HFC23 and adipic N2O motivated by project-type specific economic and environmental concerns together with strategic considerations
Only valid for EU ETS operators, but under the Effort Sharing decision Governments should justify use of any banned credits.
MS use of credits under ESD is also meant to enhance achievement of international agreement (art 6)
No new proposals for restrictions planned at present, but Commission needs to have an instrument available to act when integrity is at stake

9. More selective use of credits: Bi- or multilateral agreements
Intentions
Focus on sectoral crediting to help eliminate technical and political barriers to making progress in UNFCCC on the introduction of new mechanisms.
Challenges
Setting up administrative and procedural frameworks in DCs
Make them attractive for DCs i.e provide sufficient demand through higher targets and more selective use of credits.
Need for piloting sectoral crediting in order to crystallize the challenges and practicalities of implementation.
Participation in the World Bank Partnership on Market Readiness Fund is instrumental to facilitate the designing of robust pilots and finding interested partners.

10. Community projects Provisions under art 24(a)
Allows to issue allowances or credits for projects in reducing non-ETS emissions, for use in ETS or ESD
Implementing measures may be adopted via comitology
No double counting and no impediment to policy measures (not trivial)
MS has to agree to projects (affect ESD compliance)
Hierarchy in the Directive
1st best harmonised extension of the scope of the EU ETS
2nd best – unilateral extension of the scope of the EU ETS
3rd best – Community offsets
obligation to consider 1st best route for activity with Community projects in the subsequent EU ETS review

11. Community projects Critical mass of opportunities?
Current cap
Due to recession, significantly lower carbon price and a considerable buffer of unused EUAs and CER/ERUs
limited potential (double counting, extended coverage in ETS or other binding legislation)
Moral hazard problem / inconsistent with move away from project-level crediting internationally
Administrative costs
Tighter cap
Strategic decisions would have to be made
should we allow for more credits
if yes, which types of credits (Community offsets, JI, CDM, potential REDD credits, new sectoral credits)
No immediate action under Community offsets, but Commission welcomes pilot initiatives in order to learn more in which areas the development of rules may be envisaged at a later stage.