Under the Kyoto Protocol to the UN Convention on Climate Change (UNFCCC) a number of countries have made commitments to reduce or stabilize their emissions of greenhouse gasses (GHG) with respect to their 1988-1990 emission levels. Since for a number of OECD countries emissions reductions to meet their commitments under the Kyoto Protocol by domestic actions only would be extremely expensive, they need to acquire between 2008 and 2012 around 2.5 billion tons of emission reductions from third countries. This demand can be satisfied by purchasing from other countries (i) emission reduction units generated by projects that reduce GHG emissions or enhance sequestration; and (ii) surplus allowances under the Kyoto Protocol (Assigned Amount Units, AAUs). International emission trading involves primarily transactions between sovereign governments while the European Union Emission Trading Scheme involves firm-to-firm transactions.

Central and Eastern Europe countries are uniquely placed to take advantage of international emissions trading opportunities. This is the only region having surplus allowances during the first commitment period of the Kyoto Protocol. As a result of the restructuring of the economies in the early 1990s, most transition economies are predicted to have emission levels below the cap defined by reference to base year emissions from 1988-1990. From over 10 billion tons[1] of surplus allowances estimated to be available up to 2012, over three quarters are in Russia and Ukraine. Global supply of emissions allowances significantly exceeds global demand for emission reductions and results in a sort of competition between sellers within Central and Eastern Europe.

Green Investment Scheme – general description

The excess supply mentioned above causes that the buyers’ preferences matter. Most OECD buyers have indicated their interest in purchasing surplus allowances only if they are “greened”. Such opportunity can be provided through one of trading options established for implementation of the Article 17 of the Kyoto Protocol which is so called Green Investment Scheme (GIS). GIS is a mechanism linking sales of AAUs to investments that reduce GHG emissions through allocation of proceeds from the sales of AAUs for implementation of projects and programs focusing on GHG emissions reduction and adaptation to climate changes (so called “greening”). Under a GIS, the selling country needs to assure buyers that the proceeds from the sale of AAUs would be used to finance agreed projects and programs, and credible monitoring and verification measures would need to be adopted. In return the buying country would provide financing for the GIS under the terms of a negotiated contract.

Participation in the EU Emission Trading Scheme presents some limitation to the use of revenues from International Emissions Trading. According to the EU state aid rules, the operators of installations covered by the ETS – such as power sector and a number of large industrial plants - can have only limited access to revenues generated by greening, as this would interfere with the regulations of the EU Emission Trading Scheme and could distort competition on the European market. Therefore the bulk of revenues from selling allowances under GIS agreements would most likely be transferred to programs and projects implemented by entities not participating in the ETS.

Green Investment Scheme - Poland

Due to restructuring of the economy in 1990s, focused inter alia on reduction of the impact of the national economy to the environment and decoupling of the GDP growth from the emissions levels, Poland will have GHG emissions well below target established under the Kyoto Protocol. The surplus amounts to 500 million of AAUs in the period 2008-2012, and is assumed to be the third largest, after Russian and Ukrainian.

As of April 29, 2008 Poland met specific criteria and became eligible to engage in international emissions trading (Article 17 of the Kyoto Protocol) including trading of AAUs. The Polish Act on management of GHG emissions and emissions of other substances adopted on July 17, 2009 defines:

• proceeds from the transactions can be spent on hard greening, as well as on soft greening.
• transparent rules for acquiring of the applications for projects, that can be co-financed from the GIS proceeds,
• robust but flexible regulations for monitoring, reporting and verification of the effects provided by the projects,
• other operational rules of National Green Investment Scheme.

According to the Act, the operating entity for the National GIS is the National Fund for Environmental Protection and Water Management (NFEP&WM).

[1] A report by Point Carbon for CAN Europe „Assigned Mount Unit: Seller/buyer analysis and impact on the post 2012 climate regime”, October 26th, 2009