Dealing with surplus emissions in the climate negotiations after Copenhagen: What are the options for compromise?

This paper analyses the environmental and financial consequences of various strategies of dealing with surplus emission allowances in the aftermath of the Copenhagen Accord. This topic remains relevant, in particular, with respect to the Russian negotiation position, as this country is the largest holder of surplus emissions. It is concluded that not addressing the surplus problem is not a feasible negotiation option, as the sheer size of the surpluses would jeopardise the environmental integrity of any future agreement. Cancelling surpluses against Russia's will, though viable, is not desirable, as it might well lead to this country opting out of this climate treaty. Three options for compromise have been selected and analysed here: (1) stricter targets for Annex I countries; (2) strategic reserve for Russia; (3) institutionalising optimal banking. It is concluded that, whereas option 1 is environmentally the best, in the present political context it is probably less feasible. The other two options, although environmentally suboptimal, seem politically more favourable. Our analysis suggests that maximal revenues for surplus-holding countries arise by releasing only a limited amount of surplus credits to the market. The institutionalisation of this effect could be a key lever to a politically feasible agreement on surplus emissions.