Presentation to Intellect Technology Trade Association

1. EU Emissions Trading System (EU ETS): policy overview Presentation to Intellect Technology Trade Association

2. Outline – needs updating 1. Commitments to reduce emissions and the role of the EU ETS 2. What is the EU Emissions Trading System (EU ETS) and how trading works 3. EU ETS – Institutional Framework 4. GHG ETS Regulations 2012 5. GHG ETS Regulations 2012 - Activities covered in Phase III of the EU ETS 6. Phase III - top-down approach to cap-setting and harmonised allocation 7. Allocating EU ETS allowances for free in Phase III 8. Auctioning of EU ETS allowances in Phase III 9. Secondary Carbon Market 10. Small Emitters

3. UK commitments to reduce emissions and the role of the EU ETS • To meet our aim of limiting temperature rises to 2°C, action is needed from both developed and developing countries. Developed countries alone need to reduce emissions by 80% by 2050 • UK committed to delivering emissions reductions: - EU’s Kyoto Protocol target of reducing emissions to 8% below 1990 levels (2008-2012) - EU target to reduce emissions to 20% below 1990 levels by 2020 • Sectors covered by the EU ETS will provide over 50% of the emissions reductions needed to meet UK targets between 2013 and 2020. • Phase III of the EU ETS started in 2013 and will run until 2020 delivering estimated EU emission savings of around 3,100 MtCO2e relative to 2005 levels.

4. What is the EU ETS? • An EU-wide cap and trade system to incentivise reductions in greenhouse gases from industry and electricity generators at least cost • Cap is turned into EU Allowances (EUAs) where 1 tonne of CO2e = 1 EUA • EU Allowances are then either given out for free or sold to the market • Approximately 1,000 installations in the UK including small emitters • UK emissions account for 13% of the EU cap

5. How trading works: a simplified example EU Carbon Market Union Registry Union Registry Installation B Allocation: 200 allowances Installation A Allocation: 200 allowances

6. Start monitoring period 1 January End of Monitoring period 31 December Receive allowances for coming year 28 February Jan Dec Prepare annual emissions report December Feb Complete and submit verified annual emissions report to regulator 31 March Nov Mar The Emission Trading Year Enter Verified emissions data into registry 1 April Oct Apr Surrender Allowances from Registry Account 30 April Sep May Aug Jun Jul Commence annual verification process August Submit Improvement report to regulators 30 June How the ETS works in practice: The Annual Compliance Cycle

7. EU ETS – Institutional Framework

8. Greenhouse Gas Emissions Trading System Regulations 2012 – The UK Regulators Responsibility for implementation and regulation of the UK Greenhouse Gas Emissions Trading System Regulations 2012 is largely geographically based:

9. Greenhouse Gas Emissions Trading System Regulations 2012 • The revised EU ETS Directive is implemented in the UK by the Greenhouse Gas Emissions Trading Scheme Regulations 2012. The Regulations came into force on 1 January 2013. • A link to the Regulations can be found at www.gov.uk/eu-ets-legislation-and-research-publications • The new Regulations for Phase III of the EU ETS: • simplify the legal requirements for UK participants by consolidating 13 sets of regulations into a single regulatory instrument • move to a more proportionate and consistent penalties system and improving the independence and efficiency of the appeals process • introduce a small emitters (<25ktCO2e a year) and hospitals opt out for the EU ETSfor incumbent Phase III operators

10. Greenhouse Gas Emissions Trading System Regulations 2012 - Activities covered in Phase IIII • The Greenhouse Gas Emissions Trading System Regulations 2012  require all operators that carry out an activity covered by the EU ETS to hold a greenhouse gas emissions permit • in effect, a licence to operate and emit greenhouse gases covered by the EU ETS. Activities covered by the EU ETS are any of the activities listed in Annex I to the EU ETS Directive. 

11. Annex I Activities of the revised EU ETS Directive

12. Combustion of fuels in installations with a total rated thermal input exceeding 20 MW • Any installation where fuel (other than 97% or more biomass) is burned in a combustion unit of 3MW or above for whatever purpose and which when aggregated together exceeds 20MWth input is caught by Phase III. • All types of boilers, burners, turbines, heaters, furnaces, calciners, kilns and in particular, ovens, fryers, dryers, engines, fuel cells, chemical looping combustion units, flares, thermal or catalytic post-combustion units etc are now captured. • Stand-by generation or boiler capacity should be included in the aggregation calculation provided that it is technically feasible for them to be run concurrently with the rest of the capacity.

13. Annex I Activities – Non-Power sector emissions in Phase II of the EU ETS

14. Annex I Activities – Non-Power sector emissions in Phase II of the EU ETS

15. Phase III of the EU ETS: top-down approach to cap-setting and harmonised allocation Project Credits EU centralised cap Auction pot NER Free allocation Member State Member State

16. Declining EU ETS cap from 2013 Starting point: 1974 Mt in 2013 • HEADINGText Gradient: -1.74% 2083 Mt/yr -20% 1720 Mt 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 • Linear factor to be reviewed by 2025 16

17. Allocating EU ETS allowances for free • Harmonised set of rules across the EU based on EU-wide benchmarks set at average of top 10% performers in each sector • Installations (excluding electricity generators) receive 80% free allocation in 2013, declining each year to 30% in 2020 and 0% in 2027 (i.e full auctioning). • Sectors at risk of carbon leakage receive 100% free allocation up to the benchmark. • National Implementation Measures (NIMs): • Draft preliminary UK free allocations submitted to Commission in December 2011 and updated in April 2012 • Commission scrutiny of Member State NIMs before finalisation • Possible application of cross-sectoral correction factor • New entrants, capacity extensions etc access New Entrants Reserve

18. Auctioning of EU ETS allowances • In addition to allowances given out for free, operators can also purchase allowances, one way to do this is through EUA auctions • At least 50% of allowances will be auctioned across the EU • Harmonised EU rules for how auctions are carried out. • UK opted out of EU-wide auction platform – ICE Futures Europe to manage Phase III auctions for UK • 10 successful UK auctions of Phase III allowances so far and fortnightly auctions will continue through to December 2020.

19. Participating in Auctions • The UK’s auctions are open to those that fulfil the criteria set out in the relevant EU legislation and ICE’s membership requirements. • Guidance on how to participate in ICE emissions auctions and a full schedule of Phase III EUA auction is available on ICE emissions auctions web pages: • www.theice.com/emissionsauctions.jhtml

20. Secondary carbon market • An EU ETS operator can also access the secondary carbon market to buy EU allowances or Kyoto Units through multiple routes: • trading directly with other companies covered by the System • buying or selling from intermediaries, e.g. banks and specialist traders • using the services of a broker • joining one of the several exchanges that list carbon allowance products

21. UK’s Small Emitters and Hospital Opt-out Scheme (Article 27) • Small emitters account for around 2% of UK emissions • UK’s Opt-out scheme acknowledges the disproportionate administrative costs of the EU ETS for small emitters • Opted-out installations must participate in the UK’s scheme, which aims to deliver emissions reductions equivalent to the EU ETS • The Opt-out scheme offers deregulatory savings through: • Replacement of requirement to surrender allowances with an emission reduction target • Simplified monitoring, reporting and verification requirements, including removal of requirement for third party verification • No requirement to hold a registry account • Less burdensome rules for target adjustment following changes in capacity

22. UK’s Small Emitters and Hospital Opt-out Scheme (Article 27) Eligible installations were those that meet the criteria for exclusion as a small emitter or hospital installation under Article 27 of the revised ETS Directive and the UK’s draft 2012 GHG regulations. Such installation must also have been carrying out an Annex I activity before 30 June 2011 (Phase III incumbents) • Small emitters • Annual emissions less than 25,000tCO2 in 2008, 2009 and 2010, and subsequent years, and • Net thermal capacity less than 35 MW in 2008, 2009 and 2010 • Hospitals • Installation which primarily supplies a hospital • Association confirmed by Department of Health or Devolved Administration • The application period for the opt-out scheme ran from 23 May to 18 July 2012. Operators of 248 installations were approved to participate in the opt-out scheme by the European Commission as excluded from the EU ETS.

23. Questions?

24. Useful information • DECC EU ETS web pages: https://www.gov.uk/government/policies/reducing-the-uk-s-greenhouse-gas-emissions-by-80-by-2050/supporting-pages/eu-emissions-trading-system-eu-ets • DECC EU ETS mailbox: eu.ets@decc.gsi.gov.uk • Environment Agency EU ETS web pages: http://www.environment-agency.gov.uk/euets • Environment Agency helpdesk: ethelp@environment-agency.gov.uk

25. Thank you for your attention!