Flexibility Provisions
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.
Offsets and credits | Banking and borrowing |
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Canada - Nova Scotia | |
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Nova Scotia’s cap-and-trade legislation includes the possibility for an offset system. Further consultations will be undertaken, and a study is being completed in 2020 to consider this option and explore offset potential in the province’s carbon market. | Nova Scotia’s cap-and-trade program does not allow borrowing or banking across compliance periods. |
Canada - Québec Cap-and-Trade System | |
QUANTITATIVE LIMIT: Up to 8% of each entity´s compliance obligation. | Banking is allowed but the emitter is subject to a general holding limit. |
China - Beijing pilot ETS | |
Quantitative Limit: Domestic project-based carbon offset credits—Chinese Certified Emission Reduction (CCER) credits—are allowed. The use of CCERs is limited to 5% of the annual allocation. | Banking is allowed. |
China - Chongqing pilot ETS | |
QUANTITATIVE LIMIT: Domestic project-based carbon offset credits—CCERs—are allowed up to 8% of the compliance obligation. | Banking is allowed. |
China - Fujian pilot ETS | |
QUANTITATIVE LIMIT: Domestic project-based carbon offset credits (CCERs) and Fujian Forestry Certified Emission Reduction credits (FFCER) are allowed. The use of CCER credits is limited to 5% of the annual compliance obligation, which is increased to 10% for companies that use both FFCER and CCER credits. | Banking is allowed. |
China - Guangdong pilot ETS | |
QUANTITATIVE LIMIT: Chinese Carbon offset credits (CCERs) are allowed. As a mechanism that encourages the public to reduce carbon emissions, Pu Hui Certified Emission Reductions (PHCER) are also allowed during 2017 and 2018. In 2018, entities are allowed to make use of 1.5 million offsets (CCER and PHCER) towards compliance obligations. The number of 2019 has not yet been announced. In order to further standardize PHCER, the Guangdong Province PHCER Trading Rules were revised and issued in June 2020, setting new rules on the quantity and price of certain transaction types. | Banking is allowed. |
China - Hubei pilot ETS | |
Quantitative Limit: The use of domestic project-based carbon offset credits (CCERs) is limited to 10% of the annual initial allocation for each entity. | Banking is allowed, but only for allowances that were traded at least once. Borrowing is not allowed. |
China - Shanghai pilot ETS | |
QUANTITATIVE LIMIT: Domestic project-based carbon offset credits—CCERs—are allowed. Since 2016 the use of CCER credits is limited to 1% of the annual allocation. Between 2013 and 2015 the limit was 5%. | Banking is allowed both within and across compliance periods, with some restrictions for the latter. For banked allowances from the first trading period (2013-2015), only one-third can be used per year between 2016 and 2018 by compliance entities; allowances are fully bankable for institutional investors, with some restrictions for OTC deals. |
China - Shenzhen pilot ETS | |
QUANTITATIVE LIMIT: Domestic project-based carbon offset credits (CCERs) are allowed. The use of CCER credits is limited to 10% of the annual compliance obligation. | Banking is allowed. |
China - Tianjin pilot ETS | |
QUANTITATIVE LIMIT: Domestic project-based China Carbon Offset Credits—CCERs—are allowed. The use of CCER credits is limited to 10% of the annual compliance obligation. | Banking is allowed. |
China National ETS | |
The use of China Certified Emissions Reduction (CCER) credits is expected to be allowed during the third phase. | Expected to allow banking across compliance phases, but not to allow borrowing. |
EU Emissions Trading System (EU ETS) | |
PHASE 1 (2005-2007): | Unlimited banking has been allowed since 2008. |
Japan - Saitama Target Setting Emissions Trading System | |
Credits from five offset types are allowed in the Saitama ETS. | Banking is only allowed between two consecutive compliance periods. |
Japan - Tokyo Cap-and-Trade Program | |
Credits from four offset types are allowed in the Tokyo ETS. | Banking is only allowed between consecutive compliance periods. Borrowing is not allowed. |
Kazakhstan Emissions Trading Scheme | |
PHASE ONE (2013): The system allowed domestic offsets. | Banking is allowed within one trading period (i.e., within 2018-2020). |
Korea Emissions Trading Scheme | |
PHASE ONE (2015-2017) | Banking is allowed with some restrictions across phases. From Phase One to Phase Two, banking is limited for each installation to 10% of the annual average allocation and 20,000 Korean Allowance Units (KAUs). The amount that exceeds the threshold is deducted from the Phase Two allocation. From Phase Two to Phase Three, banking is limited to the higher of two limits: |
Mexico | |
QUALITATIVE LIMITS: Two types of flexibility instruments are foreseen, both of which will generate “offsets credits” eligible for use under the pilot. | If participants are in compliance with their surrender obligations, then their remaining allowances may be banked for use in subsequent compliance periods within the pilot. Allowances issued in the pilot will be valid only for the pilot, although SEMARNAT is tasked to also assess the viability of allowing a share of pilot allowances to be banked into the national ETS. Although the possibility of borrowing is not explicitly stated, surrender of allowances for a given compliance period is done after allocation of allowances for the subsequent compliance period takes place. |
New Zealand Emissions Trading Scheme | |
Units from Kyoto Protocol flexible mechanisms were eligible for use in the system with no restrictions until 2015. As of 1 June 2015, international units are not eligible for surrender in the NZ ETS. | Banking is allowed except for those units that were purchased under the fixed price option (see “Market Stability Provisions” below). |
Swiss ETS | |
QUALITATIVE LIMIT: Only international offsets are allowed. Exclusion criteria are listed in Annex 2 of the revised ‘CO2 Ordinance.’ Most categories of credits from CDM projects in least developed countries are allowed. Credits from CDM and JI projects from other countries are eligible only if registered and implemented before 31 December 2012. | Banking within and across phases is allowed without limits. Valid certificates (CERs, ERUs) from the 2008-2012 phase could be banked into the mandatory phase and surrendered until April 2015. Certificates from the 2008-2012 phase that were not requested to be carried over within the deadline have been canceled. Borrowing is not allowed. |
USA - California Cap-and-Trade Program | |
QUANTITATIVE LIMIT: Up to 8% of each entity’s compliance obligation until 2020 emissions. | Banking is allowed, but the emitter is subject to a general holding limit. |
USA - Massachusetts Limits on Emissions from Electricity Generators | |
No information available yet. | Banking is allowed, but restrictions apply to guarantee that emissions in any year cannot exceed the emission limit of the prior year. This is done by adjusting the number of auctioned allowances downward to compensate for banked allowances. |
USA - Regional Greenhouse Gas Initiative (RGGI) | |
QUANTITATIVE LIMIT: 3.3% of an entity's liability may be covered with offsets. This share will remain the same between 2021 and 2030. | Banking of allowances is allowed without restrictions, but regulations include adjustments to the cap to address the aggregate bank by reducing the amount of allowances available for auctions in future years by the amount of allowances not used for compliance in previous control periods. |
Colombia | |
German National Emissions Trading System | |
No information available yet. | Banking is not allowed during the introductory phase but will be allowed in the second phase. |
Montenegro | |
Ukraine | |
USA - Pennsylvania | |
USA - Transportation and Climate Initiative (TCI) | |
USA - Virginia | |
Brazil | |
Chile | |
Indonesia | |
Japan | |
Pakistan | |
Philippines | |
Taiwan, China | |
Thailand | |
Turkey | |
United Kingdom | |
USA - New Mexico | |
USA - New York City | |
USA - North Carolina | |
USA - Oregon | |
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.
Official Websites and Presentations
Australia
Carbon Farming Initiative website
EU ETS
European Commission website - International carbon market (international credits)
California
Air Resources Board website - Compliance offset program
New Zeland
NZ ETS website - International emissions units
Québec
Official website - Offset credits
RGGI
Official website on RGGI CO2 Offsets
Switzerland
Website of the Federal Office for the Environment on Foreign emission reductions certificates