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The EU's emission trading system and putting a price on carbon 7 June 2013

The EU's emission trading system and putting a price on carbon 7 June 2013. Satu HASSI, Member of European Parliament. The Science. Greenhouse effect Is enhanced by human activities Carbon dioxide Methane Nitrous oxide Ozone depleting chemicals Fluorinated greenhouse gases.

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The EU's emission trading system and putting a price on carbon 7 June 2013

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  1. The EU's emission trading system and putting a price on carbon7 June 2013 Satu HASSI, Member of European Parliament

  2. The Science • Greenhouse effect • Is enhanced by human activities • Carbon dioxide • Methane • Nitrous oxide • Ozone depleting chemicals • Fluorinated greenhouse gases

  3. Greenhouse gas emissions reductions – what scientific evidence indicates is needed Global -50% below 1990 by 2050 Developed countries80-95% below 1990 by 2050 Global peak for all emissions by 2020

  4. How does cap-and-trade work? • Regulator determines allowed emissions level (the cap), and creates and distributes allowances corresponding to the cap • Allowances are put in circulation • Scarcity gives allowances value, carbon market develops • Price signal guides companies by how much to reduce emissions • Regulator enforces rules and levies sanctions, if needed

  5. How does cap-and-trade work? • Regulator determines allowed emissions level (the cap), and creates and distributes allowances corresponding to the cap • Allowances are put in circulation • Scarcity gives allowances value, carbon market develops • Price signal guides companies by how much to reduce emissions • Regulator enforces rules and levies sanctions, if needed

  6. The EU's Climate and Energy Package: 2020 targets and key policies • Reduce GHG emissions by 20% (compared to 1990) • EU Emissions Trading System reducing overall emissions from industrial installations (and aviation from 2012) • National emission targets cover other sectors from 2013 onwards: e.g. buildings, services, agriculture, transport (except aviation) • Increase share of renewables in EU’s energy to 20% • National targets agreed, national action plans • Improve energy efficiency by 20% compared to business as usual projections • Energy Efficiency Directive • Sectoral legislation, including CO2 and cars + vans regulations

  7. GHG Target: -20% compared to 1990 -14% compared to 2005 EU ETS -21% compared to 2005 Non ETS sectors -10% compared to 2005 27 Member State targets, stretching from -20% to +20%

  8. What has the EU achieved? 1990-2011 • emissions: - 17% • GDP: + 40% The EU has met Kyoto targets (2008-2012)

  9. GHG reduction 1990-2011 in EU-27 (%). (2012-2013: -4,1%) Source: EEA 2013

  10. New installed and decommissioned power capacity in EU 2013 (MW)

  11. Net electricity generating installations in the EU 2000-2013 (GW)

  12. EU ETS fundamentals • Applicable since January 2005 and now in 9th year • Simple “downstream” cap-and-trade system for major emitting industries, that is part of a comprehensive policy • Applies to around half of carbon dioxide emissions from 30 European countries • Puts a cap on emissions from 10,000 energy-intensive installations across EU (power, cement, iron, steel, refineries, pulp and paper, lime, chemicals, ceramics, glass) + aircraft • Companies can choose: • To emit allocated emission rights (allowances) or • To reduce emissions below allocation and sell or bank • To emit more than allocation and buy • Free allocation via benchmarks reflecting 10% best performers • 52 benchmarks cover ~80% industrial emissions in the EU ETS

  13. Emission trading outside the EU Kazakhstan South Korea Ukraine EU ETS Japan Quebec USA (Eastern States) 7*China California New Zealand Australia Brazil: Rio de Janeiro Ongoing Starting + Voluntary markets + Kyoto mechanisms’ markets Planned Ratified Kyoto Protocol De-ratified Kyoto Protocol Signed but not ratified Kyoto Protocol No position

  14. Why does the EU use an ETS? • The environmental reasons: • A guaranteed environmental outcome, due to the cap • Incentives given for all types of clean technology, without distinction • The more cost-effective the instrument, the greater the reductions that can be made for the same cost • The economic reasons : • Harnesses market forces for achieving cost-effective and smooth transition to a low carbon economy via an EU-wide price signal • A carbon price signal influences daily operational and strategic investment decisions • Liquid market: on average around 26 million allowances traded each day on a number of exchanges and over-the-counter • Stable and predictable long-term regulatory framework for businesses • The practical and international reasons: • Experience in the EU ETS since system began operation in 2005 has informed and influences development of EU system, as well as emerging systems in other jurisdictions (Australia, China, South Korea, etc.) • Biggest source of demand for credits from projects in third countries, raising awareness and levels of action taken

  15. Problems 2005-2012 • National allocation -> different criteria in different countries, overall too generous allocation, which led to surplus in the market • Allocation was mainly free. Power companies charged the emission price anyway from customers, led to public anger

  16. Major ETS improvements as of 2013 • Long-term emission reduction trajectory set in the legislation • Single electronic registry replaced 27 national registries • Ongoing work to bring spot trading under financial market rules • Transition taken place to large-scale auctioning • At least half of auction revenue should be used to tackle climate change and adapt to its effects (and all revenue from aviation) • €1.5 billion raised for EU-level investment in demonstration and deployment of Carbon Capture and Storage and for 23 types of innovative renewables and advanced biofuels • Over €2 billion being used for modernisation of electricity generation • Harmonised free allocation to industry which are deemed to be at risk of carbon leakage provisions • Linkages with third country systems under development

  17. Main fights on ETS reform in 2008 • Auctioning / free allocation for the manufacturing industry • Result: free allocation for sectors prone to carbon leakage, up to sectoral benchmark (= mainly free allocation) • Earmarking of auctioning revenues • Result: political commitment to earmark 50 % of the revenues to climate policy, incl international climate funding. • Offsetting • Result: 3 % of 2005 emissions

  18. Default EU ETS linear reduction path Low-carbon roadmap projects ETS reductions of around 90% in 2050

  19. State of play: EU ETS Achievements • One carbon price, level playing field across the EU • Technically functioning and liquid market • Long-term clarity on reductions (currently -1.74%/year) But, triggered by recession, challenge of a surplus • In 2012 and 2013 rapid build-up of surplus, largely due to regulatory provisions in the transition of phase 2 to phase 3. • By end 2013 surplus could be well over 1.5 billion allowances. • Surplus continues to grow, and will reach for most of phase 3 up to 2020 a size of around 2 billion allowances.

  20. EU ETS in the short term Challenge: • Surplus of almost 2 billion allowances at the start of 2013 • Price development since 2008 • Member States consider further national measures… that can fragment the energy market, distort the carbon price signal and create additional costs for the ETS sectors • Partial solution: Back-load 900m auction supply from 2013-15 to 2019-20 (adopted in European Parliament in December 2013)

  21. EU ETS has been biggest global source of demand for international credits • Quantity of use for international credits • The EU ETS has provided the demand for 1047 million CDM and JI credit up to May 2013 • EU ETS over 2008-20: around 1.6-1.7 billion tonnes • Effort Sharing Decision: up to 700 million tonnes • Conditions for use: • CDM projects registered prior to 2013 • All new CDM projects registered from 2013 in LDCs • Restrictions adopted on HFC and Adipic Acid credits • ERUs must reflect reductions taking place in 2008-12

  22. CDM and quantity aspects: Offsetting alone cannot solve climate problem ... If Annex I alone reduces emissions to zero ... Global emission path compatible with 2°C scenario

  23. Broader carbon markets at the start of 2013 • Linking discussions with Switzerland underway based on mandate given by Council in December 2010 • European Commission and Australia announced pathway for linking the EU ETS and the Australian Carbon Pricing Mechanism in August 2012, linking mandate given by Council in early 2013, full linking to be preceded by a one-way registries link • California and Quebec ETS begun operation • Regional Greenhouse Gas Initiative (RGGI) being revised • South Korean ETS legislation passed • China – 7 pilot emission trading systems advancing preparation (Guangdong, Hubei, Beijing, Chongqing, Shanghai, Shenzen, Tianjin) alongside preparation of a national system

  24. Other GHG-emission related activities • International Carbon Action Partnership (ICAP) in place since 2008: for exchanges with interested countries/ regions on technical/non-political aspects of cap-and-trade systems (see http://icapcarbonaction.com/ for further information) • World Bank through the Partnership for Market Readiness (an €110m budget, with €15m from European Commission) • Wide range of countries active here including EU, Australia, US, and 16 implementing country participants incl. China, India, Brazil, Mexico, S.Africa, Indonesia, Thailand, Turkey, Morocco, Costa Rica. • World Bank's Carbon Partnership Facility • Commission contracts underway on Design options for New Market Mechanisms, Piloting sectoral mechanisms, ETS outreach (including 10 ETS summer schools and an on-line platform, Technical cooperation with China)

  25. Future EU ETS development • Significant impact from economic crises on EU ETS supply/demand balance • Continued broad commitment to using market forces through the EU ETS • Polarisation if measures to apply for 2013-20 or link to 2030 framework • Preferred candidates from stakeholder consultation seem to be: (c) early revision of the linear reduction factor, (b) retirement of allowances and/or some kind of automatic supply management mechanism

  26. Aviation: International Civil Aviation Organisation (ICAO) growth forecasts for emissions By 2050 290% to 667% increase 2020 63% to 88% increase • Source ICAO • 3.5 Gt is almost 20% of the 18 Gt to which global emissions need to be limited in 2050 to contain climate change to 2oC Source: ICAO GIACC/4-IP/1

  27. Are Parliamentarians effectively following States' discussions in ICAO? • International emissions from aviation are increasing fast • No 'magic bullet' – e.g. biofuels are little used in practice because of economics • Historical industry opposition to taxes, charges, VAT etc (but not subsidies) Challenges ahead • EU pursued ETS as part of package when aviation industry favoured this: “Extending the EU ETS to cover aviation is probably the least-cost and most effective way to reduce aviation’s climate impacts in Europe” – IATA, Sept.2006 • European Parliament has amended EU ETS twice in view of ICAO delivering a single global market-based measure, to apply from 2020

  28. Lessons learned • It is essential that the cap is tight enough • Do not give free allocation for power companies – it leads to huge windfall profits and public anger • There should be a mechanism to prevent collapse of price • Do not trust too much on offsetting • ETS is a good source of financing for climate policies, incl international funding

  29. Revenues from emission trading • Revenues from auctioning emission allowances in other sectors than aviation in EU: 5 bn EUR • Germany: 10 m EUR from aviation ETS alone to national and international climate funds • 9 US states 1,6 bn USD • Proposals on the table in ICAO: no revenues for climate funds

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