USE OF OFFSET CREDITS ACROSS EMISSION TRADING SYSTEMS and CARBON PRICING MECHANISMS

May 2014

This briefing note provides an overview on how the use of offset credits is regulated in different emission trading systems (ETS) and carbon pricing mechanisms around the world. It takes into consideration systems that are active and under-development, and looks at whether rules allow the use of domestic offsets, i.e. credits generated by non-covered projects in the same jurisdiction, and/or international offsets, i.e. credits generated by projects in other jurisdictions. The intent is to provide a snapshot of the regulations in place and facilitate the comparison of their design.

EU ETS – Current and Future Situation China Chongqing ETS Phase III (2013 - 2020) Use of Domestic Offsets Use of International Offsets Use of Domestic Offsets Use of International Offsets YES, companies will be NO, not envisaged YES, projects in EU Member YES, the overall use of credits allowed to use Chinese States which reduce is limited to 50% of the EU- Certified Emissions greenhouse gas emissions not wide reductions over the Reductions (CCERs) to cover covered by the ETS can issue period 2008-2020. Covered for up to 8% of their credits entities are allowed to use up emissions. All CCERs must be to either the amount allowed generated from projects to them in Phase II or to 11% within the province of the allowances they were China Tianjin ETS allocated in Phase II, whichever is higher Use of Domestic Offsets Use of International Offsets YES, companies will be NO, not envisaged Phase IV (post 2020) allowed to use CCERs to cover On 22 January 2014, the European Commission presented a up to 10% of their emissions text that would exclude international credits from the EU ETS China Hubei ETS starting from 2021. Use of Domestic Offsets Use of International Offsets Alberta Specified Gas Emitters Regulation (SGER) YES, companies will be NO, not envisaged Use of Domestic Offsets Use of International Offsets allowed to use CCERs to cover YES, covered entities will be NO, not envisaged up to 10% of their emissions. allowed to use offsets All CCERs must be generated generated from non-covered from projects within the facilities in Alberta Hubei province Additional Comments: In order to be eligible, an offset must: China Beijing ETS have occurred in Alberta; result from actions taken on or after Use of Domestic Offsets Use of International Offsets January 1st 2002; be real, demonstrable, quantifiable and YES, companies will be NO, not envisaged measurable; and be from an action that is not required by law allowed to use CCERs to cover at the time of its initiation. up to 5% of their emissions. California ETS At least 50% of the offsets have to come from projects Use of Domestic Offsets Use of International Offsets within the jurisdiction of the YES, covered entities will be Limited, under the current city of Beijing allowed to use offsets up to protocols offsets are only an 8% quantitative usage allowed from the US, Canada, China Shanghai ETS limit Indonesia, Brazil and Mexico Use of Domestic Offsets Use of International Offsets Additional Comments: California officially linked its ETS to YES, companies will be NO, not envisaged Quebec’s. Under the linked system, compliance instruments allowed to use CCERs to cover (allowances, offsets, and early action offsets) will be up to 5% of their emissions recognised as mutually and equivalently acceptable in either jurisdiction. Assembly Bill 32 allows using offsets from outside the current limits if the CA governor signs them. P a g e | 1 IETA – Climate Challenges, Market Solutions

Regional Greenhouse Gas Initiative (RGGI) ETS China Guangdong ETS Use of Domestic Offsets Use of International Offsets Use of Domestic Offsets Use of International Offsets YES, offsets are subject to a YES, for offsets that originate YES, companies will be NO, not envisaged 3.3% quantitative usage limit outside of the RGGI region, allowed to use CCERs to cover the project’s state must be up to 10% of their emissions. entered into a Memorandum At least 70% of the offsets of Understanding with the have to come from projects RGGI states within the province China Shenzhen ETS South Africa Carbon Tax Use of Domestic Offsets Use of International Offsets Use of Domestic Offsets Use of International Offsets YES, companies will be NO, not envisaged YES, offsets from Southern YES, offsets may be used to allowed to use CCERs to cover Africa may be used to reduce reduce a firm’s carbon tax up to 10% of their emissions a firm’s carbon tax liability liability

Kazakhstan ETS Additional Comments: Further regulatory details on the offset Use of Domestic Offsets Use of International Offsets mechanism and design features, including carbon offset Under Consideration Under consideration standards, project types and methodologies, and origins of offset projects have yet to be published. Additional Comments: The following sectors are preferred for South-Korea ETS domestic offsets: mining and metallurgy; agriculture; housing Use of Domestic Offsets Use of International Offsets and communal services; forestry; prevention of land YES, offsets are subject to a NO, offsets from degradation; renewables; processing of municipal and 10% quantitative usage limit international sources will be industrial waste; transport; and energy-efficient construction. excluded from the first two Mexico’s Carbon Tax phases (2015 - 2020) Use of Domestic Offsets Use of International Offsets Additional Comments: Post-2020, covered entities will be YES, offsets from Mexican Unclear, priority might be allowed to use international offsets to meet up to 10% of their CDM projects may be used to given to domestic credits surrender obligations, with the specification that the volume reduce a firm’s carbon tax shall not exceed the number of domestic offsets used for each liability compliance year. Additional Comments: The rules for the use of offset credits Switzerland ETS are yet to be published. Use of Domestic Offsets Use of International Offsets New Zealand ETS YES, offsets are subject to an YES, ERUs, CERs, and RMUs 8% quantitative usage limit are accepted international Use of Domestic Offsets Use of International Offsets offsets. AAUs are permitted Under Consideration Under Consideration from countries that have a similar ETS Additional Comments: The use offsets is contingent upon Tokyo ETS qualitative rules, e.g. CERs and ERUs from nuclear projects, large-scale hydro projects are not accepted for compliance Use of Domestic Offsets Use of International Offsets and neither are long-term CERs, temporary CERs, and non-NZ YES, unlimited offset credits YES, in the event of high originated AAUs. both from uncapped small allowance prices and medium enterprises international credits from Quebec ETS within Tokyo, and from CDMs and other units might Use of Domestic Offsets Use of International Offsets renewable energy certificates be allowed as offsets, on the YES, companies will be YES, offsets issued by nationwide. Use of offsets condition that domestic allowed to use offsets up to jurisdictions linked with generated from Japanese offsets are also used installations outside of Tokyo an 8% quantitative usage Quebec will be recognised limit is limited to 33% of a company’s obligations Additional Comments: Quebec’s ETS is linked to the Californian system. Under the linked system, compliance instruments (allowances, offsets, and early action offsets) will be recognised as mutually and equivalently acceptable in either jurisdiction. CONTACT INFORMATION For more information on IETA’s work, or if you have any queries about this briefing note, please contact Stefano De Clara Email: [email protected], Phone: +32 2 230 11 75 Website: www.ieta.org

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