The EU Linking Directive

In November 2004, the European Union adopted legislation regulating the admission of CDM credits (CERs) into the EU’s greenhouse gas Emissions Trading Scheme (ETS). The legislation, known as the Linking Directive, states that CERs from large hydro projects can only be used in the ETS if the projects meet the standards of the World Commission on Dams (WCD).

The section of the directive dealing with hydro projects states: "In the case of hydro–electric power production project activities with a generating capacity exceeding 20MW, Member States shall, when approving such project activities, ensure that relevant international criteria and guidelines, including those contained in the World Commission on Dams year 2000 Final Report, will be respected during the development of such project activities." The Linking Directive comes into force with the start of the second phase of the ETS on January 1, 2008.

The ETS covers tens of thousands of installations in the EU with major emissions of greenhouse gases. The installations, which are mainly large industrial processing plants and power stations, have been allocated allowances to emit certain amounts of greenhouse gases each year based on their historical emissions. If the installations pollute more than their allocation, they must cover their extra emissions by buying either allowances from other ETS-covered installations or, from the start of 2008, CDM credits.

As of December 2007, none of the 343 large hydros in the CDM pipeline had proven WCD compliance. International Rivers is working to ensure that credits from large hydro projects that cannot prove CDM compliance cannot be used within the European Trading System.

Carbon industry news service Point Carbon reported in October 2007 that Europe’s largest carbon exchange will prohibit trading in CERs from hydro projects over 20 MW. The London-based European Carbon Exchange (ECX) took the decision because of uncertainty over how the Linking Directive will be applied by different EU governments. “Why would you buy something if you don’t know if you can use it?” Sara Stahl of ECX told Point Carbon.

Nord Pool, an Oslo-based exchange, also refuses to trade in large hydro CERs. Other carbon brokers told Point Carbon that credits from large hydro were trading at a discount to other CERs because of regulatory uncertainty, and that few traders were interested in buying these credits.

Many EU governments are buying large volumes of CERs to make up for their failure to meet their Kyoto Protocol targets through reducing emissions domestically. These credits are not used in the ETS, which covers less than half of the EU’s greenhouse gas emissions. Nonetheless the governments of Germany, the Netherlands, and Flanders (Belgium) have committed to only buying credits from large hydros which comply with the WCD.

In October 2007, the German government issued a guideline for determining whether CDM projects comply with the WCD recommendations.

The European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) – the two biggest public banks in Europe – run a joint fund to buy carbon credits called the Multilateral Carbon Credit Fund (MCCF). The EIB has told International Rivers that it will apply the Linking Directive criteria on large hydro for projects supported under the MCCF. The EBRD says they “consider” the WCD criteria and guidelines for any large hydro they fund, including under the MCCF. The World Bank which operates a Carbon Fund for Europe jointly with the EIB has refused to commit to respecting the recommendations of the WCD, despite being a co-sponsor of the Commission. Read an International Rivers press release on these banks’ commitments (or lack of them).

In June 2007, International Carbon Investors & Services (INCIS) approved a standard for voluntary carbon credits which requires WCD compliance for large hydro projects. INCIS, formerly European Carbon Investors & Services (ECIS), is comprised of major international banks and other bodies involved in carbon trading. The INCIS Voluntary Offset Standard is aimed at the fast-growing market for voluntary carbon offsets. Voluntary offsets are not regulated under the Kyoto Protocol (as is the case for CERs) or any other body. International Rivers wrote to INCIS members commending them for adopting the WCD recommendations, highlighting the problems with the regulated CDM (often compared favorably to the voluntary market) and urging them to also adopt the WCD for their other financial activities that support hydro projects.