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Insights from implementing the EU Emission Trading System

Insights from implementing the EU Emission Trading System. Workshop « Economic Instruments for Climate Change Mitigation » 4 March 2009, South Africa. Liva.Andersone@ec.europa.eu DG Environment European Commission. Initial design of the European Carbon Market phase I and phase II.

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Insights from implementing the EU Emission Trading System

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  1. Insights from implementing the EU Emission Trading System Workshop « Economic Instruments for Climate Change Mitigation » 4 March 2009, South Africa Liva.Andersone@ec.europa.eu DG Environment European Commission

  2. Initial design of the European Carbon Marketphase I and phase II • “Downstream” mandatory cap-and-trade system • Partial coverage (approx. 50% of emissions) • Power plants and large industrial point sources • Penalties to ensure compliance (€100+shortfall) • Decentralised and combined cap-setting and allocation via national plans (largely free allocation of allowances): • 27 caps and different methods of allocating allowances • Member States responsible for allocation plans, European Commission for their evaluation

  3. Experience from phase I2005-2007 2005: The world’s largest carbon market gets off the ground and carbon enters the boardroom Carbon market infrastructure is established Electronic registry system Over 10,000 installations monitor and report emissions Independent verification of reported emissions A liquid market emerges Market intermediaries – brokers and exchanges But: Over-allocation occurred Allocations not based on verified emissions Limited damage: absence of banking from phase 1 into phase 2

  4. Main differences in period II2008-2012 There will be fewer allowances in the market Cap set at 6.5% below 2005 verified emissions Aviation to be integrated as of 2012 The first trading schemes paralleling the EU ETS will emerge (e.g. RGGI in 2009) But: cumbersome cap-setting and allocation process long uncertainties on cap no harmonised allocation very limited auctioning (appr. 4%) Conclusion of review process in 2007: More harmonisation and predictability indispensable to fully reap benefits of ETS

  5. Main elements of phase III2013-2020 • Strategic element of EU post 2012 climate and energy package • Longer trading period • Single EU-wide cap instead of 27 national caps • New industries (aluminium and ammonia producers) and gases (nitrous oxide and perfluorocarbons) included • Fully harmonised allocation rules • Auctioning is default allocation method: power sector • Phased out free allowances for normal industry • Up to 100% free allocation on basis of ambitious ex-ante benchmark for sectors at risk of carbon leakage

  6. Primary feature of the new ETS: A robust EU-wide cap beyond 2020 2083 Mtyr Gradient: -1.74% -20% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Linear decrease of cap: predictable trend-line to 2020 and beyond, factor to be reviewed by 2025

  7. Joint Implementation and the Clean Development Mechanism • Certainty on companies’ potential to use JI/ CDM post 2012 • Differentiate between EU’s independent commitment (-20%) to reduce GHG emission and contribution under intern. agreement (-30%) • Independent commitment: • Up to 1.6 Gt of credits over 2008-2020 (excludes Government purchase) • Demand from EU only would reduce market-based incentive to increase energy efficiency, low carbon technology investment • EU’s renewables target would become more expensive if EU ETS not contributing to its achievement • Once an international agreement is concluded, the EU ETS will increase the use of credits (JI/ CDM/ other) by 50% of the additional reduction effort under that agreement

  8. Lessons learnt from EU ETS Keep emissions trading simple • Simple allocation rules (auctioning) • Let the market develop without interference (no price caps) • Ensure transparency and predictability • Set clear guidance for monitoring, reporting and verification • Effective compliance regime • Use accredited private sector actors for verification • Cover only those installations/gases at the outset where sufficiently accurate monitoring is feasible, extend later in line with technical progress on monitoring • Use of verified data as basis for any free allocation • Emission trading is effective and efficient, but no panacea

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