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With market confidence in the European carbon market at a very low ebb, rules surrounding the United Nations (UN)-backed carbon offset use in the third phase of its emissions trading scheme must be clarified, according to an industry lobby group.

Henry Derwent, president and CEO of the International Emissions Trading Association (IETA), has written an open letter to Commissioner Connie Hedegaard, director general for Climate Action at the European Commission saying market confidence in the Clean Development Mechanism (CDM) is at an all-time low.

IETA has urged the commission to clarify the type of offsets – and the number of them – that participants will be able to use between 2013 and 2020, if Europe adopts more stringent cuts than it has pledged to do to date.
‘The only existing mechanism to incentivise private sector low carbon investment in developing countries is the CDM,’ the letter said. ‘The EU has been key for the development of the CDM. Yet largely as a result of decisions taken or expected by the EU, market confidence in the CDM is at a very low ebb.’

Derwent went on to say that while there is no shortage of ideas for replacement mechanisms, none of them yet come close to providing a balance of risk, reward and liquidity sufficient to tempt investors.

The third phase of the EU Emissions Trading Scheme will begin in 2013 and there are current discussions as to whether some types of CDM offsets will be restricted. While companies must buy and submit permits to reflect there level of emissions these can be topped up with CDM offsets through investing in low-carbon energy projects.

Now, the IETA has come out and called for clarification that half of the additional emissions reductions efforts can come through international offsets if and when the EU moves to a higher emissions reduction target.

Earlier this year, the UK, France and Germany joined together to call for an increase in the reduction targets to 30 per cent from 20 per cent. Whether this will be taken up by these countries and the rest of Europe is still a matter for debate.

Derwent says there needs to be a close to the debate on the eligibility of carbon instruments for compliance in the ETS.

‘The EU, as the largest market for such credits, should also exercise great caution before taking action that could severely damage the only existing major international offset mechanism,’ he says in the letter.

‘A policy that creates uncertainty on eligibility is already leading to dramatic decreases of private financing allocated to reducing emissions, rather than increasing the scaling up that the EU, and IETA, wants to see.’

The target set out in the Copenhagen Accord, which resulted from the UN’s climate change conference in December 2009, was to encourage $100bn of private investment a year by 2020. But there are doubts as to whether will come in or support new mechanisms if new regulatory risks impact investments already made.

Meanwhile, measures will soon be taken to cut down on carbon trading fraud, which multi-country police force Europol said has contributed to 90 per cent of all market activity in some countries.

From November, there will be no VAT on emissions trading purchases as a temporary scheme in order to attempt to stop traders buying emissions allowances outside of the UK and then selling them on to domestic companies charging the tax rate.

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