The EU ETS as an Environmental Instrument - Green Energy and Efficiency: An Economic Perspective - page 360

The EU ETS has also agreed to surrender these credits up to a certain threshold,
based on a percentage of either emissions or free allocation. Both CERs and ERUs
are traded in the secondary market, as are the EUAs (emission allowances in the EU
ETS), and there are also derivatives, options, swaps, etc., with CERs and ERUs as
underlying assets, but their price mechanisms are different.
The main differences between EUAs and international credits as compliance
instruments in the EU ETS are:

Liquidity: much lower for international credits than for EUAs.

￿

Homogeneity: there are no qualitative differences between EUAs; however,
international credits are perceived as more or less valuable according to their
technology, country of origin, date of issuance, etc.

￿

Regulatory risk: although international credits are valid for compliance, they are
subject to certain restrictions by the regulator. For instance CERs from HFC
destruction projects and ERUs from countries without binding targets under the
Kyoto Protocol

￿

' s Second Commitment Period will not be valid in the Phase III

of EU ETS. 11

The prices of international credits have fallen dramatically since 2011 due to the
lack of international demand for them, causing a huge imbalance. The acceptance of
international carbon credits in the EU ETS is established as a mechanism to reduce
the upside price risk and to provide exibility to the system. However the massive
use of international credits could be detrimental to the emission reduction goals of
the EU ETS. A wide price gap between EUAs and international offset could dra-
matically increase that risk and boost the use of low-cost international credits thus
reducing the incentive for companies to invest in emission reduction technologies in
the EU ETS. For this reason the regulator introduced the aforementioned offset
usage threshold.
The use of international credits has been the subject of controversy due to the
decision of the European Commission to ban the use of credits from certain types of
project (HFC-23 credits) in the EU ETS as from April 2013. This prohibition of
credits that were already in the accounts of EU ETS participants led to major legal
uncertainty in the system concerning the use of international credits during Phase
III, considering that the Commission might make similar decisions regarding pro-
jects of other types (Figs. 2 and 3 )[ 13 ].

11 Several quantitative and qualitative restrictions apply to the use of ERUs and CERs. Credits
from GHG emission reduction projects registered before December 31, 2012 can be used from all
countries, except projects from: (i) Land-Use, Land-Use Change, and Forestry (LULUCF) pro-
jects; (ii) Nuclear projects; (iii) Large hydropower projects not in compliance with the World
Commission on Dams guidelines; (iv) HFC-23 destruction projects (as from May 1, 2013); (v)
N 2 O destruction projects from adipic acid production (as from May 1, 2013).