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Linking domestic emissions trading schemes to the EU ETS

Linking domestic emissions trading schemes to the EU ETS. Technology Transfer and Investment Risk in International Emissions Trading Work package 4 June 20, 2006 Dr. Urs Springer, Ecoplan. Overview. Aims and scope of work package 4 Approach Emissions trading in Switzerland

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Linking domestic emissions trading schemes to the EU ETS

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  1. Linking domestic emissions trading schemes to the EU ETS Technology Transfer and Investment Risk in International Emissions Trading Work package 4 June 20, 2006 Dr. Urs Springer, Ecoplan

  2. Overview • Aims and scope of work package 4 • Approach • Emissions trading in Switzerland • Ready to link up? The Case of Norway < Natsource: ETS in North America and Japan > 5. Conclusions

  3. 1 Aims and scope of WP4 Objectives • to describe the climate policy framework in Switzerland, Norway, Canada, and Japan; • to assess the potential and problems of linking these schemes to the EU ETS • to deliver data about early technology transfer trends related to Canada and Japan

  4. 1 Aims and scope of WP4 Status of work • End of April: D2 completed and sent to partners for comments • Beginning of May: Short paper submitted to Climate Policy • External review (Norway: CICERO) and internal quality check (ZEW) completed • End of May: D2 submitted to Commission

  5. 1 Aims and scope of WP4 Key elements of the EU ETS

  6. Criteria • 1) System design • Trading scheme • System boundaries • Currency • Use of Kyoto mechanisms Sources Economic literature EU Commission: Speeches and personalcommunication. • 2) Target and allocation • Kyoto target • Consistency • Progress • Allocation • Reduction potential • Non-discrimination • New entrants • Transparency EU Commission: Criteria for NAP evaluation (Annex III) • 3) Compliance • Monitoring • Sanctions 2 Approach Compatibility assessment

  7. 3 Emissions trading in Switzerland Background • Kyoto target: -8% • Current GHG emissions: about 1990 level • Projected gap in 2010: 5% • CO2 tax on heating and process fuels. Rate (22 EUR / t CO2) still to be approved by Parliament. • Companies that conclude voluntary agreements with the government are excluded from the CO2 tax. • Climate cent: Levy on transport fuels (1 cent / liter). Revenues used for mitigation projects in Switzerland and abroad.

  8. 3 Emissions trading in Switzerland Key features of proposed trading scheme • Companies can be exempt from CO2 tax if they take on voluntary targets. These targets are the basis for the (free) allocation of tradable allowances for the period 2008-12. • Compliance options: • implement internal emission reduction measures • purchase allowances from other Swiss companies • purchase CERs or ERUs • Sanctions: Repayment of entire CO2 tax plus interest. • Monitoring of each installation, verification by government or private agencies.

  9. Switzerland European Union Transport Households Industry Energy and industry Other sectors CO2 tax Climate penny EU ETS CO2 tax Other policies ETS Rest of the World All sectors JI / CDM Existing link Link to be established 3 Emissions trading in Switzerland Linkage of Swiss and EU ETS

  10. EU ETS EU ETS Swiss ETS Swiss ETS • Aluminum • • Chemical industry Chemical industry • • Iron & steel Iron & steel • • Food & beverages Food & beverages Energy activities(including refineries) • • Cement & ceramics Cement & ceramics • • • Financial services Financial services • • Pulp & paper Pulp & paper • • Tourism • • … … 3 Swiss and EU ETS: Assessment of compatibility 1) System design - sectoral coverage Problem: Swiss refineries not covered

  11. 3 Swiss and EU ETS: Assessment of compatibility 1) System design – Currency, flexible mechanisms • Currency • Main problem: „Hot air“ • In CH: No problem, since „hot air“ is banned • Use of Kyoto mechanisms • Nuclear projects: Explicitly excluded in EU, implicitly excluded in CH • LULUCF: Banned in EU, allowed in CH. But: Swiss rule to be adapted, if ban in EU maintained. • GMO projects: Allowed in EU, banned in CH. • Large hydro: Must follow international guidelines in EU, no restriction in CH. • Overall: Only minor differences, no compatibility problems.

  12. 3 Swiss and EU ETS: Assessment of compatibility 2) Target and allocation • Total allocation: In accordance with national target. • Installation-level allocation • Cement industry: Allocation 45% above current emissions: Over-allocation! • Energy agency umbrella agreement: -11.5% compared to 1990 => ambitious target. • Other sectors: No signs of over-allocation. => NAP criterion regarding allocation only partially fulfilled (“taking reduction potential into account”). • Allocation to new entrants (gas-fired power plants) not clear. • Transparency: • Swiss voluntary agreements confidential, but will be published.

  13. 3 Swiss and EU ETS: Assessment of compatibility 3) Compliance • Monitoring: • EU: Annual reports for all installations, independent verification • CH: Annual reports by companies, first report in 2008 for groups. No independent verification. • Less strict in CH • Sanctions: • EU ETS: 40 EUR (phase 1) and 100 EUR (phase 2) plus surrendering of missing allowances. • CH: Repayment of CO2 tax since introduction plus interest • Problem: For EUA prices > CO2 tax (EUR 22), the most profitable option is to sell all allowances and default (pay tax).

  14. 3 Swiss and EU ETS: Assessment of compatibility Ex-post adjustments • EU Commission: “Ex-post adjustments are incompatible with the legal framework and represent interventions that disrupt the market and create uncertainty for companies.” • Consequences: • Commission has disallowed intended ex-post adjustments in 13 NAPs. • Proposed ex-post adjustment in Swiss ETS is likely to be a major obstacle to linkage.

  15. 3 Swiss and EU ETS: Result of compatibility assessment Conclusions and policy recommendations Conclusions • Swiss ETS is, in principle, compatible with EU ETS. • Some adaptations should be made to increase the chances of linkage. Recommendations • Refrain from implementing the ex-post adjustment of targets. • Strengthen compliance regime by imposing stricter sanctions or prevent over-selling. • Renegotiate voluntary agreement with cement industry and aim for voluntary agreement with Swiss refineries. Define detailed rules for new entrants. • Increase the transparency of the system (list of companies, independent verification of emission reports).

  16. 4 Ready to link up? The case of Norway Background • Kyoto target: +1% • Current GHG emissions: +9.5% • Booming petroleum industry, energy intensive industries • CO2 tax for offshore oil, domestic and transport sectors (23-40 EUR/t). Reduced rate for pulp & paper industry. • Voluntary agreement with energy intensive industries (target: -20% vs. 1990) • Emissions trading scheme along the lines of EU ETS

  17. 4 Ready to link up? The case of Norway Emissions trading scheme • System design • Cap-and-trade • First period: 2005-07, second period not yet defined • Coverage: • Same as EU ETS • But: Installations liable to the CO2 tax (offshore petroleum activities, pulp & paper) are exempt from the ETS. • Allocation: • Free of charge • General rule: 95% of demonstrated need • 20.5 mill. t for 2005-07 allocated to 51 companies

  18. ETS Norway • District heating • Energy production • Gas processing • Other minerals CO2 tax PIL VA • Steel • Cement • Petrochem • Refineries (Pulp & paper) • Aluminium • Ferrosilicon • Carbides • Other metals • Mineral fertilizer • Pulp & paper • Transport • Offshore petroleum • Domestic heating 4 Norwegian and EU ETS: Assessment of compatibility 1) System design – sectoral coverage • System design: Cap-and-trade => no problems • Overlapping coverage: no problem • Opt-out of offshore petroleum and pulp & paper: Likely to pose problem for phase 2 • Restrictions on use of CERs and ERUs: Same as EU ETS

  19. 4 Norwegian and EU ETS: Assessment of compatibility 2) Target and allocation • Allocation: • Installation level: Overall allocation factor 90.6%. => stricter than most European countries • Uncertainty regarding new gas-fired power plants (CCS required or not?). • No guarantee for reaching Kyoto target due to narrow scope of Norwegian ETS (transport and petroleum activities not covered). • Ex post adjustment of targets • Initial allocation can be changed for 2006/07 “if the conditions on which the allocation was based are changed significantly”. • Modifications can only result in a reduction of the number of allowances issued to an installation, not an increase. • Likely to be disapproved by the European Commission.

  20. 4 Norwegian and EU ETS: Assessment of compatibility 3) Compliance • Monitoring • Annual reporting of emissions required. • Verification by independent party only in special cases (EU ETS: mandatory). • Sanctions • Fine (EUR 40) and obligation to surrender missing allowances in the subsequent year. Same as EU ETS.

  21. 4 Norwegian and EU ETS: Assessment of compatibility EU vs. EFTA law • ETS Norway supposed to be linked to the EU ETS through a linking agreement according to Article 25 of the ET directive. • EC: Norway, Liechtenstein and Iceland have to implement the Directive under the rules of the European Free Trade Association EFTA. • Norway accepted, but Liechtenstein and Iceland have been reluctant to do so (even though they do not have any installations falling under the Directive). => linkage not yet established.

  22. 4 Norwegian and EU ETS: Result of compatibility assessment Conclusions and policy recommendations • Conclusions • ETS Norway is, in principle, compatible with EU ETS. • The main compatibility problems are: • Sectoral coverage: Offshore petroleum and pulp & paper excluded. • Unclear treatment of new entrants, particularly new gas-fired power plants (CCS). • Ex post adjustment of targets allowed (only reduction of allocation). • Recommendations • Include offshore petroleum activities and pulp & paper industry in the scheme. • Clarify treatment of new entrants. • Refrain from applying ex post adjustment.

  23. 5 Summary and conclusions What have we learned? • Linkage between EU ETS and domestic schemes • Norway and Switzerland: Linkage likely and feasible. • Japan and North America: Linkage faces great challenges of legal, economic and technical nature. • Economic potential • Significant benefits for Norway and Switzerland, but negligible efficiency gains for the EU. • Japan and North America: Linkage would greatly expand the market and provide substantial benefits for all parties.

  24. 5 Summary and conclusions What have we learned? 3. Main obstacles • Price caps: Segment the market, reduce efficiency. • Eligibility of tradable units: Probably impossible to maintain in practice. • Voluntary nature of trading schemes: Sanctions for non-compliance? 4. Lessons for policy development • Linkage requires that ETS have key elements in common => ETS should not be developed independently of each other • Path dependence: Once an instrument (e.g. carbon tax) is implemented, it is likely to remain in place even when new instruments are introduced 5. Outlook • No global uniform carbon market in the near term • In the long term, better prospects for linkage of major markets

  25. www.ecoplan.ch

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