Proposal for a Directive of the European Parliament and of the Council amending the Directive establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol's project mechanisms [SEC(2003) 785 ]
Date: 2003-07-23
Institutions: European Commission
Subjects: economic instrument for the environment, greenhouse gas, international agreement, reduction of gas emissions, sustainable development, tradeable emission permit

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 23.7.2003
COM(2003) 403 final

2003/0173 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending the Directive establishing a scheme for greenhouse gas emission allowance
trading within the Community, in respect of the Kyoto Protocol's project mechanisms

(presented by the Commission)

{SEC(2003) 785 }

EXPLANATORY MEMORANDUM

1.

1.1

GENERAL REMARKS.

Political context of the Proposal

Joint  Implementation  (“JI”)  and  the  Clean  Development  Mechanism  (“the  CDM”),  together
with  international  emissions  trading,  are  innovative  instruments  provided  for  in  the  Kyoto
Protocol1. These so-called  "Kyoto  flexible mechanisms"  enable Parties  to  meet  part  of  their
Kyoto  targets  by  taking  advantage  of  opportunities  to  reduce  greenhouse  gas  emissions  in
other  countries  at  lower  cost  than  at  home.  The  rationale  is  that,  from  the  global
environmental  point  of  view,  the  place  where  the  emission  reduction  takes  place  is  of
secondary importance provided that real emission reductions are achieved. Rules, modalities
and guidelines for implementation of the Kyoto Protocol’s mechanisms were agreed at the 7th
Conference of the Parties to the UNFCCC (COP7, November 2001) as part of the so-called
“Marrakech Accords”.

This proposal will boost JI  and the CDM  by providing additional incentives for business  to
engage  in  these  mechanisms.  It  thereby  promotes  technology  transfer  to  industrialised
countries,  for  example  Russia,  and  to  developing  countries  while  reducing  the  costs  of
meeting commitments under the EC emissions allowances trading scheme  established under
Directive  2003/…/EC.  The  proposal  sends  a  strong  signal  to  other  Parties  to  the  Kyoto
Protocol  that  the  Community  is  fully  committed  to  the  Kyoto  flexible  mechanisms  and  the
advantages  that  they  entail  for  both  the  Community  and  other  Parties.  At  the  same  time,
industrialised  countries  have  a  responsibility  to  reduce  their  emissions  of  greenhouse  gases
through  domestic  measures,  given  their  historic  levels  of  emissions  and  current  higher  per
capita emissions than developing countries. This underpins the principle of supplementarity,
that  industrialized  countries  are  to  take  significant  action  at  home  to  meet  their  reduction
commitments  and  use  the  Kyoto  Protocol’s  mechanisms  to  meet  only  part  of  these
commitments. This principle is enshrined in the Marrakech Accords and the EU has  always
defended  this  principle.  It  is  important  for  the  EU  to  continue  to  take  the  lead  in  tackling
climate  change,  not  least  by  implementing  the  principle  of  supplementarity.  This  proposal
finds a balance between the goal of promoting JI and CDM on the one hand and the concern
for  their  supplementarity  to  domestic  emission  reduction  measures  on  the  other,  taking  into
account that this measure by itself cannot guarantee supplementarity as it does not affect the
use  that  Member  States  may  make  of  the  Kyoto  flexible  mechanisms,  i.e.  JI,  CDM  and
emissions  trading  between  Parties.  However,  the  Community  has  a  special  responsibility  in
respect of its own legislative instruments.

1.2.

The Kyoto Protocol’s project based mechanisms - Joint Implementation and the
Clean Development Mechanism

JI  and  the  CDM  are  “project-based”,  and  allow  the  generation  of  credits  when  projects
achieve emission reductions that are additional to what would have occurred in the absence of
the project (the “baseline” scenario). Such projects need to result in real, measurable and long
term  benefits  related  to  the  mitigation  of  climate  change,  while  contributing  to  the
achievement of sustainable development goals of host countries, notably through the transfer

1  Adopted  in  1997,  the  Kyoto  Protocol  supplements  and  strengthens  commitments  set  forth  under  the  UN

Framework Convention on Climate Change (UNFCCC)

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of environmentally sound technologies. JI and the CDM differ to the extent that projects take
place in countries with different commitments and, consequently, they are subject to different
project cycle requirements under the Marrakech Accords.

JI  projects  are  to  be  undertaken  in  developed  countries  or  countries  with  economies’  in
transition  (Annex  I  Parties  to  the  UNFCCC).  They  involve  at  least  two  countries  that  have
accepted  an  emission  target,  i.e.  their  emissions  are  limited.  Emission  reductions  from  JI
projects are called emission reduction units (“ERUs”) and issued by the country in which the
project is implemented (the  “host country”). The  implementation of a JI  project  results  in  a
transfer  of  ERUs  from  one  country  to  the  other,  but  the  total  emissions  permitted  in  the
countries  remains  the  same  (a  “zero  sum  operation”).  The  host  country  benefits  from
minimising  the  part  of  its  assigned  amount  to  transfer,  while  the  investor  country  benefits
from  maximising  the  number  of  assigned  amount  units  it  acquires.  It  is  expected  that  both
countries will strike a fair balance. Because of this balance, a less strict control procedure is
required under the Marrakech Accords. JI is expected to be a good vehicle for the transfer of
advanced environmentally sound technologies, in  particular in Russia  where there is a  great
potential for JI investments in the energy sector.

JI  projects  can  also  be  implemented  between  two  Member  States  of  the  European
Community. In such a case the environmental effect  as regards  greenhouse gas emissions is
even  a  zero-sum  game  within  the  Community.  The  interaction  between  the  Community
emission allowance trading scheme and such potential projects is of increasing importance.

The  Kyoto  Protocol  provides  for  CDM  projects  to  be  hosted  by  developing  countries  (non-
Annex  I  Parties  to  the  UNFCCC,  without  quantitative  emission  reduction  targets).  Annex  I
Parties  can  use  CDM  credits  to  offset  an  increase  in  their  domestic  emissions  during  a
commitment  period.  Therefore,  an  additional  level  of  assurance  is  required  regarding  the
validity  and  amount  of  emission  credits  resulting  from  CDM  activities.  This  difference  is
reflected in the Marrakech Accords. CDM implementation is supervised by a UNFCCC body,
the  CDM  Executive  Board,  which  is  responsible  for  issuing  CDM  credits  called  certified
emission  reductions  (“CERs”).  The  CDM  is  expected  to  be  an  excellent  vehicle  for  the
transfer  of  advanced  environmentally  sound  technologies  to  developing  countries,  while
assisting  them  in  achieving  their  sustainable  development  objectives,  such  as  poverty
alleviation and sectoral economic reform.

Parties  are  responsible  to  meet  their  Kyoto  commitments  but  it  is  mainly  the  private  sector
that is expected to drive JI and the CDM. So far, the private sector has been hesitating about
JI or the CDM because of uncertainties related to the entry into force of the Kyoto Protocol.
110  Parties,  representing  more  than  two-thirds  of  the  world’s  population,  have  ratified  the
Kyoto  Protocol  but  JI  and  CDM  will  not  come  into  existence  until  the  Protocol  enters  into
force.  Lesser  factors  that  have  caused  the  private  sector  to  hesitate  include  potential
transaction costs and risks associated with early implementation of JI and the CDM, and the
lack  of  capacity  and  institutions  in  many  potential  host  countries  to  select  and  approve
projects. In addition, aside from a market for purchases by governments, as long as companies
are  not  subject  to  an  obligation  to  reduce  their  own  greenhouse  gas  emissions  at  domestic
level, it is likely that the private sector engagement in JI and the CDM will remain limited.

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1.3.

Linking JI and the CDM to the Community emission allowance trading scheme
to  lower  the  costs  of  reducing  greenhouse  gas  emissions  within  the  EU  while
contributing to global sustainable development.

On  18  March 2003, the  Council  adopted  a  Common  Position2  on  a  Directive  establishing  a
scheme  for  greenhouse  gas  emission  allowance  trading  within  the  Community  in  order  to
promote  reduction  of  greenhouse  gas  emissions  in  a  cost-effective  manner  within  the  EU.
Final adoption of this Directive is expected in 2003.

This  scheme  places  direct  emissions  of  greenhouse  gases  within  a  regulatory  framework
where  the  total  quantity  of  emissions  is  limited.  Starting  in  2005,  the  scheme  will  require
large  carbon  dioxide  emitters  (power  and  heat  generation  and  energy  intensive  industry)  to
match  the  emission  from  their  installations  with  allowances  allocated  through  national
allocation  plans.  The  Community  scheme  gives  installations’  operators  flexibility  either  to
invest  in  abatement  technology  or  to  acquire  EU  allowances  on  the  market  to  match  their
emissions,  whichever  is  the  cheaper.  The  Community  scheme  will  contribute  towards  the
cost-effective fulfilment of the EU’s commitments under the Kyoto Protocol3. The Common
Position does not provide for the inclusion of JI or CDM credits.

The  core  element  of  this  proposal  is  to  provide  the  recognition  of  JI  and  CDM  credits  as
equivalent  to  EU  emission  allowances  for  their  use  within  the  Community  scheme  by
operators to fulfil their obligations. Linking will increase the diversity of compliance options
within  the  Community  scheme  thereby  leading  to  a  reduction  of  compliance  costs  for
installations  in  the  scheme.  Linking  will  improve  the  liquidity  of  the  European  market  in
greenhouse gas emissions allowances and lower the market price for them. It is estimated that
annual  compliance  costs  in  the  period  2008-12  for  covered  installations  in  the  enlarged  EU
will  be  reduced  by  –more  than  20%.  Allowance  prices  in  the  enlarged  EU  with  linking  as
proposed are estimated to be lowered by about half.

This proposal will stimulate  the  demand for  JI  credits,  in  particular  from  Russia  because  of
the great potential for projects there, and will lead to more investments by EU companies and
the  development  and  transfer  of  advanced  environmentally  sound  technologies  and  know-
how. By stimulating demand for CDM credits it will also assist developing countries hosting
CDM  projects  in  achieving  their  sustainable  development  goals  through  the  transfer  of
environmentally  sound  technologies  and  know  how.  It  will  contribute  towards  the  fight
against climate change through implementation of the Kyoto Protocol and the UNFCCC.

The proposal is based on Article 175(1) of the Treaty, as its overall objectives are to promote
activities reducing greenhouse gas emissions in a cost-effective manner while contributing to
global  sustainable  development,  and  because  it  amends  the  EC  emissions  trading  Directive
which is based on the same Article.

Linking JI and the CDM to  emissions trading has  been  the  subject  of  extensive  discussions
and analysis in the multi-stakeholder European Climate Change Programme (ECCP), that this
proposal  draws  upon.  In  particular,  the  ECCP  Working  group  on  JI  and  the  CDM  (2002)

2

3

Council Document 15792/02
The  EC  and  its  Member  States  are  all  Parties  to  the  UNFCCC.  The  EC  ratified  the  Kyoto  Protocol
pursuant to Council Decision 2002/358/EC of 25 April 2002 concerning the approval on behalf of the
European Community of the Kyoto Protocol to the UNFCCC and the joint fulfilment thereunder (OJ 15
May 2002, L130, page 1). The EC and its Member States ratified the Kyoto Protocol on 31 May 2002
and are committed to reduce their greenhouse gas emissions by 8% below 1990 levels by 2008-2012.

4

                                                
expressed  strongly  the  view  that  linking  JI  and  the  CDM  to  the  Community  emission
allowance trading scheme is desirable and practicable in as far as the environmental integrity
of the emissions trading scheme is not undermined and on condition that consistency with the
Kyoto Protocol and the Marrakech Accords is preserved.

The  proposal  also  creates  synergies  with  European  research  through  the  Community's  RTD
Framework Programmes. European research supports technologies to address climate change
the transfer of which to other industrialised and to developing countries will be promoted by
JI and CDM.

1.4.

The form and the structure of the proposal.

Since the main objective is to recognise JI and CDM credits for allowing their use within the
Community  emission  allowance  trading  scheme,  the  proposal  is  for  a  Directive  amending
Directive  2003/…/EC  establishing  the  Community  scheme.  It  introduces  the  necessary
conditions  to  do  it  while  preserving  the  architecture,  the  simplicity  and  the  environmental
integrity of the scheme. By consolidating existing legislation, it is the most coherent way to
achieve the policy objective while reducing implementation costs.

Linking JI and the CDM to the Community scheme implies the creation of a bridge between
two different frameworks. JI and the CDM are project-specific, based on a baseline and credit
approach with an ex-post verification of emissions reductions achieved, while the Community
scheme is a “cap and trade” programme for the reduction of greenhouse gas emissions based
on ex-ante  allocation of emission allowances to covered  installations.  This  proposal  reflects
the fact that these two frameworks differ in many aspects (different institutions involved for
the  issue  of  emission  allowances  and  credits,  different  timing  for  the  implementation,
different units of account).

The  starting  point  is  that  JI  and  CDM  credits  are  recognised  as  being  equivalent  to  EU
emission allowances from  an environmental and economic point of view. Consequently, the
proposal does not modify the project cycles through which JI and CDM credits are issued. It
means  that  the  proposal  is  based  on  trust  vis-à-vis  the  Kyoto  system  and  the  competent
institutions, in particular the CDM Executive Board and the Article 6 Supervisory Committee.
It  introduces  some  safeguards  as  to  what  to  link  and  how  much  to  link  in  order  to
operationalise  the  Marrakesh  Accords  and  preserve  the  environmental  integrity  of  the
Community scheme.

The  proposal  also  transposes  into  Community  law  some  internationally  agreed  principles,
criteria and project requirements so as to ensure that these are observed in projects authorised
by the Community and its Member States. Enabling these requirements to be enforceable in
Community law is important to ensure that the Community and its Member States fulfil their
commitments  and  because  such  JI  and  CDM  credits  are  likely  to  constitute  the  majority  of
credits used within the Community scheme.

2.

THE  RECOGNITION  PROCESS:  THE  CONVERSION  OF  JI  AND  CDM  CREDITS  INTO
ALLOWANCES

Central  to  the  proposal  lies  the  concept  of  conversion  by  Member  States  of  JI  and  CDM
credits,  respectively  “ERUs”  and  “CERs”,  into  allowances,  the  unit  of  account  within  the
Community scheme. On request to their competent authority, operators can obtain allowances
converted from CERs and ERUs they have either  generated themselves or purchased on the

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market.4 The conversion shall take place through the issue of allowances by the Member State
in exchange for CERs and ERUs held by that operator in its national registry. The allowances
would come in addition to those allowances allocated in national allocation plans to operators
under the Community scheme. Operators will be able to  convert JI  and CDM credits in any
Member State that foresees such a conversion.

The conversion of CERs and ERUs into allowances has a number of advantages, for Member
State authorities and for companies participating in the Community scheme. This will create
certainty for companies participating in the emissions trading scheme as they will be able to
use  allowances  converted  from  CERs  or  ERUs  in  exactly  the  same  manner  as  any  other
allowances  that  they  have  been  initially  allocated  or  have  acquired,  in  order  to  fulfil  their
obligations under the Community scheme. The absence of any additional restrictions on use
or  banking  by  entities  thus  provides  full  fungibility  of  companies’  holdings  within  the
Community  emission  allowance  trading  system.  This  also  provides  more  certainty  about
which credits are accepted for compliance and lower transaction costs through simplicity.

Directive 2003/…/EC makes clear (in recital 9) that, from 2008, transfers of allowances will
involve corresponding adjustments of Assigned Amount Units under the Kyoto Protocol, and
this will be provided for in the Regulation on Registries adopted pursuant to Article 19 of that
Directive.  For  Member  States,  exchange  of  CERs  and  ERUs  for  allowances  linked  to
Assigned Amount Units will facilitate the implementation of the Kyoto Protocol’s restrictions
on  the  use  and  carry-over  of  JI  and  CDM  credits  (up  to  a  maximum  2.5%  of  a  Party’s
assigned amount respectively into the 2013-2017 period5).

3.

CONDITIONS FOR THE RECOGNITION OF JI AND CDM CREDITS

Under  the  proposal,  the  competent  authorities  can  convert  CERs  and  ERUs  from  project
activities that comply with the following conditions:

3.1.

Quantitative conditions

Although providing an unlimited access to JI and CDM credits may have positive economic
effects,  it  may  at  the  same  time  undermine  the  environmental  integrity  of  the  Community
emission allowance trading scheme. Linking with JI and the CDM will allow an increase in
emissions  in  sectors  covered  by  the  scheme  and  will  affect  the  emission  trajectories  of
installations using these credits. By this “outsourcing” of emission reductions outside the EU
the environmental co-benefits from further greenhouse gas emission reductions in the form of
e.g.  lowered  sulphur  or  nitrogen  dioxide  emissions  are  foregone.  Furthermore,  it  would
discourage initiatives for the  reduction  of  emissions  within  the  EU.  By  putting a downward
pressure on the market price, it could  also  have a  perverse  effect by  retarding  technological
development  of  the  most  promising  emission  reduction  technologies  within  the  EU  while
these are necessary for fighting against climate change over the medium to long-term.

These concerns are recognised in the Kyoto Protocol, which requires that “The acquisition of
ERUs shall be supplemental to domestic actions for the purposes of meeting commitments6”,
and  that  “Parties  …  may  use  the  certified  emission  reductions  accruing  from  such  project

4

5

6

The award of ERUs or CERs by a Member State to an operator without payment corresponding to the
market value may constitute state aid and would require a notification to the Commission.
Decisions 16/CP.7 and 17/CP.7).
Article 6(1)(d) of the Kyoto Protocol, on JI

6

                                                
activities  to  contribute  to  compliance  with  part  of  their  …  reduction  commitments7”.  The
Marrakesh  Accords  also  require  “that  the  use  of  the  mechanisms  shall  be  supplemental  to
domestic  action”8.  Developing  countries  want  industrialised  countries  to  take  significant
action  to  reduce  their  emissions  at  home  and,  although  they  are  interested  in  investment
through the CDM, they will be unwilling to take on greater commitments to combat climate
change unless industrialised countries take significant action to reduce domestic emissions.

While  the  Community  and  its  Member  States  have  agreed  internationally  that  “use  of  the
mechanisms  shall  be  supplemental  to  domestic  action”,  the  Community  scheme  creates  an
EU-wide market where allowances can be traded without restriction. This means that Member
States cannot take individual decisions on what  credits to recognise or not in the context of
the Community scheme. It is therefore necessary to closely monitor the level of JI and CDM
credits converted for use in the Community scheme, and have a provision in this proposal for
a review to be undertaken to ensure if necessary that the Marrakesh Accords are respected, as
this cannot be done by the Member States individually in respect of the Community scheme.
The proposal therefore provides for a review to automatically take place once the number of
CERs and ERUs converted for use in the Community scheme reaches 6% of the total quantity
of  allowances  allocated  by  the  Member  States.  In  this  case,  the  Commission  may  consider
whether  a  maximum  level  of  for  example  8%  of  the  total  quantity  of  allowances  should  be
introduced  for  the  remainder  of  the  period,  to  ensure  supplementarity  under  the  Kyoto
Protocol  in  respect  of  the  Community  scheme  and  to  preserve  the  overall  objective  of  the
Community scheme to achieve emission reductions within the EU. The introduction of such a
quantitative condition would be done through the committee carrying out tasks in relation to
Directive 2003/…/EC, because of the practical need for this decision to be taken during  the
relevant trading period.

This  monitoring  provision  does  not  constrain  the  quantity  of  credits  converted  for  the  time
being,  with  the  exception  of  the  exclusion  of  credits  from  sinks  projects  (see  Section  3.2
below).  It  will  therefore  allow  the  operators  covered  by  the  Community  emissions  trading
scheme  to  reap  the  full  benefits  of  linking  JI  and  CDM  to  the  Community  scheme.  These
benefits are estimated to amount to halving the allowance price from € 26 without the linking
to  under  €  13  and  an  annual  cost  saving  for  the  installations  covered  by  the  Community
scheme of €  700  million  in  the  enlarged  EU.  The  emissions  of  these  installations  would  be
allowed  to  rise  by  some  111  million  tonnes  of  CO2  equivalent  as  compared  to  the  baseline
without the linking.

This proposal does not regulate the use of JI or CDM credits by Member States or by private
individuals in respect of commitments outside of the Community scheme, and it remains the
responsibility of Member States to ensure supplementarity in these areas. For this reason, the
Commission’s  recent  proposal  for  a  monitoring  mechanism  of  Community  greenhouse  gas
emissions and the implementation of the Kyoto Protocol9 requires Member States to report on
how their use of JI and the CDM is supplemental to domestic actions. It also does not prevent
EU  private  sector  entities  to  generate,  hold,  or  transfer  CERs  and  ERUs  beyond  any
quantitative limit. CERs and ERUs not converted into EU allowances retain their commercial
value  as  Kyoto  compliance  instruments  for  Member  States  and  other  Parties  to  the  Kyoto
Protocol.

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8

9

Article 12(3)(b) of the Kyoto Protocol, on the CDM
Decision 15/CP.7: “Principles, nature and scope of the mechanisms pursuant to Articles 6, 12 and 17 of
the Kyoto Protocol”
COM(2003) 51 final

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It is estimated that in the absence of limits on the conversion as foreseen in this proposal, the
JI  and  CDM  credits  used  in  the  Community  scheme  will  amount  to  an  estimated  7%  of
initially allocated allowances for the 2008-2012 period. The level of 6% of the total quantity
of allowances allocated, which will trigger the review, is estimated to correspond to some 2%
of  the  EU  base  year  emissions.  This  would  represent  more  than  a  quarter  of  the  total  8%
emission  reductions  the  EU  has  to  achieve  in  order  to  meet  its  target  under  Kyoto.  The
maximum level of 8% that the Commission would consider when the 6% trigger threshold has
been reached corresponds to an estimated 2.7% of the EU base year emissions, or one third of
the Community's target under the Kyoto Protocol. Monitoring - will be -provided for by the
Registries  Regulation  at  the  point  of  time  where  CERs  and  ERUs  are  converted  into  EU
allowances  and  appropriate  public  access  will  be  provided  to  information  on  amounts
converted in the Member States10. Taking into account that Member States may make use of
the  flexible  mechanisms  under  the  Kyoto  Protocol  in  addition  to  the  conversion  of  JI  and
CDM credits following this proposal, these thresholds are considered necessary to ensure the
supplementarity of the flexible mechanisms to domestic emission reduction efforts inside the
EU.

3.2.

Qualitative conditions:

(cid:1)  Avoiding  double  counting  of  emissions  covered  by  the  Community  emission

allowance trading scheme and emission reductions from project activities

By placing direct emissions from certain activities in a regulatory framework where the total
quantity  of  emissions  are  capped,  the  Community  emission  allowance  trading  scheme  does
not  risk  “double  counting”.  As  a  result  of  the  harmonised  and  consistent  coverage  of  the
power  and  heat  generation  sector,  Member  States  may  not  allocate  any  allowances  to
installations generating power from carbon-free sources or to installations consuming power,
heat or steam (indirect emitters).

Double  counting  in  the  context  of  linking  project  credits  to  the  Community  trading  scheme
might  happen,  though,  if  ERUs  were  issued  as  a  result  of  emission  reductions  generated
through  projects  undertaken  within  the  Community  that  also  lead  directly  or  indirectly  to  a
reduction or limitation in emissions from an installation covered by the Community emission
trading  scheme.  Double  counting  needs  to  be  prevented  both  from  the  environmental  and
economic  point  of  view.  Generating  ERUs,  while  freeing  up  allowances  at  the  same  time,
implies a loosening of the overall cap, as ERUs exchanged into allowances entitle the holder
to  increase  emissions  to  the  same  amount  as  they  have  been  reduced  via  a  JI  project.
Economically, double counting would distort competition in the liberalised European power
market.  While  existing  carbon-free  sources  would  not  receive  any  allowances  in  the  initial
allocation in the framework of the national allocation plans, new investments in carbon-free
sources can not be awarded ERUs for conversion into allowances either.

Double counting should be forbidden following the principle that one tonne of emissions shall
be  accounted  for  only  once  and  a  reduction  of  it  not  be  rewarded  more  than  once.  For  that
reason,  an  installation  covered  by  the  Community  scheme  cannot  be,  at  the  same  time,
eligible under JI. This problem is very likely to arise with JI projects undertaken in the energy
supply and demand sector in Acceding countries.

10

See in particular Article 20(3) of Directive 2003/…/EC

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To avoid double counting, the  proposal  requires that no ERUs  be  issued  for  reductions  that
affect  directly  or  indirectly  emissions  at  installations  covered  by  the  Directive  2003/…/EC.
Article  6  of  the  Kyoto  Protocol  requires  Parties  involved  to  approve  JI  projects.  The
requirement for Member States not to approve projects which may result in double counting
of  emissions  is  consistent  with  this  Article  of  the  Kyoto  Protocol.  Double-counting  of
emissions  would  give  a  host  Member  State  interest  greater  difficulties  to  comply  with  its
Kyoto target, and it is important to regulate this issue at Community level in order to preserve
the  environmental  integrity  of  the  trading  system  based  on  an  accurate  accounting  of
emissions  and  to  avoid  distortions  of  competition  (e.g.  in  the  liberalised  EU  electricity
market).  The  proposal  invites  the  Committee  carrying  out  tasks  in  relation  to  Directive
2003/…/EC to develop guidelines on the avoidance of double counting.

(cid:1)  Temporary exemption for JI activities in Acceding countries

The  Commission  acknowledges  the  efforts  made  by  certain  Member  States  and  candidate
countries in implementing JI at an early stage. Many Acceding countries will join the EU on
1st May 2004 and, by then, the Community scheme will be part of the acquis communautaire.
The proposal gives the possibility to temporarily exempt JI activities that would normally fall
under  the  scope  of  emissions  trading  Directive  2003/…/EC  which  are  approved  before  31
December 2004 or, where later, the date of a country’s accession to the EU, to be continued as
JI projects and generate ERUs until 31 December 2012. However, with the view of avoiding
any  double  counting  of  emissions,  the  proposal  requires  that,  in  respect  of  such  project
activities,  no  allowances  shall  be  allocated  in  the  national  allocation  plan  in  respect  of
emission reductions resulting from those project activities.

The  main  reason  is  that  the  “transformation”  of  an  on-going  JI  project  into  an  installation
subject  to  allowance  trading  may  result  in  legal  and  contractual  difficulties  for  both  the
investor and the host country that have made a bilateral arrangement for the acquisition and
transfer of ERUs. Under the Community scheme, it is the Member State where the installation
is located that is responsible in allocating allowances to the operator. Consequently, it is up to
the country hosting the on-going JI project to decide whether this activity should temporarily
be  exempted  from  the  trading  scheme  or  not.  It  could  decide  not  to  do  so  and  allocate
allowances on the basis of the baseline that was initially designed for the JI project.

(cid:1)  Exclusion of credits generated from certain activities from the  possibility  to convert

them into allowances for use in the Community scheme

This proposal does not regulate the use of JI or CDM credits by Member States or by private
individuals in respect of commitments outside of the Community  emissions trading scheme.
The Community scheme creates an EU-wide market where allowances can be traded without
restriction, meaning that Member  States  cannot  take  individual  decisions  on  what  credits  to
recognise or not to recognise. It is therefore necessary to take a common approach to project
activities in the context of the Community scheme.

The proposal excludes JI and CDM credits from being converted into  allowances for use in
the Community scheme from projects that do not achieve permanent emission reduction from
sources (emitters) -and could result in significant impacts on bio-diversity. It is agreed in the
Marrakesh Accords (Decisions 16/CP.7 and 17/CP.7) that Annex I Parties are to refrain from
using  CERs  and  ERUs  generated  from  nuclear  facilities  to  meet  their  commitments  under
Article  3(1)  of  the  Kyoto  Protocol.  Article  3(1)  contains  a  legally-binding  commitment  for
Annex  I  Parties  to  ensure  that  their  emissions  do  not  exceed  their  emission  limitation  and
reductions  commitments  inscribed  in  Annex  B  to  the  Kyoto  Protocol.  It  also  contains  a

9

collective goal for all Annex I Parties to have a view to reducing their overall emissions by at
least  5  per  cent  below  1990  levels  in  the  period  2008-12.  This  collective  goal  originally
formed  part  of  a  separate  article  but  was  added  to  Article  3(1)  in  the  later  stages  in  the
negotiations.  The  Kyoto  Protocol  clearly  foresees  legally-binding  commitments  for  Annex  I
Parties under Article 3(1) extending beyond 2012. This is clear from Article 3(9) of the Kyoto
Protocol,  which  provides  for  Annex  B  to  be  amended  to  establish  commitments  for
subsequent commitment periods that take effect through Article 3.1. It follows therefore that
the  commitment  on  Annex  I  Parties  to  refrain  from  using  CERs  and  ERUs  generated  from
nuclear facilities has been fixed until 2012 and provides an indication for the continuation for
subsequent periods.

JI  and  CDM  credits  that  may  be  generated  through  land  use,  land  use  change  and  forestry
(LULUCF)  activities  are  also  excluded  from  recognition.  LULUCF  activities  can  only
temporarily store the carbon, which will at some time be released into the atmosphere. They
are  not  covered  by  the  Community  emission  allowance  trading  scheme,  which  aims  at
achieving  permanent  reductions  from  emission  sources.  The  Community  trading  scheme  is
very much designed as a technological driver for long term emission abatement improvements
from energy and industrial sources. Recognising credits from LULUCF activities  would not
be  consistent  with  the  approach  taken  by  the  Council  and  the  European  Parliament  on
emissions trading. Furthermore, there are still many uncertainties as to how to account for and
monitor emission removals by sinks under the Kyoto Protocol, both under JI and the CDM, at
country  -and  at  project-  levels.  It  is  not  clear  how  the  temporary  and  reversible  nature  of
LULUCF carbon sequestration can be reconciled with entity-level emissions trading,  as  this
would  have  to  involve  the  attribution  of  subsequent  releases  of  greenhouse  gases  to  the
beneficiary from the initial sequestration. Negotiations are currently in progress for the design
of  modalities  for  the  inclusion  of  afforestation  and  reforestation  under  the  CDM,  and  these
will  not  be  agreed  internationally  before  the  9th  Conference  of  the  Parties  to  the  UNFCCC
(December  2003)  at  the  earliest.  In  the  light  of  the  application  of  these  modalities,  the
Commission  will  give  due  consideration  to  whether  and,  if  so,  how  credits  from  LULUCF
activities  could  be  used  in  entity-level  emissions  trading  in  the  Community  scheme.  In
addition,  the  JI  and  CDM  should  bring  technology  transfer  through,  for  example,  the
promotion  of  new,  cleaner  technologies  and  improvements  in  energy  efficiency,  while
afforestation  and  reforestation  activities do  not  bring  technological  transfer  or  development.
Because  sinks  projects  are  expected  to  be  cheaper  than  projects  involving  the  transfer  of
technologies, allowing credits from such projects to be converted would be at the expense of
promoting technological transfer to other industrialised and developing countries which is key
to  the  JI's  and  CDM’s  success  and  the  long-term  goal  of  stabilising  global  levels  of
greenhouse gas emissions.

Subject  to  the  double  counting  provisions  for  JI  projects  in  the  Community,  the  proposal
recognises the possibility to convert JI and CDM credits from hydro power plants. However,
Member  States  and  other  industrialised  countries  should  take  account  of  environmental  and
social impacts of project activities in which they participate or which are undertaken by legal
entities  they  authorise  to  participate,  which  should  avoid  projects  entailing  negative
environmental and social impacts, in particular from large hydro-electric power production as
identified  by  the  World  Commission  on  Dams11.  The  review  that  takes  place  in  2006  of  the
Community  emissions  trading  scheme  should  examine  the  extent  to  which  large  hydro-electric

11  See  final  report  of  the  World  Commission  on  Dams:  Dams  and  Development:  A  New  Framework  for

Decision-Making, published in November 2000.

10

                                                
power  production  projects  have  been  established  which  may  have  negative  environmental  and
social impacts.

3.3.

Timing conditions and consequences

JI and CDM credits are accepted for use in the Community emissions trading scheme as from
2008, which implies equal treatment of these two project mechanisms. Under Article 12(10)
of the Kyoto Protocol on the CDM, CERs obtained before the first commitment period (2008-
2012)  can  be  used  to  assist  in  achieving  compliance  in  the  first  commitment  period.
Therefore, providing  in EC law for -CDM credits to be used  pre-2008  would  not  be in  line
with  the  Kyoto  Protocol’s  approach.  The  certainty  of  the  acceptance  after  2008  of  CDM
credits generated before then to meet obligations under the EC scheme will nonetheless give
an additional stimulus for the CDM at an early stage and can therefore be expected to reduce
transaction costs and lower risks associated with investing in CDM projects.

As far as JI credits are concerned, the Marrakech Accords12 stipulate that ERUs shall only be
issued for a crediting period starting after the beginning of the year 2008. This means that JI
credits cannot exist before 2008. Consequently, the proposal does not foresee the exchange of
ERUs  into  allowances  in  the  2005-2007  period,  for  the  simple  fact  that  no  ERUs  will  be
available prior to 2008.

4.

4.1.

LINKS  WITH  EXISTING  COMMUNITY  ENVIRONMENTAL  LEGISLATION  AND  THE  EU
STRATEGY ON SUSTAINABLE DEVELOPMENT

Requirement to take account of the acquis communautaire for the establishment
of  baselines  for  project  activities  undertaken  in  countries  having  signed  an
Accession Treaty with the EU

Under the Kyoto Protocol, JI and the CDM must achieve additional reductions to those that
would  have  happened  otherwise,  and  the  Marrakech  Accords  state  that  a  baseline  shall  be
established taking into account relevant national policies and circumstances, such as sectoral
reform  initiatives,  local  fuel  availability,  power  sector  expansion  plans,  and  the  economic
situation  in  the  project  sector13.  Wherever  the  country  hosting  JI  or  CDM  projects  have  a
legislation setting precise requirements that have an impact on greenhouse gas emissions, this
legislation  should  be  fully  taken  into  account  for  the  purpose  of  baseline  setting.  Acceding
countries are committed to align their national laws, rules and procedures with the entire body
of  EC  legislation,  the  so-called  acquis  communautaire  at  the  latest  by  accession,  with  the
exception of some transition measures agreed within the accession negotiations and recorded
in the Treaty of Accession. EC legislation requirements shall be seen as part of the baseline
for JI projects undertaken in those countries.

12

13

Decision 16/CP.7 Guidelines for the implementation of Article 6 of the Kyoto Protocol
Decision 16/CP.7 Guidelines for the implementation of Article 6 of the Kyoto Protocol: “The baseline
(…) is the scenario that reasonably represents the anthropogenic emissions by sources (…) that would
occur in the absence of the proposed project. A baseline shall cover emissions from all gases, sectors
and source categories listed in Annex A to the Kyoto protocol (…) within the project boundary”.

11

                                                
4.2.

Requirement  to  take  account  of  environmental  and  social  impacts  of  project
activities in which Member States are involved

The Marrakech Accords affirm that it is the host country’s prerogative to confirm whether JI
and  CDM  projects  assist  it  in  achieving  sustainable  development.  It  is  the  Member  States’
responsibility  to  approve  JI  and  CDM  projects  in  which  they  or  their  legal  entities  are
involved.

The  proposal  states  that  Member  States  shall  take  account  of  environmental  and  social
impacts of project activities in which they participate or which are undertaken by legal entities
they  authorise  to  participate  in.  It  is  a  general  requirement  that  applies  both  to  project
preparation (before project approval) and project implementation (when emission reductions
are  monitored  and  verified).  This  requirement  is  consistent  with  the  Marrakech  Accords
whereby much discretion exists for Member States, whether social and environmental criteria
on  CDM  and  JI  projects  should  be  taken  into  account  before  they  give  their  approval  on
projects.  Taking  account  of  economic,  social  and  environmental  impacts  in  the  project
approval  process  will  ensure  that  approved  JI  and  CDM  projects  effectively  contribute  to
sustainable  development.  Since  participation  in  JI  and  the  CDM  is  voluntary,  the  proposal
includes  an  encouragement  to  the  private  sector  to  enhance  corporate  environmental  and
social responsibility and accountability in accordance with the Plan of Implementation agreed
at the World Summit on Sustainable Development in Johannesburg.

4.3.

Public access to information on JI and CDM project activities

In accordance with Directive 2003/4/EC on public access to environmental information, the
requirements of the Aarhus Convention and the requirements on public information set forth
by the  Marrakech  accords, including through national  registries14,  this proposal ensures  that
information on project activities is also made available to the public. This provision applies to
projects outside the territory of the Community in which a private entity participates, as this
participation is under the responsibility of the Member State.

4.4.

Environmental  impact  assessment  of  national  strategies/programmes  for
JI/CDM implementation

The proposal states that Member States shall assess the environmental impacts that may result
from  national  strategies  or  programmes  for  the  implementation  of  JI/CDM  projects  and  to
consult  the  public  prior  to  their  adoption.  This  provision  implements  both  the  Aarhus
Convention and the Directive 2001/42/EC of 27 June 2001 on the assessment of the effects of
certain plans  and programmes on  the environment (Strategic  Environmental  Assessment  for
policies, plans and programmes (SEA)).

4.5.

Possibility  for  EMAS  verifiers  to  verify  emission  reductions  from  JI  project
activities within the Community

Only  designated  operational  entities  that  are  accredited  by  the  CDM  Executive  Board  can
validate projects and/or verify and certify emission reductions under the CDM.

14

See in particular Section E of the Annex to the draft Decision -/CMP.1 on modalities for the accounting
of assigned amounts under article 7.4 of the Kyoto Protocol.

12

                                                
Under  the  “fast-track”  procedure  for  JI  (when  the  host  party  meets  all  participation
requirements provided for in Section D of Decision 16/CP.7), Annex I Parties can decide who
to designate for verifying emission reductions.

The proposal gives to Member States the opportunity to designate environmental verifiers that
are  involved  in  EMAS  to  verify  emission  reductions  from  JI  fast  track  activities  within  the
Community.  The  advantage  is  to  benefit  from  existing  accreditation  bodies  and  procedures
established in accordance with Article  4  of Regulation 761/2001/EC15 of 19 March 2001 of
the  EMAS  Regulation.  However,  beyond  a  sound  knowledge  on  climate  change  issues,
environmental verifiers under EMAS would have to demonstrate that they have the necessary
expertise and understanding of the JI project cycle requirements.

5.

CO-ORDINATION WITH MEMBER STATES’ NATIONAL DESIGNATED AUTHORITY FOR
THE IMPLEMENTATION OF JI AND THE CDM

With a  view  to  better  implementation,  the  proposal  recommends  full  co-ordination  between
the  competent  authority  for  the  implementation  of  the  emissions  trading  Directive
2003/…/EC16  and  the  designated  national  authority  for  the  implementation  of  JI  and  CDM
projects in accordance with the Marrakech Accords17.

6.

THE CASE OF RENEWABLE ENERGY PROJECTS

The replacement of power and heat production from conventional fossil fuels with renewable
energy  sources  is  an  important  option  to  reduce  greenhouse  gas  emissions  from  power  and
heat production.

The Community emission allowance trading scheme does not specifically address renewable
energy as it does not emit carbon dioxide emissions. Renewable energy benefits from the fact
that no allowances need to be obtained and surrendered for producing renewable-based power
and heat, while such allowances imply increased opportunity costs for those producers using
fossil fuels like coal, oil or natural gas. These increased opportunity costs will be reflected in
market prices for power and heat to the benefit of renewable-based producers.

It  is  expected  that  many  renewable  energy  projects  will  be  proposed  as  Kyoto  project
activities,  in  particular  under  the  CDM.  These  projects  will  greatly  contribute  to  climate
change mitigation and could help some countries to adapt themselves to the adverse effects of
climate  change.  There  is  a  great  potential  to  create  synergy  with  the  objective  of  poverty
alleviation. It is worth noting that the Parties to the UNFCCC recently adopted (COP8, Delhi,
India)  simplified  modalities  for  small-scale  CDM  projects,  including  renewable  energy
projects with a maximum output capacity equivalent of up to 15 megawatts. This will greatly

15

16

17

Regulation  761/2001/EC  of  19  March  2001  allowing  voluntary  participation  by  organisations  in  a
Community Eco-management and audit scheme (EMAS), see accreditation requirements in Annex V.
Article 18
Decision 16/CP.7, §20(a) and Decision 17/CP.7, §29

13

                                                
facilitate the implementation of renewable energy projects under the CDM while minimising
transaction costs.

However, renewable energy facilities that may affect emissions from installations covered by
the  Community  emission  allowance  trading  scheme  will  not  be  eligible  under  JI  within  the
EU because of the double counting provision.

14

2003/0173 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Directive 2003/.../EC establishing a scheme for greenhouse gas emission
allowance trading within the Community, in respect of the Kyoto Protocol's project
mechanisms

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article
175(1) thereof,

Having regard to the proposal from the Commission18,

Having regard to the opinion of the European Economic and Social Committee19,

Having regard to the opinion of the Committee of the Regions20,

Acting in accordance with the procedure laid down in Article 251 of the Treaty21,

Whereas

(1)

Directive  2003/…/EC  of  the  European  Parliament  and  the  Council22  establishes  a
scheme for greenhouse gas emission allowance trading within the Community in order
to  promote  reductions  of  greenhouse  gas  emissions  in  a  cost  effective  and
economically  efficient  manner,  recognising  that  in  the  longer-term,  global  emissions
of greenhouse gases will need to be reduced by approximately 70% compared to 1990
levels.  It  aims  at  contributing  towards  fulfilling  the  commitments  of  the  Community
and  its  Member  States  to  reduce  anthropogenic  greenhouse  gas  emissions  under  the
Kyoto  Protocol  which  was  approved  by  Council  Decision  2002/358/EC  of  25  April
2002  concerning  the  approval,  on  behalf  of  the  European  Community,  of  the  Kyoto
Protocol  to  the  United  Nations  Framework  Convention  on  Climate  Change
(UNFCCC) and the joint fulfilment of commitments thereunder 23.

(2)

Directive  2003/.../EC  states  that  the  recognition  of  credits  from  project-based
mechanisms for fulfilling obligations as from 2005 will increase the cost-effectiveness
of achieving reductions of global greenhouse gas emissions and shall be provided for

18

19

20

21

22

23

OJ C […], […], p.[…].
OJ C […], […], p.[…].
OJ C […], […], p.[…].
OJ C […], […], p.[…].
OJ C […], […], p.[…].
OJ L 130, 15.5.2002, p. 1.

15

                                                
by  provisions  for  linking  the  Kyoto  project-based  mechanisms  including  Joint
Implementation (JI) and the Clean Development Mechanism (CDM) under the Kyoto
Protocol with the Community greenhouse emission trading scheme (“the Community
scheme”).

Linking  the  Kyoto  project-based  mechanisms  to  the  Community  scheme,  while
safeguarding its environmental integrity, gives the opportunity to use emission credits
generated  through  project  activities  eligible  under  Article  6  and  12  of  the  Kyoto
Protocol  in  order  to  fulfil  operators’  obligations  under  Article  12  (3)  of  Directive
2003/…/EC.  As  a  result,  this  will  increase  the  diversity  of  low  cost  compliance
options  within  the  Community  scheme  leading  to  a  reduction  of  overall  costs  of
compliance with the Kyoto Protocol while improving the liquidity of the Community
market of greenhouse gas emissions allowances. By stimulating demand for JI credits
Community  companies  will  invest  in  the  development  and  transfer  of  advanced
environmentally  sound  technologies  and  know-how.  The  demand  for  CDM  credits
will also be stimulated and thereby developing countries hosting CDM projects will be
assisted in achieving their sustainable development goals.

Credits  from  the  Kyoto  Protocol’s  project-based  mechanisms  will  only  come  into
existence once the Kyoto Protocol enters into force. In addition to the use of the Kyoto
project-based  mechanisms  by  the  Community  and  its  Member  States,  and  by
companies and individuals outside the Community scheme, those mechanisms should
be  linked  to  the  Community  scheme  in  such  a  way  to  ensure  consistency  with  the
Kyoto  Protocol  and  subsequent  decisions  adopted  thereunder  as  well  as  with  the
objectives  and  architecture  of  the  Community  scheme  and  provisions  laid  down  by
Directive 2003/…/EC.

Emission  credits  generated  through  the  Kyoto  project-based  activities  should  be
converted  into  allowances  under  Directive  2003/…/EC  so  as  to  use  a  single  unit  of
account  within  the  Community  market  of  greenhouse  gas  emissions  allowances
thereby  recognising  the  equivalence  between  Kyoto  emission  credits  and  emission
allowances.

The  -quantity  of  emissions  credits  from  the  Kyoto  project-based  mechanisms  -
converted  into  allowances  should  be  monitored  and  a  review  foreseen  that  can
operationalise  the  commitments  of  the  Community  and  its  Member  States  to  ensure
supplementarity  under  the  Kyoto  Protocol  and  subsequent  decisions  adopted
thereunder in respect of the Community scheme and preserve the overall objective of
the Community scheme to achieve emission reductions thereunder.

In  accordance with  the  Kyoto  Protocol  and  subsequent  decisions  adopted  thereunder
emission credits resulting from project activities involving nuclear facilities should not
be  used  for  meeting  commitments  under  the  Kyoto  Protocol.  Emission  credits
resulting from land use, land use change and forestry project activities should not be
converted into allowances under this Directive because they do not achieve permanent
emission reduction from sources.

In order to avoid double counting, emission reductions units should not be issued as a
result  of  reductions  generated  through  project  activities  undertaken  within  the
Community  that  also  lead  to  a  reduction  in,  or  limitation  of,  emissions  from  an
installation covered by Directive 2003/…/EC.

(3)

(4)

(5)

(6)

(7)

(8)

16

(9)

In  accordance  with  the  relevant  Treaties  of  Accession,  the  acquis  communautaire
should  be  taken  into  account  for  the  establishment  of  baselines  for  project  activities
undertaken  in  countries  acceding  to  the  Union.  A  temporary  derogation  should
however  be  allowed  for  on-going  JI  project  activities  approved  until  31  December
2004 or, where later, the date of a State’s accession to the Union, which may result in
the  issue  of  emission  reduction  units  until  31  December  2012  provided  that  no
allowances  are  allocated  in  the  national  allocation  plan  in  respect  of  emission
reductions resulting from these project activities.

(10) Approval of Kyoto project activities prior to their implementation is the responsibility
of  Member  States.  In  considering  their  approval,  Member  States  should  ensure  that
these  project  activities  achieve  additional  emission  reductions  and  result  in  real,
measurable  and long term benefits  related  to  the  mitigation  of  climate  change,  while
contributing  to  the  achievement  of  sustainable  development  goals  of  host  countries,
notably  through  the  transfer  of  environmentally  sound  technologies,  in  accordance
with  the  Kyoto  Protocol  and  any  decision  adopted  thereunder,  to  the  specific
development needs and objectives of host countries, and to poverty eradication.

(11)

(12)

(13)

In line with the European Union Strategy on Sustainable Development24, this Directive
requires  that  environmental  and  social  impacts  that  may  result  from  JI  and  CDM
project  activities  should  be  taken  into  account  when  projects  are  prepared  and
implemented  in  order  to  ensure  that  they  will  effectively  contribute  to  sustainable
development.

In  accordance  with  the  UNFCCC,  the  Kyoto  Protocol  and  any  subsequent  decision
adopted  for  their  implementation,  the  Commission  and  the  Member  States  should
support  capacity  building  activities  in  developing  countries  and  countries  with
economies in transition in order to help them take full advantage of JI and the CDM in
a supportive manner with their sustainable development strategies.

Since  participation  in  JI  and  CDM  project  activities  is  voluntary,  corporate
environmental  and  social  responsibility  and  accountability  should  be  enhanced  in
accordance with paragraph 17 of the World Summit on Sustainable Development Plan
of  implementation25.  In  that  regard,  companies  should  be  encouraged  to  improve
social  and  environmental  performance  of  JI  and  CDM  activities  in  which  they
participate.

(14)

The  public  should  have  access  to  information  on  project  activities  and  be  consulted
when  national  programmes  for  JI  and  CDM  projects  implementation  are  developed
prior to their adoption.

(15) Member  States’  National  Programmes  for  the  implementation  of  JI  and  the  CDM
should  take  into  due  consideration  relevant  Community  policy,  in  particular
Community  economic  development  and  aid  co-operation,  and  be  in  accordance  with
Community rules on competition and public procurement.

(16) Directive 2003/…/EC should therefore be amended accordingly.

24

25

COM(2001)264 final.
Adopted by the World Summit on Sustainable Development, held in Johannesburg, South Africa, from
26 
See
2002. 
http://www.johannesburgsummit.org/html/documents/summit_docs/2309_planfinal.htm.

September 

August 

to 

4 

17

                                                
(17)

(18)

The measures necessary for the implementation of this Directive should be adopted in
accordance  with  Council  Decision  1999/468/EC  of  28  June  1999  laying  down  the
procedures for the exercise of implementing powers conferred on the Commission26.

Since  the  objective  of  the  proposed  action,  the  establishment  of  a  link  between  the
Kyoto project-based mechanisms and the Community scheme, cannot be achieved by
the  Member  States  acting  individually,  and  can  therefore  by  reason  of  the  scale  and
effects of the proposed action be better achieved at Community level, the Community
may  adopt  measures,  in  accordance  with  the  principle  of  subsidiarity  as  set  out  in
article 5 of the Treaty. In accordance with the principle of proportionality, as set out in
that Article, this Directive does  not go  beyond what  is  necessary  in  order to achieve
that objective,

HAVE ADOPTED THIS DIRECTIVE:

Article 1
Amendments to Directive 2003/…/EC

Directive 2003/…/EC is hereby amended as follows:

1.

In Article 3, the following points are added:

(k)

(l)

(m)

(n)

“Annex  I  Party”  means  a  Party  listed  in  Annex  I  to  the  UNFCCC  that  has
ratified the Kyoto Protocol as specified in Article 1(7) of the Kyoto Protocol;

“project  activity”  means  a  project  activity  approved  by  one  or  more  Annex  I
Parties in accordance with Article 6 or Article 12 of the Kyoto Protocol and the
decisions adopted thereunder;

“emission reduction unit” (ERU) means a unit issued pursuant to Article 6 of
the Kyoto Protocol and the decisions adopted thereunder;

“certified  emission  reduction”  (CER)  means  a  unit  issued  pursuant  to  Article
12 of the Kyoto Protocol and the decisions adopted thereunder.

The following Articles are inserted after Article 11:

2.

“

Article 11(bis)

Conversion  of  CERs  and  ERUs  from  project  activities  for  use  in  the  Community
scheme

1.

Following the entry into force of the Kyoto Protocol and subject to paragraphs
2  and  3  of  this  Article,  Member  States  may  convert  CERs  and  ERUs  from
project activities into allowances for use in the Community scheme during each
period  referred  to  in  Article  11(2)  of  this  Directive,  at  the  request  of  an
operator.  This  shall  take  place  through  the  issue  of  one  allowance  by  the

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OJ L 198, 17.7.1999, p. 23.

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Member  State  in  exchange  for  one  CER  or  ERU  held  by  that  operator  in  its
national registry.

2.

At  such  time  as  the  number  of  CERs  and  ERUs  from  project  activities
converted for use in the Community scheme reaches 6% of the total quantity of
allowances  allocated  by  the  Member  States  for  the  period,  the  Commission
shall undertake a immediate review. In the light of this review, the Commission
may consider whether a maximum of for example 8% of the total quantity of
allowances allocated by the Member States for the period should be introduced
in accordance with the procedure in Article 23(2).

3.

All  CERs  and  ERUs  may  be  converted  for  use  in  the  Community  scheme
except from the following project activities:

(a)

In accordance with the Kyoto Protocol and subsequent decisions adopted
thereunder, nuclear facilities; and

(b) Land use, land-use change and forestry

Article 11(ter)
Project activities

1. Member  States  shall  take  all  necessary  measures  to  ensure  that  baselines  for
project activities, as defined by subsequent decisions adopted under the Kyoto
Protocol, undertaken in countries having signed a Treaty of Accession with the
Union  fully  comply  with  the  acquis  communataire,  including  the  temporary
derogations set out in the Treaty of Accession.

2.

3.

Except as provided for in paragraph 3, Member States hosting project activities
shall  ensure  that  no  ERUs  are  issued  for  reductions  or  limitations  of
greenhouse gas emissions from installations covered by this Directive.

Until 31 December 2012, emission reductions resulting from project activities
which fall under the scope of this Directive and which are approved before 31
December 2004 or, where later, at the date of the State’s accession to the Union
may  result  in  the  issue  of  ERUs.  In  respect  of  such  project  activities,  no
allowances shall be allocated in respect of emission reductions resulting from
those project activities.

4. Member States shall take all necessary measures to ensure that the preparation
and implementation of project activities in which they participate or authorise
private or public entities to participate that are undertaken outside the territory
of  the  Community  take  into  account  the  environmental  and  social  impacts  of
those  projects.  They  shall  also  ensure  that  these  projects  are  developed  and
implemented in such a manner to contribute to sustainable development, and to
the specific development needs and objectives of the host countries.

5.

In considering approval of project activities in accordance with Articles 6 and
12  of  the  Kyoto  Protocol  and  decisions  adopted  thereunder,  Member  States
shall ensure that project activities result in:

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(a)

(b)

(c)

real,  measurable  and  long  term  benefits  related  to  the  mitigation  of
climate change;

reductions in emissions that are additional to any that would occur in the
absence of the proposed project activity; and

the  transfer  of  environmentally  safe  and  sound  technology  and  know-
how.

6.

Provisions  for  the  implementation  of  paragraphs  1  to  5  shall  be  adopted  in
accordance with Article 23(2).

”

3.

In Article 17 the following paragraph is added:

“Information on project activities in which a Member State participates or authorises
private  or  public  entities  to  participate,  held  by  the  competent  authority,  shall  be
made available to the public by that authority subject to the restrictions laid down in
Article 3(3) and Article 4 of Directive 2003/4/EC.”

4.

The following article is inserted after Article 17:

“Article 17(bis)
Strategic impact assessment of national JI and CDM implementation programmes

Member  States  shall  assess  the  environmental  impacts  that  may  result  from  their
national strategies or programmes for the implementation of projects and consult the
public  prior  to  their  adoption  in  accordance  with  Directive  2001/42/EC  of  the
European Parliament and of the Council 27, in particular Article 6 thereof.”

5.

In Article 18 the following paragraph is added:

“Member  States  shall  in  particular  ensure  co-ordination  between  their  designated
focal point for approving projects pursuant to Article 6, paragraph 1(a) of the Kyoto
Protocol and their designated national authority for the implementation of Article 12
of  the  Kyoto  Protocol  respectively  designated  in  accordance  with  subsequent
decisions adopted under the Kyoto Protocol.”

6.

In paragraph 3 of Article 19 the following sentence is added:

“That  Regulation  shall  also  include  provisions  concerning  the  conversion  of  CERs
and ERUs for use in the Community scheme and on monitoring of the level of such
conversion.”

7.

Article 21 is amended as follows:

(a)

In paragraph 1 the second sentence is replaced by the following:

27

Directive 2001/42/EC of 27 June 2001 on the assessment of the effects of certain plans and programmes
on the environment

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“This  report  shall  pay  particular  attention  to  the  arrangements  for  the  allocation  of
allowances,  the  conversion  of  ERUs  and  CERs  for  use  in  the  Community  scheme,
the operation of registries, the application of the monitoring and reporting guidelines,
verification  and  issues  relating  to  compliance  with  the  Directive  and  on  the  fiscal
treatment of allowances, if any.”

(b)

Paragraph 3 is replaced by the following:

“3.The  Commission  shall  organise  an  exchange  of  information  between  the
competent  authorities  of  the  Member  States  concerning  developments  relating  to
issues  of  allocation,  the  conversion  of  ERUs  and  CERs  for  use  in  the  Community
scheme, 
the  operation  of  registries,  monitoring,  reporting,  verification  and
compliance.”

8.

The following article is inserted after Article 21:

“Article 21(bis)

In  accordance  with the UNFCCC, the Kyoto  Protocol  and  any  subsequent  decision
adopted  for  their  implementation,  the  Commission  and  the  Member  States  shall
endeavour  to  support  capacity  building  activities  in  developing  countries  and
countries with economies in transition in order to help them take full advantage of JI
and the CDM  in a  supportive manner with their  sustainable  development  strategies
and to facilitate the engagement of entities in JI and CDM project development and
implementation.”

9.

Article 30 is amended as follows:

(a)

in paragraph 2 the following point is added

“(k)

the impact of project mechanisms on host countries, particularly on their
development  objectives,  including  whether  JI  and  CDM  large  hydro-
electric  power  production  projects  have  been  established  which  have
negative environmental and social impacts;”

(b)

paragraph 3 is deleted.

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In Annex V the following point is added:

“(13) Verifiers accredited in accordance with the procedure and criteria laid down in
Regulation (EC) No 761/2001 2001 of the European Parliament and of the Council
allowing voluntary participation by organisations in a Community Eco-Management
and  Audit  Scheme  (EMAS)  which  have  the  necessary  expertise  and  experience  in
greenhouse  gas  mitigation  activities  can  be  verifiers  for  project  activities  eligible
under Joint Implementation undertaken within the Community.”

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Article 2
Implementation

1.

2.

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative
provisions  necessary  to  comply  with  this  Directive  by  30  September  2004  at  the
latest. They shall forthwith inform the Commission thereof.

When  Member  States  adopt  these  measures,  they  shall  contain  a  reference  to  this
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official
publication.  The  methods  of  making  such  reference  shall  be  laid  down  by  the
Member States.

Member  States  shall  communicate  to  the  Commission  the  text  of  the  provision  of
national  law,  which  they  adopt  in  the  field  covered  by  this  Directive.  The
Commission shall inform the other Member States thereof

This Directive shall enter into force on the day of its publication in the Official Journal of the
European Union.

Article 3

Article 4

Addressees

This Directive is addressed to the Member States.

Done at Brussels,

For the European Parliament
The President

For the Council
The President

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