Recently, there has been much discussion in the market regarding the inauguration of the International Transaction Log (ITL) in April 2007. Concern has arisen over the European Commission’s (Commission) stance that all 27 EU Member States must meet the eligibility requirements of Article 17 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (Kyoto Protocol), prior to the linking of the ITL and Community Independent Transaction Log (CITL). It is unlikely that all 27 EU Member States will satisfy the eligibility criteria by the start of 2008, hence the market is rallying to suggest alternative solutions to this problem.
The Registries Regulation
By way of background, the EU Registries Regulation (No. 2216/2004) (Registries Regulation), which was effective beginning 22 December 2004, established and defined the parameters for a standardised and secure system of EU Member State registries for the issue, transfer and cancellation of allowances. Such registries are not allowance trading platforms, but rather provide for the accurate accounting of compliance and allowance ownership within the EU emissions trading scheme. The Registries Regulation provides that each EU Member State and the Commission shall establish a registry in the form of a standardised electronic database.
At the request of a registry account holder, allowances may be transferred between holding accounts within a registry and between registries. Transfers may only be made to or from a third country registry or the clean development mechanism (CDM) registry where an agreement has been concluded in accordance with Directive 2003/87/EC (EU ETS Directive) and the transfer is in accordance with the Commission’s provisions on mutual recognition.
The CITL, established by the Commission, is a standardised electronic database which records the issuance, transfer, surrender and cancellation of allowances within national registries. Currently, EU Member States’ registries are connected to the CITL through a communication link. Allowance trading between companies in different EU Member States is possible through the CITL, which tracks all such transactions and transfers between EU Member States’ registries.
The CITL performs automated checks on all processes in the Community registries system concerning allowances, verified emissions, accounts and Kyoto units to ensure that there are no irregularities. Processes that fail these checks will be terminated to ensure that transactions in the Community registries system comply with the EU ETS Directive.
The EU ETS Directive requires the registries to disseminate environmental information, subject to certain confidentiality requirements. The CITL, therefore, publishes information about individual companies’ verified emissions and whether or not they have been compliant.
National registries will soon also be able to link to the ITL, a system developed and implemented by the Secretariat to the United Nations Framework Convention on Climate Change (UNFCCC).
The ITL will form the central hub of a settlement system that will deliver allowances from sellers to buyers. It will function to verify, record and route transactions that are received from the CDM registry and national registries. A communication link between the ITL and CITL will also be established. After which, all processes concerning allowances, verified emissions, accounts and Kyoto units shall be completed through the ITL and thereon communicated to the CITL.
The ITL will become fully functional once national registries have established operational links and passed the requisite tests. The testing involves three phases: documentation testing; connectivity and security testing; and software testing. Most EU Member State registries and the CITL use a lower form of security than that required by the ITL.
The UNFCCC has stated that a number of national registries are scheduled to begin official testing of their systems against the ITL in late April and May 2007. At the time of writing, the registries of Japan and New Zealand, as well as the CDM registry, had already linked their test environments to the ITL and had successfully carried out trial transactions.
Once the communication link between the CITL and the ITL is established, processes concerning accounts, verified emissions, transactions within registries and external transfers will not be finalised until both the CITL and ITL inform the initiating registry that they have not detected any discrepancies.
Under Article 17 of the Kyoto Protocol, Annex 1 (or industrialised) countries must fulfil various ‘eligibility criteria’ as fleshed out in the Marrakech Accords, which specify the modalities, rules and guidelines for the trading of allowances under the Kyoto Protocol. Amongst the eligibility criteria, Annex 1 countries were required to calculate and report their total greenhouse gas emissions for the 2008 to 2012 period to the UNFCCC no later than 31 December 2006. The UNFCCC has 16 months to study each report, which may result in decisions regarding eligibility criteria falling beyond 1 January 2008. Market speculation has suggested that the Commission is considering not linking the ITL and CITL until all 27 EU Member States have fulfilled the eligibility criteria. Such an ‘all or nothing’ approach is obviously of grave concern to the industry as eligibility delays may depress emissions trading into early 2008. To the more prepared EU Member States, it appears unjust to hold up progress due to delays from those EU Member States that have failed to meet the eligibility criteria by 2008.
EU Member State registries are expected to join the ITL en masse by no later than 1 December 2007, in order to meet delivery of future CDM contracts. On 17 April 2007, the UNFCCC moved to reassure the market that, from a technical perspective, there should not be any problems connecting the CITL to the ITL by this date. The UNFCCC is focused on ensuring that the regulatory and institutional infrastructure components, such as the CITL and ITL, required to effect the Kyoto Protocol’s functioning are in place prior to the first compliance period in 2008. Despite this, the arguably more pressing issue is the resolution of the Commission’s stance on Article 17 eligibility criteria. Currently, industry groups are working to suggest potential solutions to this problem.