Adopting an effective risk management strategy is something oil companies will regularly engage in when it comes to their staple oil and gas markets.
However when it comes to environmental issues, particularly under the EU Emissions Trading Scheme (EU ETS), the same approach is not always applied. This article attempts to highlight how understanding the specific rules of the EU ETS could allow installations to significantly reduce the cost of compliance or use the carbon market to generate value.
The EU Emissions Trading Scheme (EU ETS) legislation under Directive 2003/87/EC allows installations to use international credits created under the Kyoto Protocol’s project based mechanisms towards fulfilling part of their EU ETS obligations. The Kyoto Protocol allows for 2 project based mechanisms which create international credits:
- The Clean Development Mechanism (CDM) which generates credits known as Certified Emission Reductions or CERs from projects in developing countries; and
- The Joint Implementation (JI) mechanism which generates credits known as Emission Reduction Units or ERUs from projects in developed countries with a target under the KP.
Existing installations had an entitlement in Phase 2 (2008-2012) to use international credits up to a limit set by each Member State (the UK allowed each installation a limit of 8% of total Phase 2 allocation). However, for Phase 3 (2013-2020) the European Commission (EC) wanted to harmonise the rules and so proposed legislation that sets EU wide limits on the amount of international credits that can be used. After months of scrutiny by the European Parliament and the Council, this legislation was adopted by the EC on 8th Nov 2013.
The application of the legislation to each installation needs careful review but in general should allow both existing operators and new entrants to exchange additional volumes of international credits for compliance in Phase 3. Our analysis suggests that across some 72 installations in the UK Oil & Gas Sector covered under the EU ETS there is still the opportunity to use approximately 9.68m international credits
At current market prices (2 Dec 13) the spread between the commonly used EU allowances and international credits (in this case CERs) is around EUR 4. This means that the unused international credit limits across the UK Oil & Gas sector currently presents an opportunity with a current value of around EUR 38.72m.
Therefore in order to cost effectively manage compliance under the EU ETS, installations should look closely to include the use of international credits in their approach.