2013 will see some important changes to the international framework for emissions trading. These changes will be of interest to anyone involved in the carbon markets, from carbon investors or regulators through to operators required to comply with a greenhouse gas permit, and CDM project developers.

The latest round of climate talks, the UNFCCC’s 18th Conference of the Parties (COP 18), took place in Doha in November / December 2012. The talks confirmed a new eight-year commitment period for the Kyoto Protocol (which will expire at the end of December 2020). The parties also agreed a firm timetable to adopt a universal climate agreement to succeed the Kyoto Protocol – this builds on the Durban Platform for Enhanced Action agreed in 2011. The new deal is to be agreed by 2015, and will come into force in 2020.

The second commitment period for Kyoto is limited in its impact because the participating parties account for less than 15 per cent of global emissions of greenhouse gases. However, it is significant because it means that the legal mechanisms and market instruments set up under Kyoto (the Clean Development Mechanism, Joint Implementation and International Emissions Trading) can continue in 2013 and beyond.

For the first time, developed countries also agreed to make payments to developing countries for “loss and damage” due to climate change. There are still questions around this, however, including whether funds for “loss and damage” will come from existing humanitarian aid and disaster relief budgets.

At a European level, 1 January 2013 marks the beginning of Phase 3 of the EU ETS. Key differences include:

  • Phase 3 will run from 2013 to 2020 so it is longer than previous phases (eight years rather than five).
  • Some new sectors (aviation, bulk organic chemicals, and primary aluminium production) have been brought into the EU ETS.
  • In Phases 1 and 2, Member States had more autonomy to set their own caps and distribute allowances. However, from 2013 onwards most elements of the scheme will be determined at EU level.
  • In Phase 2 most installations got a free allocation of allowances. In Phase 3, the electricity generation sectors will get no free allocation at all and other sectors will see their free allocation significantly reduced. Where an installation gets a free allocation, it will be based on an EU-wide benchmark for that particular industry.
  • There are new rules to protect sectors that are at risk of “carbon leakage” (the risk that operators may choose to move production outside the EU to avoid the compliance costs of the EU ETS).
  • Some small emitters (under 35MW) will be exempt.
  • A new European Union Registry has replaced individual registries in each Member State.
  • There are changes to monitoring, reporting and verification procedures.

Another significant change affecting the carbon markets comes into force in 2013. Carbon credits from projects involving the destruction of trifluormethane (HFC-23) and nitrous oxide (N2O) from adipic acid production cannot be used for compliance with the EU ETS, with effect from 1 January 2013. There is an exception for credits that relate to emissions reductions realised in 2012, which can be used for compliance purposes until 30 April 2013. This may result in complex issues for companies that are already committed to buying or selling these credits under forward contracts.

The High Court recently considered a similar issue in Deutsche Bank AG v. Total Global Steel Ltd. Deutsche Bank (DB) claimed damages from Total Global Steel (TGS) for breach of four contracts made in March 2010. Under the contracts, DB agreed to buy from TGS a total of 492,000 Certified Emissions Reductions (CERs). TGS was obliged to deliver CERs that “may be used for determining compliance with emissions limitation commitments pursuant to and in accordance with the EU ETS”.  However, TGS supplied CERs that had previously been surrendered under the EU ETS for compliance purposes. The European Commission has introduced a check that prevented surrendered CERs from being 'recycled' and used again for compliance purposes, so the CERs were effectively worthless. DB argued that the CERs supplied by TGS did not meet the contract requirements. Mr Justice Andrew Smith acknowledged the complexity of the case, but agreed with DB and held that  TGS was in breach of contract, and awarded DB €4,182,000 in damages.

We may expect to see further litigation on carbon trading contracts in the courts in 2013.