A week into the Durban conference, progress on the continued workability of the Kyoto Protocol emissions trading mechanism is slow. A number of parties to the negotiations have acknowledged that action needs to be taken to tackle the surplus of Assigned Amount Units (AAUs) in the international emissions market. The details of the action remain undecided, despite some proposals being put forward in various discussion groups. If a second commitment period is to go ahead, agreement on the carry-over of AAUs will have to be reached in order to give certainty to the market.

As to the issue of linkage, a centralised decision now appears unlikely, and separate negotiations have started to take place between different blocs as to ways of connecting national and regional emissions trading schemes.

Carry-over of AAUs and the emissions market

As previously reported by Climatico, emissions trading is a key pillar of the Kyoto Protocol, and is aimed at reducing greenhouse gas emissions by way of a participatory market mechanism. The viability of the emissions market is therefore vital to the smooth functioning of this system. The principal threats to the continuing functionality of the emissions market are the AAU surplus (caused by oversupply) and uncertainty over whether there will be a gap between commitment periods.

The Ad-hoc Working Group for the Kyoto Protocol (AWG-KP) has so far been the forum of choice in addressing the issue of the AAU surplus and the workings of the emissions market. The Least Developed Countries (LDC) bloc and the Alliance of Small Island States (AOSIS) were particularly vocal in expressing their desire to see a plan emerge for a credible second commitment period, which would necessarily involve the elimination of the loophole that is the AAU surplus. These blocs were joined by Australia and the EU, which is understandable given the former’s intention to have a national emissions trading scheme from 2015 and the latter’s already existing EU Emissions Trading System (EU ETS).

The proposed adjustments to the emissions market are of relevance only if the Kyoto Protocol continues into a second commitment period. This is in itself an issue currently debated in Durban, with different factions being formed over the contents of an extension of the Protocol beyond 2012. But if the Kyoto Protocol is to survive Durban, the problem of the surplus AAUs must be addressed if emissions trading is to remain an effective part of the UN climate change mitigation framework.

Linkage between national and regional emissions schemes

With several national and regional emissions trading schemes either up and running (the EU ETS) or in the pipeline (Australia), another key issue that the Durban conference needs to address is that of linkage between them. This has not formed the subject of direct discussion in the official negotiating sessions at Durban. However, Australia has announcedthat it intends to start work on linking its fledgling trading scheme to those in New Zealand and the EU.

This is an important step in improving market integration, and may well prove a viable alternative to the Kyoto emissions trading mechanism should parties fail to agree on or delay the second commitment period. It is somewhat disappointing that the driving force behind a system of linkages between schemes has not originated from the Durban negotiations themselves. However, given that parties are finding it challenging to agree on more pressing issues such as the continuity of the Kyoto Protocol, it is not altogether surprising that linkage is not at the top of the agenda. It seems that individual blocs or countries have been left to enter into their own bilateral or multilateral negotiations on this matter if they view emissions trading as a valuable regulatory tool of climate change mitigation.

Hopes for the second week of negotiations

Indications that many negotiating parties are keen to reach an agreement over the treatment of the AAU surplus are encouraging. It is hoped that this willingness to engage in discussions will materialise into a concrete solution by the end of the conference, and particularly one which can uphold the viability of the emissions market. The AWG-KP has alreadypresented a number of possible avenues of action, ranging from no restrictions on the carry-over of AAUs to different options on limits. It is necessary that a sufficiently small amount can be carried over into the second commitment period, so that the environmental goal of emissions reductions is not compromised.

On the issue of linkage, it remains to be seen which other countries or blocs (if any) express a desire to work together to achieve a closer interconnection between their respective mechanisms, as centralised action in this respect appears overly complex to orchestrate.