EU trading scheme slammed for "double counting" carbon credits

The EU's emissions trading scheme (ETS) has been accused of systematic double counting of carbon allowances by a new report released last week.

The study from green business think-tank E3 International claimed that around 18m allowances had been double counted, making it impossible for independent observers to verify the environmental benefits of the scheme.

Under the ETS, 10,500 of Europe's biggest polluting firms are assigned carbon allowances – each representing a tonne of carbon and boasting a unique serial number – totalling the level at which their emissions are capped. If their emissions exceed this cap they have to buy extra allowances to account for the extra pollution. Firms then have to surrender to national registries enough allowances to cover their annual emissions.

E3 International said it had analysed all the serial numbers of carbon allowances surrendered to date by participants in the scheme and displayed on the Community Independent Transaction Log (CITL) and found that nearly 18 million allowances had been surrendered by firms more than once.

The study found that the problem of two separate firms submitting the same allowance with the same serial number was evident in 13 out of the 24 national emission registries, with the practice particularly rife in Italy, where millions of allowances were found to have been double counted.

Andy Kerr, director of E3, said that the practice of double counting was permitted under the regulations governing the ETS, which allows national registries to reissue the allowances submitted to it back into the market. But he warned that this approach made it impossible for any group other than the administrators running the ETS to assess its environmental integrity and its effectiveness at reducing emissions.

"The administrators say that the number of allowances they push back out into the market is cancelled out by the number they retire from the scheme," Kerr said. "But for a trading scheme to work it has to be transparent and accountable and this practice means that, at the moment, independent groups cannot keep track of the scheme's effectiveness."

The European Commission dismissed E3's findings, claiming that it "can confirm that the number of allowances put out of circulation [retired] in 2005 and 2006 corresponds to the number of verified emissions reported by companies in 2005 and 2006… Any allegation that there would have been double counting is pertinently incorrect".

It argued that while companies must surrender allowances equivalent to their actual emissions each year and governments must in turn surrender carbon units to the UN's Kyoto scheme for tracking a country's overall emissions, those units could come from other carbon market mechanisms besides the ETS and as a result governments could be left with excess allowances that they could reissue back into the ETS market. It is this reissuance – which is in line with the scheme's current regulations – that has resulted in two different firms submitting the same allowance.

However, Kerr argued that the Commission was "responding to an allegation we have not made", adding that the research never accused the ETS of failing to ensure the right number of allowances were submitted over all.

"What we are saying is the fact that unique carbon allowances can be used by multiple firms within the scheme makes it very difficult for independent observers to track its environmental integrity," Kerr said. "That national registries can recycle submitted allowances to other firms is a crazy system."