The Elephant in the Room

3 October 2009

Look carefully around you: there is an elephant walking the hallways in Bangkok (it’s not the local type). It’s an intangible but very sizable beast: 7.5 to 10 Gt CO2e worth of surplus assigned amount units (AAUs).

It’s important to understand the scale of the AAU elephant – almost a third of current, best-case Annex I pledges. If this gets off the track, it threatens to undermine real emissions reductions and collapse the price of carbon when carried over from Kyoto’s first commitment period to a post-2012 regime. This represents a serious threat to the goal of limiting warming to as far below 2oC as possible.

The collapse of economies in transition during the 1990s produced real social and economic hardship. Yet emissions fell dramatically, delaying the reduction of carbon space in the atmosphere.

However, this was by no means the result of climate policy, and rewarding this phenomenon as “early action” contravenes the principle that only targeted, policy-driven changes in greenhouse gas emissions should be accounted for. In addition, to no one’s surprise, surplus AAUs are currently the “grubby outcasts” of the carbon market (even worse than HFCs).

It wasn’t the best idea in Kyoto for Parties to allocate the surplus, but they can join together to correct this error in Copenhagen.

If countries with surpluses want to trade, that needs to be part of a credible, environmentally sound solution.

For example, countries holding extra AAU amounts could agree to a stringent discount (e.g., 60%) of the surplus, if carried over, and the remaining Annex I countries could increase their pledges by another 5%, insuring that overall Annex I aggregate emissions stay more than 40% below 1990 levels in 2020. If countries can’t agree to this kind of solution, carry-over should be forbidden under the Copenhagen agreement.

The EU Commission took a strong position on the AAU surplus issue. Options they have been considering should be rolled into the kind of compromise described above. AAUs cannot be used for compliance in the EU post-2012 climate and energy package. Now the EU can set the tone internationally, reaching a solution to absorb its surplus out of the global compliance system before Copenhagen.

Russia and Ukraine have set 2020 targets, but according to IIASA, those levels could actually be achieved by business-as-usual emissions growth from current levels, while still generating hundreds of megatons of credits annually. Talk about a free elephant ride!

This could divert huge financing flows away from mitigation in developing countries.

Russia and Ukraine should set more ambitious targets, well below BAU, and address the current surplus. While their emissions collapse slowed the growth of GHG stocks, this would be reversed if the Kyoto surplus was used to achieve targets, and especially so if future weak targets generate yet more questionable credits. From ECO’s viewpoint, that would be about as absurd as watching a magician pull an elephant out of a hat.

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