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Revision of the EU Emissions Trading System

Revision of the EU Emissions Trading System. Thomas Bernheim Policy Officer DG Environment European Commission. Objectives of EU ETS review. Cost-effective contribution to -20% GHG target for 2020, or to stricter target under international climate agreement

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Revision of the EU Emissions Trading System

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  1. Revision of theEU Emissions Trading System Thomas BernheimPolicy Officer DG Environment European Commission

  2. Objectives of EU ETS review • Cost-effective contribution to -20% GHG target for 2020, or to stricter target under international climate agreement • Improvement of the EU ETS based on experience • A clear long-term carbon price

  3. Overview • Scope • Cap setting • Allocation methods including EII • Redistribution of auctioning rights • Use of credits • Monitoring, reporting, verification

  4. Scope

  5. Streamlining the scope of the EU ETS • Environmentally, no difference between emissions from combustion and processes, therefore not treated separately • Codifying broad interpretation of combustion installation by • Explicit definition of combustion installation • Listing some activities explicity for further clarification • Legal certainty and level playing field

  6. New sectors and gases - Principles • Enhancing environmental effectiveness and reducing competitive distortions • General consideration: attaching a price to carbon • Additional criteria for inclusion: • Significance of the source • Feasibility to monitor emissions • Proportionality of transaction costs • Interaction with existing policies and regulation • Compliance costs

  7. New sectors and gases – included from 2013 onwards • CO2 emissions from petrochemicals production, ammonia and other chemicals including process emissions • CO2 and PFC emissions from the production of aluminium • N2O emissions from the production of nitric, adipic and glyoxal and glyocylic acid production • Carbon capture and storage • Not exactly emissions, but widening the scope

  8. Small installations • Improving cost-effectiveness of small installations • Opt-out of installations on condition that • less than 25 MW • less than 10.000 tonnes CO2 per year • Equivalent measures to reduce GHG at national level • Monitoring arrangements are in place • Opt-out granted through • Application by Member States • Tacit consent of the Commission after 6 months • Aggregation clause

  9. Summary of scope effects

  10. Cap setting

  11. Cap setting • New: single EU-wide cap instead of 27 caps set by Member States • CO2 allowances available in 2020: 1720 Mt • - 21% compared to 2005 emissions • Linear decrease • predictable trend-line to 2020 and beyond (annual decrease by 1.74%) • possible review by 2025 at the latest • Automatic adjustment to stricter target • Aviation to be included in line with political agreement

  12. Figures on the Cap • Figures based on • NAP 2 decisions of the Commission • ETS scope as applicable in Phase 2 • To be adjusted for: • Opt-ins in Phase 2 • Extended scope in Phase 3 • Inclusion of aviation • Inclusion of Norway, Liechtenstein, Iceland

  13. Allocation method including EII

  14. Allocation principles • Harmonised allocation rules ensure level playing field across the EU: • No distortion of competition • Auctioning as the rule with free allocation for a transitional period • In terms of allocation rules, 3 categories of operators: • No free allocation (i.e. full auctioning) (category 1) • Partial free allocation (category 2) • Up to 100% free allocation (category 3)

  15. Category 1: Auctioning • Basic principle for allocation is auctioning: • Eliminates windfall profits • Simplest and most transparent allocation system • Level playing field for new entrants and incumbents • Full auctioning for sectors able to pass on costs (category 1): • Power sector • Exemption: heat produced through high efficiency cogeneration with a view to avoiding distortions of competition • Auctioning on the basis of harmonised rules ensuring • Transparency and non-discrimination • Full access for SMEs

  16. Category 2: Free allocation as a transitional measure • All industrial installations not falling under category 3 (see below) • Maximum amount to be allocated for free: • Incumbents: share of VE 05-07 corresponds to share of cap • New sectors: must not exceed VE 05-07 • Community-wide rules (benchmarks) for free allocation to be determined taking into account most efficient techniques, substitutes, alternative production processes, use of biomass and CCS • No free allocation for electricity production • Partial free allocation to industry as a transitional measure: • 80% of allocations determined in accordance with Community-wide rules for free in 2013 • Yearly reduction • Phased out by 2020

  17. Category 3: full free allocation • Installations in sectors which are exposed to a significant risk of carbon leakage • Up to 100% free allocation • Number of allowances determined by Community-wide rules • Sectors determined in 2010 taking into account ability to pass on costs without losing market share to non-EU competitors • particularly vulnerable to international competition (‘carbon leakage’) • Further criteria: • Increase in production costs through auctioning • Potential to reduce emission levels (most efficient techniques) • Market structure, product market, exposure to international competition • Effect of climate change and energy policies

  18. Review in 2011: further measures • 2011: situation of exposed energy intensive industries (category 3) to be reviewed • European Commission to submit an analytical report • in the light of international developments • Following consultations with all relevant social partners • Report to be accompanied byany appropriate proposals: • Adjusting free allocation • Introducing system to neutralise distortive effects („importers“) • Binding sectoral agreements have to be taken into account • Conformity with principles of UNFCCC and WTO

  19. Use of auctioning revenues • At least 20% of auction revenues should be used to • Reduce GHG emissions • Adapt to the impacts of climate change • Fund research and development for reducing emissions and adaptation • Develop RES to meet the EU‘s 20% target • Increase energy efficiency by 20% • CCS • Deforestation • Social aspects • Administrative expenses of the ETS management • Measures to be notified (monitoring)

  20. Redistribution of auctioning rights

  21. Re-distribution of auctioning rights • Wide range of different economic situations in Member States • Different treatment of Member States under the Community system is inappropriate, in order to eliminate distortions and to ensure highest possible degree of efficiency • Only different treatment that is possible is the share that each Member State can auction from the overall auctioning cap

  22. Underlying principles of distribution of auctioning rights • Auctioning principle • 90% of the auctioning CAP is distributed according to the MS share of 2005 Verified Emissions • 10% distributed to Member States that have a GDP per capita below 120% of EU average • This distribution takes into account GDP per capita and expected growth rates

  23. Distribution of auctioning rights • Rich Member States receive 90% of proportional auctioning cap • Member States close to EU GDP/Capita average, receive around 100% of proportional auctioning cap • Poor Member States receive more than 100% of proportional auctioning cap • Three exceptions to this auctioning distribution rule: • Three member states are projected to have high direct costs when implementing the package, even taking into account full access to renewables trade and access to JI/CDM. • Direct costs in Belgium, Luxemburg and Sweden are projected to be above 0.7% of GDP • Therefore Belgium, Luxemburg and Sweden receive 10% more auctioning rights on top of the 90% basic rule

  24. Direct costs package

  25. Direct costs package

  26. The international dimension of the EU ETS • EU to lead negotiations of ambitious international agreement • Overall objective: limiting global warming to 2° C above pre-industrial level • Requires contribution from developed and major emitting developing countries • Need to provide incentives to join an ambitious international agreement • Possible to link EU ETS not only to other national emission trading systems, but also to sub-federal and regional systems

  27. Use of credits

  28. Credits in the 2nd trading period and their possible impact on 3rd trading period • Allowed use of JI/CDM in second trading period: • NAP 2 allocations 5.7% below 2005 VE, but access to credits up to 13.5% of Phase 2 cap (1.4 bn t CO2) • Theoretically, EU emissions could be 7.8% above 2005 levels • Potential loss of credits not used in Phase 2 • Reasons for limiting use of credits in phase 3 if there is no international agreement: • Without international agreement, no incentives for investment in low carbon technologies • No incentives to increase energy efficiency • RES target very expensive

  29. Credits in the 3rd trading period • Absence of an international agreement: • Credits from 2008-12 can also be used from 2013-2020 corresponding to one third of reduction effort over the period • Certainty for operators: • credits imported in 2008-12 can be used until 2020 • Credits from projects launched before 2013 can be used • Other credits to be used may emerge from • Agreements concluded with third countries • New projects in LDC • Total amount of credits (1.4 Bt) must not be exceeded More than one third of reduction effort can be met by credits from 2008-2020

  30. Credits and an international agreement • Access to credits will be automatically increased by one half of the additional reduction effort • Example: cap reduced by 200 Mt would mean an additional import of 100 Mt in the form of credits • This provides an incentive to join international agreement, in order to benefit more from higher levels of credits

  31. Monitoring, reporting, verification

  32. Monitoring & Reporting, Verification & Accreditation, Compliance • More harmonised rules through Regulations on • monitoring and reporting of emissions by operators • verification of reports and accreditation of verifiers (including mutual recognition) • This will enhance reliability and thus international credibility of the EU ETS • Non-compliance penalties (€100/ton CO2) to increase by inflation rate to keep deterrent effect

  33. Conclusions EU ETS • Emission reduction objectives of the Community require most efficient approach • A more harmonised EU ETS can exploit the benefits of emissions trading to the full • The proposal • ensures significant contribution by ETS to overall targets • provides a predictable and reliable long-term perspective for industry to take the necessary investment decisions • is sufficiently simple to be attractive for other countries to join • credibly underlines EU leadership

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