Banking of AAU Surpluses Considered Harmful

8 June 2010

The unrest in Ukraine is not the first instance of controversy over the use of AAUs. A recent story involves 
Hungary, which sold nearly 2 million CERs to a Hong Kong firm that had already been used for compliance under the EU ETS. Instead of retiring CERs from its registry when companies surrendered them, Hungary retired some of its large surplus of AAUs instead, so that it could re-sell the CERs. This is not itself illegal and is a more attractive option than directly selling AAUs, as CERs fetch slightly more money and are encumbered by fewer restrictions on the revenue from their sale. However, if practised on a large scale, such laundering risks seriously undermining the carbon price in the EU ETS through contamination of the scheme with cheap hot air AAUs, which also have lower environmental integrity than CERs.  Decreasing the carbon price in this way will in turn lead to less domestic emission reductions in Europe. To avoid this, the EU’s 27 Member States have agreed not to sell used CERs, but the practice is proving difficult to track. Other stories abound. In late 2009, Environment Minister Maciej Nowicki of Poland resigned amid press reports of a disagreement with the Prime Minister over the use of revenue from selling AAUs worth 25 million euros to Spain. Ironically, Nowicki acted correctly, allocating the cash to Green Investment Scheme-backed projects, as Polish law requires.  But leaked reports of a meeting, later denied by the government, alleged that the Prime Minister objected to this. Meanwhile the Slovakian government saw three environment ministers lose their jobs during 2009 in relation to an opaque deal with a US-based company. You get the picture. ECO simply offers all this as further evidence as to why no banking of AAU surpluses should be 
allowed.