Registry Issues for Domestic Emissions Trading and the Kyoto Mechanisms

1. Registry Issues for Domestic Emissions Trading and the Kyoto Mechanisms Consultations on Registries Bonn June 2, 2002 Erik Haites Margaree Consultants

2. DET/RET Programs Many Annex B Parties will implement domestic or regional emissions trading (DET/RET) to help meet their commitments DET/RET programs likely to differ: • voluntary/mandatory participation • coverage - sources, gases, sinks • stringency of the cap, safety valve • distribution of units - auction, free MARGAREE

3. DET/RET Programs • burden on participants - free allocation rule (rate-based, absolute) or auction revenue distribution • enforcement - effectiveness, penalties • opt-ins - sources, project credits • compliance period, banking, borrowing • definition of unit • liability provisions MARGAREE

4. Links Between Programs Foreign entities may own DET/RET units: • only in issuing registry - trading • in other registries - trading, compliance Transfers require transaction log, assurance of integrity of foreign registries Compliance use in other countries requires host government approval, equivalent transfers of Kyoto Protocol units MARGAREE

5. Links Between Programs Annex B government may restrict use of foreign DET/RET units for compliance due to environmental integrity concerns: • treatment of indirect emissions • stringency of the cap, treatment of opt-ins • nature of, baselines for, projects • permanence of sinks Equivalent transfer of KP units leaves host government responsible for integrity MARGAREE

6. Links Between Programs If matched by KP unit transfers,DET/RET transfers may be limited by provisions for: • commitment period reserve • supplementarity • limit on use of LULUCF CERs If DET/RET designed to ensure low price, foreign transfers may be limited to provide competitive advantage for domestic sources MARGAREE

7. Registry Issues Units for DET/RET program could be: • units specific to the DET/RET program • KP units - AAUs, CERs, ERUs, RMUs Limits on foreign units may be imposed on acquisitions or on use for compliance Limits on foreign transfers or acquisition/ use may be implemented using permits MARGAREE

8. Registry Issues Single registry for KP units and DET/RET program likely Registry will need to track holdings of all units and permits an entity may hold -- DET/RET units for several countries Transaction log may need to include checks on transfers/acquisitions of DET/RET units MARGAREE

9. Environmental Integrity Government may prohibit acquisition/use of specified types of units for integrity reasons Use prohibition allows units to be held in registry for trading purposes May not be possible to identify DET/RET units by type -- sinks, nuclear, etc. -- so restrictions may be limited to KP units MARGAREE

10. Supplementarity Domestic action shall constitute a significant element of the effort of Party Domestic policies should be designed to achieve this requirement Larger acquisitions of KP units then due to: • Large increases in emissions by entities in the DET/RET • Poor performance by non-DET/RET policies offset through purchases of KP units MARGAREE

11. Supplementarity Assume program design will meet the requirement, so no restrictions on use/ acquisition of foreign KP or DET/RET units Impose quantitative limits on acquisition/ use of foreign KP or DET/RET units: • by each DET/RET participant • in aggregate for DET/RET participants With no restrictions entities could “wash” units to circumvent restrictions imposed by other countries MARGAREE

12. Limit on LULUCF CERs To ensure it complies with the limit on acquisition of LULUCF CERs an Annex B Party could limit use/acquisition: • by each DET/RET participant • in aggregate by DET/RET participants Party could decide to accept risk that limit will not be reached Transaction log will identify transfers that cause the national limit to be violated MARGAREE

13. Commitment Period Reserve KP units held in the registry can not be less than the prescribed level Transaction log will identify transfers that would cause reserve requirement to be violated If transaction proceeds anyway, the KP units can not be used for compliance until any questions of implementation have been resolved MARGAREE

14. Commitment Period Reserve Transaction log allows transfers on first-come, first-served basis, may have a rush to transfer Other options include: • Specified fraction of units can be transferred • Require a permit to transfer and limit the number of permits (issue permits free for acquisitions) Will need policy on acquisition/use of units that violated the CPR requirement when transferred MARGAREE

15. Conclusions DET/RET programs will differ in design raising integrity and competitiveness concerns KP unit transfers equal to DET/RET transfers leaves host Party responsible for integrity A Party may limit transfers or acquisitions/use of units for various reasons DET/RET programs may use KP units or national units MARGAREE

16. Conclusions National registries can also serve as registries for DET/RET systems, but may need to track additional types of units A Party may wish to implement measures in addition to reliance on the transaction log to maintain the commitment period reserve Need policy on acquisition/use of units that violated the CPR requirement when transferred MARGAREE