There is a range of options that can provide additional flexibility for covered entities in an ETS to comply with the system. Temporal flexibility provisions, such as banking and borrowing, can provide the option to take advantage of mitigation options outside established compliance periods, whereas other credits such as offsets expand mitigation options beyond covered regions and/or sectors covered by an ETS.

Banking or borrowing provisions can help address market fluctuations through time due to developments such as economic fluctuations, abnormal weather, or technological developments. “Banking” provisions allow entities to hold surplus allowances from previous trading periods, when mitigation may have been easier, and to surrender them in future compliance periods, when it may be more expensive. Alternatively, if future mitigation costs are lower, for example through new technology, entities may “borrow” allowances to surrender in the present, which are then deducted from their future budgets. In both cases, it is important that emissions remain under the cap across various trading periods. 

The location and sector where GHGs are emitted are irrelevant for climate change on the global level. The costs of mitigation actions, however, may be lower in regions or sectors not covered by the cap. Therefore, offering covered entities the opportunity to contribute to emission reduction projects outside the sectoral or geographic scope of an ETS may reduce compliance costs without compromising environmental integrity. Existing international mechanisms that some ETS-jurisdictions have decided to recognize as offset credit providers (to various extents) are Joint Implementation (JI) and the Clean Development Mechanism (CDM) established under the Kyoto Protocol. Other systems have developed their own offset options focusing on domestic mitigation.  Important criteria for offsets are their additionality, permanence, and leakage: offsetting must demonstrate actual emission reductions compared to what would have otherwise happened, ensure emissions are not simply released at a later date, or are displaced elsewhere. 

Back to Top
Offsets and credits Banking and borrowing
Canada - Ontario Cap-and-Trade Program

Phase I (2017-2020): In the first phase, offset credits and early reduction credits will be available for use. Early reduction credits are offered to facilities who have taken early mitigation action in the four years preceding approval of the final cap-and-trade regulation. The regulations do not currently provide details on the creation and distribution of Early Reduction Credits, but Ontario has indicated intent to amend the regulation to do so.

Ontario is in the process of finalizing offset protocols in conjunction with Québec. The protocols will be consistent with offset project criteria developed together with Québec, California and other Western Climate Initiative members in 2010. The following project protocols will be prioritized for development: Ozone Depleting Substances, Landfill Gas Capture and Coal Mine Methane Destruction. This will be followed by additional protocols, mostly for forestry and agriculture.

Quantitative Limits: Offset credits can be used to meet up to 8% of an entity’s compliance obligation.

Banking is allowed but the emitter will be subject to a general holding limit.

Canada - Québec Cap-and-Trade System

Quantitative limit: Up to 8% of each entity´s compliance obligation.

Qualitative limit: Currently five domestic (non-Kyoto) offset types are accepted as compliance units originating from projects carried out according to five “protocols” in Québec:

1) CH4 destruction as part of projects to cover manure storage facilities;
2) Capture of gas from specified landfill sites;
3) Destruction of certain ozone depleting substances contained in insulating foam and of certain refrigerant gases recovered from domestic appliances in Canada;
4) Capture and destruction of CH4 from a CH4 drainage system at an active underground or surface coal mine, except a mountaintop removal mine;
5) Capture and destruction of CH4 from the ventilation system of an active underground coal mine.

Additional offset types may be approved by the authority.

Offsets issued by jurisdictions linked with Québec are recognized for compliance.

The Minister may require the promoter to replace any offset credit issued to the buyer for a project, in the event that:

1. Due to omissions, inaccuracies or false information in the documents provided by the promoter, the GHG emissions reductions for which the offset credits were issued were not eligible;
2. Offset credits were applied for under another program for the same reductions as those covered by the application for credits under this regulation.

In the instance that credit recovery is not possible; an equivalent number of credits will be retired from the Minister's environmental integrity account. The Minister takes 3% of issued offset credits as a contingency reserve to fill that account.

Banking is allowed but the emitter is subject to a general holding limit. Borrowing is not allowed.

China - Beijing pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reduction (CCER) credits — are allowed. The use of CCER credits is limited to 5% of the annual allocation.

Qualitative Limit: Out of the 5% annual allocation limit, at least 50% must come from projects within the jurisdiction of the city of Beijing. Credits from hydropower, HFC, PFC, N2O and SF6 projects are not eligible and all reductions have to be achieved after the beginning of 2013.

Verified carbon emission reductions from energy saving projects and forest carbon sink projects from within the city of Beijing are also allowed.

Banking is allowed during the pilot phase. Borrowing is not allowed.

China - Chongqing pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reductions (CCERs) — are allowed with a maximum amount of 8% of the compliance obligation.

Qualitative Limit: Reductions have to be achieved after 2010 with the exception of carbon sink projects. Credits from hydro projects are not allowed.

Banking is allowed during the pilot phase. Borrowing is not allowed.

China - Fujian pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reduction (CCER) and Fujian Forestry Certified Emission Reduction (FFCER)—allowed. The use of CCER credits is limited to 5% of the annual compliance obligation and to increase to 10% for companies that use FFCER credits.

Qualitative Limit: Eligible offsets will be restricted to those generated in Fujian province, from CO2 or CH4 projects. Hydro power related credits are not eligible. FFCERs projects need to start implementation after 16 February 2005 and the project developers need to have independent legal personality.

Banking is allowed during the pilot phase. Borrowing is not allowed.

China - Guangdong pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reduction (CCER) — are allowed. The use of CCER credits is limited to 10% of the actual emissions of the compliance entities.

Qualitative Limit: Of the annual compliance obligation met by offsets, at least half must be from CO2 or CH4 reduction projects. At least 70% of CCERs have to come from within Guangdong. Pre-CDM credits are not eligible, as are credits from hydropower or most fossil fuel projects. CCERs from the other pilot markets or regions that already have launched carbon markets are not allowed.

Banking is allowed during the pilot phase. Borrowing is not allowed.

China - Hubei pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reduction (CCER) — is limited to 10% of the annual allocation.

Qualitative Limit: CCERs must come from rural biogas or forestry projects in the province of Hubei or from provinces and regions that have signed agreements with Hubei and that were generated after 1 January 2015 are allowed.

Banking is allowed during the pilot phase, but only for allowances that were traded at least once. Borrowing is not allowed.

China - Shanghai pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reduction (CCER) — are allowed. The use of CCER credits is limited to 1% of the annual allocation.

Qualitative Limit: Credits for reductions that were realized before January 2013 cannot be used for compliance. Credits from hydro projects are not allowed.

Within the pilot phase, banking is allowed across compliance periods. For banked allowances from the first trading period (2013-2015), only one third can be used per year between 2016 and 2018 for compliance entities; fully bankable for institutional investors without limit (except for OTC deals after 9 May 2016 with one third of the SHEA to be exchanged per year between 2016 and 2018).

Borrowing is not allowed.

China - Shenzhen pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reduction (CCER) —allowed. The use of CCER credits is limited to 10% of the annual compliance obligation.

Qualitative Limit: Credits from hydro projects are not eligible and there are further geographic restrictions for the use of certain CCERs.

Banking is allowed during the pilot phase. Borrowing not allowed.

Different from other pilots, Shenzhen releases its annual allowances before the compliance date of previous vintage but doesn’t allow them to be used for the purpose for previous vintage compliance.

China - Tianjin pilot system

Quantitative Limit: Domestic project-based carbon offset credits — China Certified Emission Reduction (CCER) — are allowed. The use of CCER credits is limited to 10% of the annual compliance obligation.

Qualitative Limit: Credits have to stem from CO2 reduction projects, excluding hydro and have to be realized after 2013.

Banking is allowed during the pilot phase. Borrowing is not allowed.

EU Emissions Trading System (EU ETS)

Phase one (2005-2007): Unlimited use of Clean Development Mechanism (CDM) and Joint Implementation (JI) credits.

Phases two (2008-2012) and three (2013-2020): 

Qualitative limit:
Most categories of CDM/JI credits are allowed (restrictions vary across different EU Member States), no credits from the land use, land-use change and forestry (LULUCF) and nuclear power sectors. Strict requirements apply for large hydro projects exceeding 20 MW.

Since the start of Phase three (1 January 2013), additional restrictions apply for CDM: newly generated (post-2012) international credits may only come from projects in Least Developed Countries (LDCs). Projects from industrial gas credits (projects involving the destruction of HFC-23 and N2O) are excluded regardless of the host country.

Credits issued for emission reductions that occurred in the first commitment period of the Kyoto Protocol are no longer accepted as of 31 March 2015.ommitment period of the Kyoto Protocol are no longer accepted as of 31 March 2015.

Quantitative limit: In Phase two (2008-2012), operators were allowed to use JI and CDM credits up to a certain percentage limit determined in the respective country’s National Allocation Plans. Unused entitlements were transferred to Phase three (2013-2020).

The total use of credits for Phase two and three may amount up to 50% of the overall reduction under the EU ETS in that period (approximately 1.6 billion tons CO2e).

Phase four (2021-2030):
Currently no international offsets are envisaged.

Unlimited banking is allowed since 2008. Borrowing is not allowed.

Japan - Saitama Target Setting Emissions Trading System

Currently credits from five offset types are allowed in the Saitama scheme.

Small and Mid-size Facility Credits: Total amount of emission reductions achieved by implementing emission reduction measures from non-covered small and medium sized facilities in Saitama since FY2011. Issuance of credits from FY2012. Small and Mid-size Facility Credits can be used for compliance without limit.

Outside Saitama Credits: Emission reductions achieved from large facilities outside the Saitama Prefecture. Large facilities: energy consumption of 1,500kL of crude oil equivalent or more in a base-year, and with base-year emissions of 150,000 tonnes or less. Credits only issued for the reduction amount that exceeds the compliance factor of 8%. Issuance of credits from FY2015. Outside Saitama Credits can be used for compliance for up to one-third, in the case of offices, or to half, in the case of factories, for the facilities' reduction targets.

Renewable Energy Credits: Credits from solar (heat, electricity), wind, geothermal, or hydro (under 1,000kW) electricity production are counted at 1.5 times the value of regular credits. Credits from biomass (biomass rate of 95% or more, black liquor is excluded) and hydro power (1,000kW to 10,000kW) are converted with the factor 1. Types of Credits: Environmental Value Equivalent, Renewable Energy Certificates, New Energy Electricity generated under the Renewable Portfolio Standard Law. Renewable Energy Credits can be used for compliance without limit.

Forest Absorption Credits: Credits from forests inside the Saitama Prefecture are counted at 1.5 times the value of regular credits. Others are converted with the factor 1. Forest absorption Credits can be used for compliance without limit.

Tokyo Credits (via linking), two types:
1) Excess Credits from TMG ETS: Emission reductions from facilities with base-year emissions of 150,000t or less. Issuance of credits from FY2015.
2) Small and mid-size Facility Credits issued by TMG ETS: Issuance of credits from FY2012. Tokyo Credits can be used for compliance without a limit.

All offsets have to be verified by verification agencies.

Banking is allowed between two consecutive compliance periods (e.g. banking from first to second compliance period is allowed. Banking from first to third is not). Borrowing is not allowed.

Japan - Tokyo Cap-and-Trade Program

Currently credits from four offset types are allowed in the TMG ETS.

Small and Mid-size Facility Credits: Total amount of emission reductions achieved by implementing emission reduction measures from non-covered small- and medium-sized facilities in Tokyo since FY2010. Issuance of credits from FY2011. Small and Mid-size Facility Credits can be used for compliance without limit. 

Outside Tokyo Credits: Emission reductions achieved from large facilities outside of the Tokyo area. Large facilities: energy consumption of 1,500 kL of crude oil equivalent or more in a base-year, and with base-year emissions of 150,000t or less. Credits are only issued for the reduction amount that exceeds the compliance factor of 8%. Issuance of credits from FY2015. Outside Tokyo Credits can be used for compliance for up to one-third of facilities' reduction obligations.

Renewable Energy Credits: Credits from solar (heat, electricity), wind, geothermal, or hydro (under 1,000 kW) electricity production are counted at 1.5 times the value of regular credits. Credits from biomass (biomass rate of 95% or more, black liquor is excluded) are converted with the factor 1. Types of Credits: Environmental Value Equivalent, Renewable Energy Certificates and New Energy Electricity, generated under the Renewable Portfolio Standard Law. Renewable Energy Credits can be used for compliance without a limit.

Saitama Credits (via linking), two types:
1) Excess Credits of the Saitama Scheme: Emission reductions from facilities with base-year emissions of 150,000 tons or less. Issuance of credits from FY2015.
2) Small and mid-size Facility Credits issued by Saitama Prefecture. Issuance of credits from FY2012. Saitama Credits can be used for compliance without a limit.

All offsets have to be verified by verification agencies.

Banking is allowed between two compliance periods (e.g. banking from first to second compliance period is allowed. Banking from first to third is not). Borrowing is not allowed.

Korea Emissions Trading Scheme

Phase one (2015-2017) and Phase two (2018-2020):

Qualitative limit:
Only domestic credits from external reduction activities implemented by non-ETS entities - that meet international standards - may be used for compliance. Domestic CDM credits (CERs) are allowed in the scheme. Eligible activities include those eligible under the CDM and Carbon Capture and Storage (CCS). However, only activities implemented after 14 April 2010 are eligible.

Quantitative limit: Up to 10% of each entity's compliance obligation.


Phase three (2021-2025):
Up to 10% of each entity's compliance obligation with a maximum of 5% coming from international offsets.

Banking is allowed without any restrictions. Borrowing is allowed only within a single trading phase (maximum of 10% of entity's obligation in 2015. Increased to 20% in 2016 and 2017), but not across phases.

New Zealand Emissions Trading Scheme (NZ ETS)

Qualitative Limit: As of 1 June 2015, international units are not eligible for surrender in the NZ ETS.

NZUs are granted to participants that voluntarily register in the scheme for removal activities.

Forestry Removal Activities: Participants are entitled to receive one NZU per ton of removals for registered post-1989 forest land. If the forest is harvested or deforested, units must be surrendered to account for the emissions, and if the participant chooses to deregister from the scheme, NZUs equivalent to the number received must be returned.

Other Removal Activities: participants are currently entitled to receive one NZU per two tons of removals. This is set to increase over the next three years in line with the phase-out of the one-for-two surrender obligation measure (see Price Management Provisions).

In the year to June 2017, 9.5 million NZUs were transferred to participants for removal activities (forestry removal activities - 7.7 million, and other removal activities - 1.8 million).

Since January 2013, pre-1990 forest landowners have the option to offset deforestation on their land by planting an equivalent new forest elsewhere in New Zealand (under given conditions).

Banking is allowed except for those units that were purchased under the fixed price option (see 'price management provisions'). Borrowing is not allowed.

Swiss ETS

Qualitative limit: Exclusion criteria are listed in Annex 2 of the revised CO2 Ordinance. Most categories of credits from CDM projects in LDCs are allowed. Credits from CDM and JI projects from other countries are eligible only if registered and implemented before 31 December 2012.

Quantitative limit: Industries that already participated in the voluntary phase (2008-2012): For 2013-2020, the maximum amount of offsets allowed into the scheme equals 11% of five times the average emissions allowances allocated in the voluntary phase (2008-2012) minus offset credits used in that same time period.

Industries entering the Swiss ETS in the mandatory phase and newly covered emission sources (2013-2020): 4.5% of their actual emissions in 2013-2020.

In exceptional cases, companies may submit a request to the Federal Office of the Environment to increase this limit. They must prove that they would otherwise not be able to comply with their liability without major economic impairment and commit to acquire as many European allowances as the additional international ones. This provision is limited until 31 December 2018.

Banking within compliance periods is allowed. Banking from one compliance period to the next is also allowed without limit.

Valid certificates (CERs, ERUs) from the 2008-2012 commitment period may be carried over and surrendered until 30 April 2015. Valid certificates from the 2008-2012 commitment period that have not been requested to be carried over within the deadline will be canceled.

USA - California Cap-and-Trade Program

Quantitative Limit: Up to 8% of each entity's compliance obligation.

Qualitative Limit: Currently six domestic offset types are accepted as compliance units originating from projects carried out according to six 'protocols':
1. U.S. forest projects
2. Urban forest projects
3. Livestock projects (methane management)
4. Ozone depleting substances projects
5. Mine methane capture (MMC) projects
6. Rice cultivation projects

Banking is allowed but the emitter is subject to a general holding limit. Borrowing of future vintage allowances is not allowed.

USA - Regional Greenhouse Gas Initiative (RGGI)

Quantitative limit: 3.3% of an entity's liability may be covered with offsets.

Qualitative limit: Offset allowances from five offset types located in RGGI states are allowed:
1. Landfill methane capture and destruction;
2. Reduction in SF6 emissions;
3. Sequestration of carbon due to reforestation, improved forest management, or avoided conversion;
4. Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency; and
5. Avoided methane emissions from agricultural manure management operations.

Banking is allowed without restrictions.
An annual reduction in the number of allowances offered by states at auction accounts for the large surplus of banked allowances currently in the market. Borrowing is not allowed.

Canada - Nova Scotia
China

Phase I (2017-2019): Using CCER (China Certified Emission Reduction) credits.

In 2012, the NDRC issued the ‘Interim Measures for the Management of Voluntary GHG Emission Reduction Transactions’. These measures include guidelines for the issuance of domestically-produced offsets, known as CCERs. CCERs are expected to be used in the national ETS. The revised Interim Regulation and upcoming regulation on administrative measures for the offset scheme will impose quantitative and qualitative limits on the use of CCERs.

No information available yet.

Kazakhstan Emissions Trading Scheme (KAZ ETS)

Qualitative Limit: The system allows domestic offsets. International credits may be allowed in the future.

Banking is provided for by the legislation.

Ukraine
Brazil
Chile
Japan
Mexico
Russia
Taiwan
Thailand
Turkey
USA - Oregon
USA - Virginia
USA - Washington
Vietnam

Studies

Broekhoff, D. & Zyla, K. (2008) Outside the Cap. Opportunities and Limitations of Greenhouse Gas Offsets. World Resource Institute.

Fankhauser, S. & Hepburn, C. (2009) Carbon Markets in Space and Time. Centre for Climate Change Economics and Policy/ Grantham Research Institute on Climate Change and the Environment.

Neuhoff, K., Schopp, A., Boyd, R., Stelmakh, K., Vasa, A. (2012) Banking of Surplus Emissions Allowances. Does the Volume Matter? Deutsches Institut für Wirtschaftsforschung.

Trotignon, R. (2011) Combining cap-and-trade with offsets: Lessons from the CER use in the EU ETS in 2008 and 2009. Climate Economics Chair Publications.