Poland-Italy AAU deal inked as Kyoto compliance countdown begins

Published 18:38 on October 5, 2015  /  Last updated at 10:48 on October 28, 2015  /  Australia, Climate Talks, EMEA, EU ETS, International, Japan, Kyoto Mechanisms, New Zealand, Switzerland, Voluntary Market  /  No Comments

Poland on Monday agreed to sell Italy 20 million zloty (€4.7 million) worth of Assigned Amount Units (AAUs), helping the Mediterranean nation cover a carbon unit deficit it was facing under the treaty’s first commitment period (CP1) and likely marking one of the last deals of its kind.

(Corrects total cumulative CP1 emissions figure to 46.7 billion tonnes from 65.6 billion)

Poland on Monday agreed to sell Italy 20 million zloty (€4.7 million) worth of Assigned Amount Units (AAUs), helping the Mediterranean nation cover a carbon unit deficit it was facing under the treaty’s first commitment period (CP1) and likely marking one of the last deals of its kind.

Poland’s environment ministry gave no further details, including about how many Italy had bought or the per-unit price agreed, saying only that the proceeds would be invested in making at least a dozen Polish schools more energy efficient.

Preliminary UN data released last week suggested Italy may have been shopping around for up to 20.3 million units, which if true could translate into a price of around 1 zloty (€0.24) per unit.

The UN’s climate change secretariat on Sep. 30 released figures showing the greenhouse gas emission levels of the Kyoto Protocol’s 36 developed country signatories during the first commitment period (CP1, 2008-2012), as well as the number of carbon units they currently hold in their UN registry accounts.

These ‘Annex I’ countries have until 2400 UTC on Nov. 18 – the end of the so-called True-up period – to transfer enough AAUs into their retirement accounts at the registry to cover their GHG emissions over the five-year period.

The data, published on the UNFCCC website, showed that Italy had emitted a total 2.48 billion tonnes of CO2e during CP1 compared to total holdings of 2.46 billion AAUs between the country’s holding and retirement accounts as of Sep. 30.

Iceland was the only other country potentially staring at an AAU deficit, with the figures showing its CP1 emissions of 23.36 million tonnes versus registry holdings of 20.1 million AAUs.

A spokeswoman for the country’s environment ministry said Iceland expected to have enough units to meet its CP1 target. She said this was due to the application of a provision from the UN’s 2001 Marrakesh Accords that exempts emissions from large industrial plants built in small countries since 1990 that utilise renewable energy.

COMPLIANCE

The UN figures published last week show Annex 1 countries emitted a total 46.7 billion tonnes of CO2e in CP1.

As of Sep. 30, they were collectively sitting on 77.8 billion AAUs in their retirement and holding accounts, equating to a surplus of 12.2 billion units.  The largest gluts were held by Russia (5.78 billion) and Ukraine (2 billion), with the EU-15’s total share of the oversupply at 3.26 billion.

However, to be fully compliant under the 18-year old Kyoto pact, a country must hold a sufficient number of AAUs in its retirement account by the November deadline.

Based on those rules and the preliminary data, almost every one of the Annex I countries with an ample inventory of AAUs was not technically in compliance as of the end of September, because large amounts of AAUs were still sitting in their holding accounts.

Only tiny Monaco had fulfilled its Kyoto CP1 obligations, holding the same number of AAUs in its retirement account as tonnes emitted during the five-year period.

The remaining 35 Annex I countries now have fewer than 45 days to transfer the required number of units over to their retirement accounts.

Failure to hold a sufficient number of AAUs in this account at the end of True-up period can result in repercussions ranging from a review by Kyoto’s Compliance Committee to, in severe cases, the suspension of carbon-unit trading under Kyoto, or the AAU shortfall being inflated by 30% and that figure being deducted from a country’s AAU balance during the protocol’s second commitment period (2013-2020).

CANCELLED

The UN data also showed that Annex I countries had cancelled around 695 million AAUs. Australia and the UK led the way with 229.5 million and 109.3 million respectively.

Cancelled units cannot be counted against a country’s emissions.

Governments must cancel an AAU for every EU Allowance or Kyoto project-based credit (CER or ERU) that is used to voluntarily offset an organisation’s or individual’s emissions.

Annex I countries must also cancel AAUs to account for deforestation that has occurred since 1990, Kyoto’s base year, as the trees in question are no longer able to absorb CO2.

Australia’s cancelled units are the result of the government committing to not double-count emissions reductions from state and voluntary programs such as New South Wales ESS, GGAS, Greenhouse Friendly, GreenPower, and Greenhouse Friendly.

AAU REVOIR?

Monday’s Italy-Poland AAU deal will likely culminate the bevy of opaque, mostly inter-governmental transactions agreed over the past 13 years.

At least 60 deals saw hundreds of millions of AAUs change hands, with reported prices ranging from a pre-recession peak of €14/tonne to the sub-€1 level seen since the end of CP1.

The first reported AAU trade featured Slovakia selling 200,000 units to a Japanese trading house in 2002, in a deal brokered by New York-based Evolution Markets.

Japan, via a handful of its companies, would become a major buyer of AAUs upon realisation that it would struggle to meet its Kyoto targets.  Western European nations were also purchasers, often via funds run by international organisations including the World Bank and EBRD.

On the other side of the transactions was almost always an Eastern European or former Soviet nation, as most were sitting on a plethora of units created through the collapse of the USSR and the region’s heavy industry rather than investment in emissions reductions.

A handful of deals drew controversy and left a number of political casualties in their wake.

One 2008 transaction between Slovakia and US-based Interblue led to several Slovak environment ministers losing their jobs, while former Ukrainian Prime Minister Yulia Tymoshenko was jailed in 2011 following accusations by rival Viktor Yanukovich that included misappropriating at least €200 million in AAU sale proceeds.

AAUs were dubbed “hot air” by some green groups because they did not come about as the result of climate policy.

They became a divisive issue at UN talks, with western nations seeking their cancellation and eastern countries arguing that their method of creation was irrelevant compared to the fact that they represented genuine reductions.

Eventually, negotiators at the 2012 UN climate summit in Doha agreed to allow nations holding surplus AAUs from CP1 to carry them forward to CP2.

However, strict limits were imposed on buyers, allowing them to only procure AAUs up to a maximum of 2.5% of their own CP2 allocations.

In addition, Australia, the EU, Japan, New Zealand, Switzerland and Norway made a political declaration vowing that they would not buy any.

As a result, today’s AAU deal may be the last one if not forever then for a while – a notion echoed by Poland’s top climate envoy Marcin Korolec.

“Selling GHG reductions to Italy. (The) last such transaction in Europe at least for some time,” he tweeted on Monday.

By Mike Szabo – mike@carbon-pulse.com

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