Use of Kyoto credits by European industrial installations: from an efficient market to a burst bubble

European industrial installations surrendered over 1 billion Kyoto credits (675 million CERs and 383 million ERUs) in Phase II (2008-2012) of the European Union Emission Trading Scheme (EU ETS). Kyoto credits have always been less expensive than EUAs, initially as a result of asymmetric information, and then due to the fact that credit surrender was capped at around 1,650 MtCO2e at the European level. Lower credit prices enabled installations to reduce their compliance costs. The savings achieved by installations subject to the EU ETS are estimated between €4 billion and €20 billion over the period between 2008 and 2012. The use of CERs and ERUs within the EU ETS grew exponentially. It was also effective from an economic standpoint in several ways: 1. a vast majority of the installations – 70%, which represent 90% of the emissions covered – made use of the option to return credits; 2. the use of credits was primarily limited by the supply: once delivered, credits made their way from the producer's account to the end-customer's account very quickly, on average in seven months; 3. the use of the credits did not depend on whether the installation had an allowance deficit or surplus: even installations that had a surplus, which did not “need” credits for compliance, surrendered them to minimise their compliance costs; 4. the development of market infrastructure played an important role in matching credit buyers and sellers by ensuring that a price emerged, and improving the transparency of information. Demand from the EU ETS dried up as companies had already contracted all the credits allowed by their maximum surrender limit since mid-2012. This limit was set in 2004 and was only marginally increased in 2009 via the review of the EU ETS Directive for Phase III: the limit rose from around 1,400 MtCO2e over the period 2008 - 2012 to an authorised amount of 1,650 MtCO2e for the period 2008 to 2020, i.e. an additional amount of only 250 million over the eight years between 2013 and 2020. The bubble burst in the second half of 2012 after the market became convinced that European demand had dried up; this conviction was reinforced by the flooding of Russian and Ukrainian ERUs as both States boosted issuance of ERUs before the end of the first commitment period of the Kyoto Protocol. The thousands of industrial companies buying CERs and ERUs were therefore replaced by just a few States, which made the international credit market much less liquid. In fact, the qualitative restrictions introduced in phase 3 of the EU ETS, which were supposed to rebalance the market, became obsolete before they even entered into effect on the 1st of May 2013. On this point, we note that the European Union is currently the only region in the world that does not obligate its operators to use a minimum amount of domestic offsets.