Approaching the AAU Issue with a strategic compliance reserve and optimized trading.

The issue of surplus emissions permits (Assigned Amount Units i.e. AAUs) under the Kyoto Protocol is emerging as one of the crucial sticking points in the negotiations. The excess of emissions permits that will be available to Countries of Central and Eastern Europe and the Former Soviet Union is fuelling EU and Japanese arguments that the Kyoto Protocol should be replaced. Addressing this problem is both politically and environmentally necessary, if a second commitment period of the Kyoto Protocol is to be agreed.

This paper sets out the position of all parties and draws following conclusions:

• The issue of surplus AAUs is shaping up as a crucial sticking point in the negotiations around the future climate regime.
• The Russian position contains several contradictions which may provide an entry point for negotiation on the future use of AAUs. Europe and developing countries will need to engage in these negotiations to find a workable solution.
• It is hard to see how the CEE member countries could really benefit from the carry over given the likely sub-prime value of these assets post 2012, and the fact that they cannot use them for their own post 2012 compliance. Instead a proposed potential avenue may be to establish a non-tradable strategic compliance reserve from the first commitment period surplus of AAUs.