European companies covered by the EU emissions trading system will be allowed to convert credits from JI and CDM projects for use towards meeting their commitments under the trading system.

As its name implies, the Linking Directive will create a link between the Flexible Mechanisms of the Kyoto Protocol - Joint Implementation (JI) and the Clean Development Mechanism (CDM) - and the EU emissions trading scheme.

In principle, companies which carry out emission reduction projects outside the EU through JI or CDM will be able to convert the credits they earn from those projects into allowances that can be used for compliance under the EU Emissions Trading Scheme. The Linking Directive will therefore further lower the cost to EU industry by offering more options for complying with the requirements of the Emissions Trading Scheme.

Governments will be allowed to use credits from JI and CDM projects towards meeting their commitments under the Kyoto Protocol during the first Kyoto commitment period 2008-2012.

The reasoning behind JI and CDM is similar to the one behind emissions trading: It does not matter where emissions reductions are achieved as climate change is a global problem. The important thing is that they take place and are achieved in the most cost-effective way. It is estimated that the linking of project credits to the emissions trading system will lower the annual compliance costs for companies covered by the scheme, which include companies in the ten accession countries, by about a quarter.

The EU takes into account the obligation for Parties to the Kyoto Protocol to achieve a significant part of their Kyoto targets through emission reductions in the European Union, so that the use of the Kyoto flexible mechanisms is supplementary to domestic efforts. It therefore envisages the triggering of a review once JI and CDM project credits equivalent to 6% of the total quantity of allowances issued for the trading period 2008-2012 enter the emissions trading scheme. If and when triggered, this review will consider placing a limit on the credits that can be converted during the remainder of the trading period.