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. 

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Offsets and credits Banking and borrowing
Canada - Nova Scotia

Nova Scotia’s cap-and-trade legislation includes the possibility for an offset system. Further consultations will be undertaken in 2019 to consider this option.

Not yet defined.

Canada - Québec Cap-and-Trade System

QUANTITATIVE LIMIT: Up to 8% of each entity´s compliance obligation.

QUALITATIVE LIMIT: Offset credits may be generated from projects carried out according to five protocols in Québec:

(1)    CH4 destruction from covered manure storage facilities;
(2)    CH4 destruction from landfill sites;
(3)    Destruction of ozone-depleting substances contained in insulating foam or used as refrigerant gases removed from domestic appliances in Canada;
(4)    CH4 destruction from drainage systems at active coal mines; and
(5)    CH4 destruction from ventilation systems of active underground coal mines.

Québec is currently developing an offset protocol for afforestation and reforestation projects in private lands in Québec, which will be open to public consultation at a later point. A number of new offset protocols, co-commissioned with Ontario, were also under development. With the termination of Ontario’s cap-and-trade program this work was discontinued and Québec is currently assessing its priorities in terms of which protocols to keep developing.

Offsets credits issued by jurisdictions linked with Québec are recognized as compliance instruments.

Québec offset credits are 100% guaranteed. In cases where offset credits issued for a project were deemed illegitimate, the Minister may require the offset promoter (developer) to replace them.

If credit recovery is not possible, an equivalent number of credits will be retired from the Minister’s environmental integrity account. That account is filled up through a contingency reserve of 3% of issued offset credits from all offset projects.

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

China - Beijing pilot ETS

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

Qualitative Limit: CCERs from energy conservation projects and forestry carbon sink projects are allowed, whereas credits from hydropower, HFC, PFC, N2O, and SF6 projects are not eligible. CCERs must come from projects that began operation after the beginning of 2013 (with exceptions for carbon sink projects, for which the date is February 2005).

Out of the 5% limit, at least 50% must come from projects within the jurisdiction of the city of Beijing. Among the non-Beijing CCERs, priority is given to those with regional climate or pollution control cooperation agreements (e.g., Hebei and Tianjin).

Banking is allowed.
Borrowing is not allowed.

China - Chongqing pilot ETS

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits—CCERs—are allowed up to 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.
Borrowing is not allowed.

China - Fujian pilot ETS

QUANTITATIVE LIMIT: Domestic project-based carbon offset credits (CCERs) and Fujian Forestry Certified Emission Reduction (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.

QUALITATIVE LIMIT: Eligible offsets will be restricted to those generated in Fujian province, from CO2 or CH4 projects. Hydropower-related credits are not eligible. FFCER projects, with three project types (afforestation, forest management, and bamboo management), need to start implementation after 16 February 2005 and the project developers need to have independent legal personality.

Banking is allowed.
Borrowing is not allowed.

China - Guangdong pilot ETS

QUANTITATIVE LIMIT: 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.

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 offsets need to come from within the Guangdong province. Pre-CDM credits are not eligible. Credits from hydro and from most fossil fuel projects are also not eligible.

Banking is allowed.
Borrowing is not 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.

QUALITATIVE LIMIT: CCERs must come from rural biogas or forestry projects in the key counties under the national or provincial poverty alleviation plan in urban agglomeration areas of the middle reaches of the Yangtze River (within Hubei). CCERs must have been generated between 1 January 2013 and 31 December 2015.

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%.

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

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.
Borrowing is not allowed.

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.

QUALITATIVE LIMIT: Credits from hydro projects are not eligible and additional geographic restrictions apply to the use of certain CCERs.

Banking is allowed.
Borrowing is not allowed.
Unlike other pilots, Shenzhen releases its annual allowances before the compliance date of the previous vintage but does not allow them to be used for the purpose for previous vintage compliance.

China - Tianjin 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.

QUALITATIVE LIMIT: Credits must stem from CO2 reduction projects, excluding hydro. They must be realized after 2013.

Banking is allowed.
Borrowing is not allowed.

EU Emissions Trading System (EU ETS)

PHASE 1 (2005-2007):
Unlimited use of Clean Development Mechanism (CDM) credits and Joint Implementation credits (JI) was provided for in the Directive. In practice, no credits were used in phase 1. 

PHASE 2 (2008-2012):
Qualitative Limits: Most categories of CDM/JI credits were allowed, no credits from LULUCF and nuclear power sectors. Strict requirements for large hydro projects exceeding 20 MW. 
Quantitative Limits: In phase 2 (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 3 (2013-2020).

PHASE 3 (2013-2020):
Qualitative Limits: Newly generated (post-2012) international credits may only come from projects in Least Developed Countries. Credits from CDM and JI projects from other countries are eligible only if registered and implemented before 31 December 2012. 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 were no longer accepted after 31 March 2015.
Quantitative Limits: The total use of credits for phase 2 and phase 3 may amount up to 50% of the overall reduction under the EU ETS in that period (~1.6 Gt CO2e).  

PHASE 4 (2021-2030):
The use of offsets is not envisaged.

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

Japan - Saitama Target Setting Emissions Trading System

Credits from five offset types are allowed in the Saitama ETS.

SMALL AND MID-SIZE FACILITY CREDITS: Emissions reductions from non-covered small- and medium-sized facilities in Saitama.
Quantitative Limits: None.

OUTSIDE SAITAMA CREDITS: Emission reductions achieved from large facilities outside of the Saitama prefecture. Large facilities are those with an energy consumption of 1,500kL of crude oil equivalent or more in a base-year, and with base-year emissions of 150,000t or less.
Quantitative Limits: Credits are only issued for the reduction amount that exceeds the compliance factor. These credits can be used for compliance for up to one-third of offices’ reduction obligations. Factories can use up to 50%.

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) are converted with the factor 1. These credits encompass the following types: Environmental Value Equivalent, Renewable Energy Certificates, and New Energy Electricity, generated under the Renewable Portfolio Standard Law.
Quantitative Limits: None.

TOKYO CREDITS (VIA LINKING):
(1) Excess Credits: Emissions reductions from facilities with base-year emissions of 150,000 tonnes or less. Issuance of credits from FY2015.
(2) Small- and mid-size Facility Credits: Issued by Saitama Prefecture. Issuance of credits from FY2012.
Quantitative Limits: None.

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.
Quantitative Limits: None.

EMISSIONS REDUCTION METHODS:
Renewable Energy: When covered facilities generate electricity from renewable sources for their own use, they can deduct this amount of electricity from the total energy usage of the facility.

Banking is only allowed between two consecutive compliance periods.
Borrowing is not allowed.

Japan - Tokyo Cap-and-Trade Program

Credits from four offset types are allowed in the Tokyo ETS.

SMALL AND MID-SIZE FACILITY CREDITS: Emissions reductions from non-covered small- and medium-sized facilities in Tokyo.

Quantitative Limits: None.

OUTSIDE TOKYO CREDITS: Emission reductions achieved from large facilities outside of the Tokyo area. Large facilities are those with an energy consumption of 1,500kL of crude oil equivalent or more in a base-year, and with base-year emissions of 150,000t or less.

Quantitative Limits: Credits are only issued for the reduction amount that exceeds the compliance factor. These 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 1,000kW) 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) are converted with the factor 1. These credits encompass the following types: Environmental Value Equivalent, Renewable Energy Certificates, and New Energy Electricity, generated under the Renewable Portfolio Standard Law.
Quantitative Limits: None.

SAITAMA CREDITS (VIA LINKING):
(1) Excess Credits: Emissions reductions from facilities in Saitama with base-year emissions of 150,000 tonnes or less. Issuance of credits from FY2015.
(2) Small- and Mid-size Facility Credits issued by Saitama Prefecture. Issuance of credits from FY2012.

Quantitative Limits:
None.
All offsets have to be verified by verification agencies.

EMISSIONS REDUCTION METHODS:
(1)    Low Carbon Electricity and Heat: In order to evaluate energy efficiency efforts of the covered facilities, CO2 emission factors of supply side (electricity and others) are fixed during each compliance period. When covered facilities procure electricity or heating from TMG-certified suppliers with lower emission factors, they can reduce the difference between these emission factors from their emissions to be reported to TMG.
(2) Renewable Energy: When covered facilities generate electricity from renewable sources for their own use, they can deduct this amount of electricity from the total energy usage of the facility.

Banking is only allowed between consecutive compliance periods.
Borrowing is not allowed.

Kazakhstan Emissions Trading Scheme

QUALITATIVE LIMIT: The system allows domestic offsets. International credits may be allowed in the future.

Banking is allowed within one trading period (i.e., within 2018-2020).
Banking between trading periods is not possible.

Korea Emissions Trading Scheme

PHASE ONE (2015-2017)
QUALITATIVE LIMIT: Only domestic credits from external reduction activities implemented by non-ETS entities–and that meet international standards–could be used for compliance in this phase. Domestic CDM credits (CERs), and credits from domestically certified projects (Korean Offset Credits) were allowed. These credits had to be converted to Korean Credit Units (KCUs) of a specified vintage before being used for compliance. Eligible activities included those eligible under the CDM and Carbon Capture and Storage. However, only activities implemented after 14 April 2010 were eligible. As of December 2017, 35 domestic and 211 CDM methodologies had been approved for use under the KETS. 

QUANTITATIVE LIMIT: Up to 10% of each entity’s compliance obligation.

PHASE TWO (2018-2020)
QUALITATIVE LIMIT: In Phase Two, trades of CERs generated after 1 June 2016 from international CDM projects developed by domestic companies are allowed. CDM projects operated by Korean companies will be allowed when:
(1) at least 20% of the ownership rights, operating rights, or the voting stocks are owned by a Korean company;
(2) a Korean company sells or distributes more than 20% of the total project cost; or
(3) the projects are funded by a Korean company with a national or regional government operating in a UN-designated Least Developed Country or a low-income economy as classified by the World Bank.

Regulated entities must convert CDM credits (CERs) to KCUs in order to be used for compliance.

QUANTITATIVE LIMIT: Up to 10% of each entity’s compliance obligation (of which up to 5% for international offset credit).

PHASE THREE (2021-2025): Rules are not yet clear.

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 Phase Two allocation. From Phase Two to Phase Three, banking is limited to the higher of two limits:
(1) the net annual amount of allowances sold in Phase Two; and
(2) company- and facility-specific limits, of 250,000 KAUs and 5,000 KAUs respectively.

Borrowing is allowed only within a single trading phase. In 2015, this was limited to 10% of an entity’s obligation. This limit increased to 20% in 2016 and 2017. In the first compliance year of Phase Two (2018), borrowing was limited to 15% of an entity’s obligation. From 2019, the borrowing limit will be affected by how much an entity has borrowed in the past via the following formula: [Borrowing limit of previous year-(“borrowing ratio” in previous year x 50%)]/entity’s emission volume.

New Zealand Emissions Trading Scheme

QUALITATIVE LIMIT: 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 Price Management Provisions).
Borrowing is not allowed.

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.

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.

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.

QUALITATIVE LIMIT: Currently, six domestic offset types are accepted as compliance units originating from projects carried out according to six “protocols”:
(1) US forest projects;
(2) Urban forest projects;
(3) Livestock projects (methane management);
(4) Ozone depleting substances projects;
(5) Mine methane capture (MMC) projects; and
(6) Rice cultivation projects.

FROM 2021: AB 398 lays out two significant changes to the offset program from 2021 onwards:
(1) The share of offsets that can be used to fulfillthe compliance obligation will reduce to 4% between 2021-2025 and will remain at 6% thereafter.
(2) At least half of the offset usage limits post-2020 would need to result in direct environmental benefits (DEBS) in the State of California. The DEBS requirement is operationalized through a performance standard, which defines DEBS eligibility by offset activity type. Offset projects implemented outside of California may still result in DEBS based on scientific evidence and project data provided. For example, afforestation projects outside California could also provide benefits within California by improving the quality of waters flowing through the state. Recent regulatory amendments specify the exact criteria that will be used for determining DEBS.

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

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.
Borrowing is not allowed, but the possibility of emergency deferred compliance exists.

USA - Regional Greenhouse Gas Initiative (RGGI)

QUANTITATIVE LIMIT: 3.3% of an entity's liability may be covered with offsets. This percentage share will remain equal between 2021 and 2030 according to the Model Rule.

QUALITATIVE LIMIT: Currently the program allows offset allowances from five offset types located in RGGI states:
(1) Landfill methane capture and destruction;
(2) Sequestration of carbon due to reforestation, improved forest management, or avoided conversion;
(3) Avoidance of methane emissions from agricultural manure management operations;
(4) Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency; and
(5) Reduction in SF6 emissions.

According to the model rule, offset Protocols 4 and 5 will be discontinued from 2021. Some states have discontinued other protocols, but all states accept offset allowances issued by any participating state. To date, only one offset project has been approved under RGGI.

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.
Borrowing is not allowed.

China National ETS

The use of China Certified Emissions Reduction (CCER) credits is expected to be allowed during the third phase.

In 2012, the NDRC issued the ‘Interim Measures for the Management of Voluntary GHG Emission Reduction Transactions’ (the “Interim Measures”). These measures include guidelines for the issuance of CCERs. The acceptance of CCERs is expected to be regulated through a revision of the Interim Measures and through the development of an ‘Administration Measure of Offset Scheme for National ETS’ (upcoming) focusing on the quality and limits on the use of CCERs in the ETS. Specific timelines and detailed rules are yet to be published.

Expected to allow banking across compliance phases, but not to allow borrowing.

Colombia
Mexico
Ukraine
USA - New Jersey
USA - Virginia
Brazil
Chile
Indonesia
Japan
Russia
Taiwan, China
Thailand
Turkey
USA - New Mexico
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.