Nov. 5-6, 2024 — Reporting by Mathew Carr

–Don’t trade on this story; I’m confirming the facts

Click to access CC-2024-1-3-Liechtenstein-EB.pdf

Liechtenstein, the tiny European country, will be punished for breaching rules of the Kyoto Protocol because it failed to hand in the required volume of emission allowances and credits.

It will be punished by having a smaller allocation of emission credits under its next tranche for 2021-2030 under Paris(I think)…130% of its shortfall in 2013-2020 under Kyoto. Kyoto, which focussed on rich countries and ran from 2008-2020, is ending and evolving into the Paris climate deal, which covers all nations.

The country missed a deadline last year to hand over credits matching its emissions in a proper way.

It had its emission credits in the wrong account. There was a technical issue that disallowed transfer into a “retirement account,” where the credits were meant to be.

The sanction document shows the UN system is serious about punishing those who fail to obey rules … still…this does seem a marginal case of wrongdoing. That’s my initial thought.

With a population of about 40,000 and a total area of only 160 km2, Liechtenstein is one of the smallest countries in the world.

Within about 60 years, Liechtenstein developed from a mainly agricultural state to one of the most highly industrialized countries in the world. The high value-added development includes industry and financial services.

This analysis below needs confirming (stay tuned):

This chart below shows Liechtenstein had emissions of 1.56m tons of CO2 equivalent of emissions in the period (2013-2020). It had zero in its retirement account, which is the problem (I think). It had 1.8m tons in its holding account — adding together the AAU carbon allowances with the CER carbon credits. So it had plenty theoretically available

Acronyms explained below:

See this.

So the wrongdoer country in this case must transfer 1.56 million carbon credits to its retirement account when allowed.

On top of this, it will receive 130% of 1.56 million credits fewer in the following period, the 10 years through 2030.

What’s the mistake and value of the sanction in monetary terms?

Here’s where it gets a little tricky (for me at least).

Certified Emission Reduction credits might trade for $5/ton. Some are valued at $30/t (see here).

So the sanction that Liechtenstein faces is …it will get a 2.03m tons smaller allocation in the period starting 2021.

At $5 this is a $10.1 million hit to the country’s taxpayers — because of technical registry problems. That’s bearable, but irritating, even for a rich city state.

However, at $30/t the sanction is $60.8 million.

Because lawmakers around the world have left climate action so late, prices might surge.

At $100 a ton (EU carbon allowances have already breached this a few months ago) the Liechtenstein sanction is worth $203 million. That’s real pain for a small country because of a “small” mistake.

The pain of the sanction lies not with transferring carbon that should have been transferred earlier. It’s the lower “allocation” of allowances going forward (the allocation represents a declining cap …the bit of the market that creates price tension and incentivizes faster emission cuts by countries.)

In the EU, Assigned Amount Unit carbon allowances are stapled to each EU carbon allowance (EUA). EUA futures for December are trading today for 64 euros a ton on ICE Futures Europe. That’s equivalent to $69 a ton. EUAs for 2027 are priced at 69 euros, the contango is evident on ICE.

These figures demonstrate that carbon markets are providing serious incentives.

Another substantial wrinkle

I’ve published Liechtenstein’s climate plan, its climate contribution, below …for the period 2021-2030.

It’s dated 2017 and, somewhat naughtily, the country has not updated since (I think).

The country is planning to cut emissions by 40% by 2030 vs 1990 and it should be tightening its target even more.

Now, the government can be a little less ambitious when it rewrites its contribution (to make up for the registry mistake).

CarrZee comment: Countries are being slow on climate action because the registries have not yet been properly sorted out. Build markets properly, and countries and companies will come — they will be ok using those markets. Fail to build them properly, countries and companies will stay away.

This is a clear failure of the United Nations.

Country envoys at the UN need to get a grip of their own system later this month at the yearly talks, a tricky thing because 200 countries need to agree on ways to encourage better market rules across the world. We are already above the 1.5C target in Paris.

[More to come — as I said, these are initial thoughts only]

The docs, snipped, for convenience (link above)