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EU ETS undermined as Hungary 'recycles' credits

The reputation of the EU’s emissions trading scheme (ETS) – and carbon markets more generally – is under threat after it was revealed that the Hungarian government intends to ‘recycle’ already-used carbon credits by reselling them to a Japanese buyer.

Hungarian officials acknowledge plans to sell nearly 2 million tonnes of Certified Emissions Reductions (CERs) for around 4bn forint ($21m). CERs are generated by projects registered under the UN’s Clean Development Mechanism (CDM), and theoretically represent one tonne of saved carbon.

Hungary has already used the CERs to meet its emissions-reduction obligations under the EU ETS. Though such recycling of credits sounds fraudulent, in fact it is legal, due to the separation of the EU ETS and the emissions-reduction targets taken on by signatories to the Kyoto Protocol.

Hungary defends its actions by insisting that it will replace the recycled CERs with Assigned Allowance Units (AAUs). One Hungarian official also claims that at least five other eastern European countries have plans to sell used CERs.

But European officials immediately slammed Hungary’s decision, claiming that legality aside, the sale could undermine both the EU ETS and the CDM. Henry Derwent, president of the Geneva-based International Emissions Trading Agency, says the practice is dangerous as innocent buyers could snap up CERs without knowing that they are no longer eligible within the EU ETS.

“This apparent double-counting could damage the reputation of the EU ETS,” Derwent says. “A distinction between recycled and compliance-grade credits would be difficult for everyday market participants ... to make.”

News of Hungary’s CER sale further widened the spread between CERs and EU Emissions Allowances (EUAs) on the European Climate Exchange.

In contrast to EUAs, which are allocated to installations based on their historical emissions and are freely tradable, there is a cap on how many CERs each installation can use when meeting its obligations under the EU ETS. Many observers are concerned that the ever-widening spread between EUAs and CERs will dampen project developers' appetites for renewables projects under the CDM.

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