EU ETS Review – Working Group on Scope

1. EU ETS Review – Working Group on Scope • Members involved • Andy Kelly – Centrica • Alex Morrell – EdF • Nick Sturgeon – Chemical Industries Association • Richard Leese – British Cement Association • Matthew Croucher – Society of Motor Manufacturers & Trading • Bill Thompson – BP • Daniel Waller – Alcan • Initial discussions aimed at finding areas of consensus where they exist, and exploration of those areas where views differ • Intention to stimulate discussion within wider WG8 group prior to first ECCP II meeting on 8/9 March – Still work in progress • Subsequent formal document circulated for review and comment

2. ECCP II review of EUETS Scope – current agenda items • Expansion: • CO2 from Petrochemical and Fertilizer sectors • N2O from Nitric Acid plants • CO2 and PFCs from production of Aluminium • CH4 from coalmines • Review of Article 24 opt-in • Unilateral opt in of N2O • Is this needed for Phase III? • Small installations – inclusion/exclusion thresholds • CCS • Emissions reduction projects Anything missing?

3. Deeper vs more Extensive EU ETS • Consensus that review should aim to make EU ETS a deeper scheme, tightly focussed on large sources of emissions • Question phase III inclusion of other gases as previous studies for ECCP II & LETS concluded that for most emissions other mechanisms more effective - even suitable PFC, N2O emissions are controlled under IPPC • Acknowledgement this brings a risk of some emitters not being subject to constraints; must be tackled through equivalence of effort/cost • Equivalence could be through CCAs, IPPC, F-gas regs, even direct carbon taxes? • eg, PPC covers some PFC & N2O emissions. Does this constitute equivalence? Does inconsistent application of PPC across EU cause intra-EU competitiveness issues?

4. ECCP II review meetings (in 2006): Conclusions on non-CO2 gases • N2O emissions from Industry • nitric and adipic acid producers (89 Mt CO2e EU-15) • Conclusion: BREF under IPPC (EUETS would require a benchmark) • N2O in combustion (40 Mt CO2e EU-15) • Preference for regulation under IPPC. Inclusion in EU ETS for significant sources needs availability of precise, reliable and affordable measurement equipment and processes – further analysis needed. • CH4 from waste (115 Mt pa to 74 Mt CO2e). • Reduction due to Landfill Directive, and more paper recycling • Conclusion: Composting CH4 potentially included in future revisions of EUETS • CH4 from coalmining and handling • Conclusion: Offset mechanism credits for CH4 capture and incineration. Including all CH4 from coal mines gives redundant mine ownership issues • CH4 from oil & gas production, distribution and use 32Mt (90% approx from transmission) • Voluntary agreements for phasing out largest emissions sources and grey iron pipes. • Other CH4 sources Approx 27 Mt • Wastewater, biomass combustion, fossil fuel combustion and open burning of agricultural waste • Indirect effect of EU Water Framework Directive, nation regulations on burning of agri waste and biomass • Fluorinated gases • Regulation for containment, recovery, use bans and prohibitions + directive for motor vehicle air con systems with high GWP gases. Expect 21 Mt CO2 by 2012 vs BAU 40-50Mt by 2020 Source:http://forum.europa.eu.int/Public/irc/env/eccp_2/library?l=/eccp_fluorinated&vm=detailed&sb=Title

5. Small Emitters • General agreement that an annual CO2 emissions threshold (25kt/yr?) could work better than of current capacity based level • Would remove substantial number of installations without diluting environmental coverage significantly • In UK 59% installations <25kt/yr account for less than 2.5% emissions • Where emissions below threshold installations could elect for inclusion • Implementation of a de-minimis source threshold to be considered • At present need agreement with competent authority • EC considering a 3MW threshold for exclusion from aggregation • Should other gases be included, would require a different CO2e threshold due to reporting & monitoring issues for high GWP gases

6. Domestic Projects • Development of a project basis under EU ETS • Direct emissions only? • Demonstration of additionality – processes not subject to other regulations requiring reductions. • No double benefit (e.g. CO2 process reductions leading to CO2 reductions elsewhere (Power Generation) • GHG reductions demonstrable National Inventory • Rigorous Reporting Monitoring and Verification regime linked to current MRV (e.g. Tiering) • Subject to a comitology procedure? Overly bureaucratic? • Is this the future of JI post-2012? Why shouldn’t domestic projects be available?

7. Criteria for assessing sector inclusion/exclusion • Agreed relevant criteria • Level of emissions both installation and sector total  • Ability to define consistent definition of activity  • Feasibility of robust, accurate and cost-effective MRV  • not necessary to target Tier 1 across the board, eg Flaring • Avoidance of double regulation if other policies more effective  • Need to ensure equivalence of effort • (Gas) Need for independent definition of baseline  • Fra,Ned inclusion of N2O will set benchmark • Divergence of views • Feasibility of agreed allocation methodology ? • Potential for abatement ? • difficulty in defining abatement potential • bringing sectors into scheme can lead to finding abatement • Competitiveness issues ? • Could be intra-sector, intra-EU or external to EU • Evidence required to inform decisions

8. Specific comments on other sectors/gases • Large Emission sources of CO2 • should be included into the scheme unless can demonstrate good reasons against • Surface transport • Majority felt issues as laid out in previous ETG sessions demonstrates that other measures would be more effective for this sector • Domestic • Individually would be excluded due to de-minimis. On an aggregated basis would face same problems with inclusion as highlighted for surface transport • Cement: CH4 & N2O • Excluded on de-minimis. Other measures more effective for low levels of emissions? • Aluminium PFC & CO2 • PFCs already covered and substantially reduced under IPPC. • Chemical: CO2 & N2O • Crackers already included. Potential for inclusion of flaring if MRV issues resolved • Reductions in N2O from nitric acid will occur under IPPC by 2012 Concern that blanket exclusions should be reviewed if length of phases increased – risk losing benefit of technological improvement or ability to address increasing sources of emissions