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Relevant Kyoto Protocol rules

Australia has joined the second commitment period of the Kyoto Protocol from 2013–20 and will achieve its target in compliance with the Kyoto Protocol rules. This appendix explains these rules. All references to articles and paragraphs refer to the Kyoto Protocol unless otherwise specified.

A.1 Kyoto Protocol compliance

To comply with its Kyoto Protocol obligations, at the end of the second commitment period Australia will need to ‘retire’ enough Kyoto units to match its greenhouse gas emissions over the period 2013–20.

Australia was assigned an initial carbon budget, equal to its Kyoto target, at the start of the commitment period (art. 3, para. 1). Australia is able to create Assigned Amount Units (AAUs) equal to this budget, with each AAU representing one tonne of emissions. After 2020, it can retire these units for compliance.

As well as these AAUs, Kyoto rules allow Australia to use other units for compliance, including:

  • Removal Units (RMUs)—if Australia achieves removals of emissions (for example, through storing carbon in forests: UNFCCC, Dec 13/CMP.1), it can issue RMUs and use these for compliance (see A.7). Australia can also use RMUs issued by other countries.
  • AAUs from other countries (art. 17) (see A.4).
  • Certified Emission Reductions (CERs) issued under the Clean Development Mechanism (art. 12).
  • Emission Reduction Units (ERUs) issued under the Joint Implementation Mechanism (art. 6).
  • Units issued under a market-based mechanism established under the UNFCCC (see A.5).

If Australia’s domestic emissions exceed its second commitment period target, it can still comply with its obligation by purchasing units. In this case, the additional emissions in Australia are offset by emissions reductions elsewhere. Similarly, if Australia sells units to other countries, it cannot use those units to meet its own target.

All units must be tracked using the Kyoto Protocol’s integrated electronic registry system. Countries use this system to issue, transfer, retire (for compliance) and cancel units. Kyoto Protocol compliance is illustrated in Figure A.1.

Figure A.1: Kyoto Protocol compliance

This chart shows how compliance with the Kyoto Protocol works for Parties. It shows that total national emissions under the Kyoto Protocol can be met with a range of international units including AAUs, RMUs and other international units.

A.2 True-up period

Kyoto rules define what happens after the commitment period ends. First, countries are given time to finalise their emissions inventory reporting. Inventory reports are submitted with a two-year delay and are subject to international review (UNFCCC, Dec 15/CMP.1). Australia submitted its final inventory report for the first commitment period on 15 April 2014.

Once all Parties’ final inventory reports have been reviewed, Parties will have a 100-day period (‘true-up period’) to get things in order and retire the right amount of units for compliance. Countries can continue to trade in this period.

The timing of the true-up period is important because it determines the timing of carryover, which in turn has implications for the availability of units (see A.3). Timing needs to be agreed by Parties to the UNFCCC and has not yet been decided. Most analysts consider the earliest the true-up period could start is mid-2015 and, if Parties do not decide on timing at the Lima meeting in November 2014, it would be delayed to at least 2016.

A.3 Carryover rules

Under the Kyoto Protocol, Australia can carry over to the second commitment period certain Kyoto units that have not been retired for compliance with the first commitment period. Different units are subject to different carryover restrictions (Dec 13/CMP.1):

  • AAUs (whether Australia’s surplus or bought from another country) can be carried over without restriction (see A.4).
  • CERs can be carried over up to a maximum of 2.5 per cent of Australia’s initial assigned amount for the first commitment period (equivalent to 74 million units)
  • ERUs can be carried over up to a maximum of 2.5 per cent of Australia’s initial assigned amount (74 million units).
  • RMUs, ERUs converted from RMUs and temporary CERs (issued for forestry projects under the CDM) cannot be carried over.

At the end of the true-up period, Australia will submit a report confirming what units it proposes to carry over. This report will be subject to international review.

Carryover, like all other Kyoto Protocol transactions, is recorded in the integrated electronic registry system. The first commitment period units Australia elects to carry over will be converted into second commitment period units. Any first commitment period units that are not carried over are cancelled.

The rules for compliance in the first commitment period, true-up and carryover are a window of opportunity for Australia. Provided that the volume is available, Australia could purchase first commitment period units such as CERs, ERUs or RMUs before the end of true-up and retire them for compliance towards its first commitment period target. This would increase the number of AAUs that Australia could carry over and use towards its second commitment period target (Figure A.2 illustrates). From an environmental perspective, this is robust—provided that all units purchased represent genuine emissions reductions.

Figure A.2: Compliance, true-up and carryover restrictions

This chart shows how carry-over works under Kyoto Protocol, and makes two points. The first is that if the number of AAUs issued exceeds total national emissions, the surplus AAUs can be carried over into the next Kyoto commitment period. The second is that, if international units are also used for compliance, additional AAUs can be carried over.

A.4 Use of surplus AAUs

Once carried over, there is no restriction on using Australia’s own AAUs to meet its 2020 target. Parties have, however, agreed to some trade constraints for surplus AAUs from the first commitment period. This was in response to concerns about the large surplus of AAUs (‘hot air’) that many countries are expected to have (Chapter 3). The arrangements will also apply to Australia’s surplus.

For each country, AAUs that are carried over from the first commitment period will be placed in a special account in the registry called the ‘previous period surplus reserve account’. Australia will be able to use these AAUs without restriction towards its second commitment period target (Dec 1/CMP.8 para. 24).

Parties can buy other countries’ previous period surplus AAUs in the second commitment period, but only to a limit of 2 per cent of their assigned amount from the first commitment period (Dec 1/CMP.8 para. 26).

When the new rules were agreed in 2012, Australia made a political declaration that it would not purchase surplus AAUs carried over by other countries. Japan, Liechtenstein, Monaco, Norway and Switzerland made similar statements, and these AAUs cannot be used for compliance under the EU’s legislation.

The 2012 amendments to the Kyoto Protocol also contained a safeguard to avoid creating new surpluses of AAUs in the second commitment period (new hot air) (art. 3 para. 7 ter). This safeguard forces countries with second commitment period targets weaker than the threshold (their average emissions in 2008–10) to cancel AAUs. In effect, this means their second commitment period target cannot exceed this threshold. This improves the environmental integrity of AAUs in the second commitment period.

A.5 New market mechanisms

When the second commitment period was agreed in 2012, several amendments to the Kyoto Protocol were also adopted. One allows for countries with a Kyoto Protocol target to use units generated under a market-based mechanism established under the UNFCCC towards meeting their second commitment period targets (art. 3 para. 12 bis–ter). The rules for these new market mechanisms are still under negotiation.

A.6 Share of proceeds

The Kyoto Protocol rules require 2 per cent of CERs generated from each CDM project to be provided to the Adaptation Fund, which sells the units and uses the proceeds to assist vulnerable developing countries’ adaptation projects. This ‘share of proceeds’ occurs at the point of issuance and the cost is reflected in the price of remaining CERs sold on the market.

In the second commitment period, a similar ‘share of proceeds’ has been agreed for the transfers of other Kyoto Protocol units (Dec. 1/CMP.8 para. 20). This means that if Australia was to buy second commitment period ERUs, RMUs or AAUs, 2 per cent of the units transferred would need to be provided to the Adaptation Fund. This is only required for the first international transfer of the units and not for subsequent transfers.

These rules would need to be taken into account when purchasing units for the second commitment period.

A.7 Land use accounting

To meet Kyoto Protocol targets, countries must count net emissions from some types of land use activities (including, for the second commitment period, forest management) and can opt to count others (revegetation, cropland management, grazing land management, and wetland drainage and rewetting).

For removals such as those from afforestation, reforestation and forest management, countries issue an RMU. There is a limit on the number of forest management RMUs a country can use toward its second commitment period target (3.5 per cent of 1990 emissions, excluding land use, land use change and forestry, multiplied by eight) (Dec. 2/CMP.7, Annex D para. 13). This limit applies to forest management RMUs issued by Australia, as well as any forest management RMUs acquired from other countries.

There is also a limit on the number of CERs from afforestation and reforestation projects that can be used (1 per cent of 1990 emissions, excluding land use, land use change and forestry, multiplied by eight) (Dec. 2/CMP.7, Annex D para. 19).