European Emission Trading Scheme at a turning point –.pdf

7/26/2019 European Emission Trading Scheme at a turning point .pdf

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EUROPEAN EMISSION TRADING SCHEME AT A TURNING POINT FROMTHE PILOT PHASE TO POST-2012

Aura Carmen Slate*

Abstract : Climate change action has become a top priority for the Europeangovernments and for the European Union. Since the polluters are part of the energy-intensive industries, the mechanisms designed to reduce greenhouse gas emissionsshould focus on the economic sector as a primary source of concern. Therefore,environmental issues interrelate with the economic ones and one viable expressionof this relation is the EU ETS, a cap-and-trade mechanism. The ETS started with a

pilot phase in year 2005 and will continue with a third phase after 2012, periodwhich coincides with the end of Kyotos commitment. Although statistical data provethat the EU ETS is becoming more ecient with each phase, in the absence of globalinvolvement the eorts invested in the scheme will be made in vain.

Keywords: European emission trading scheme, national allocation plan,allowance, greenhouse gases, EU-wide cap.

JEL:Q Environmental and Ecological Economics; Q 5 Environmental Economics;Q 56 Environment and Development; Environment and Trade

*Aura Carmen Slate holds a Master of Arts in European Studies and a Master of Arts in History and Practice of International

Relations at the Bucharest University, Romania. Her latest article is Obstacles and Future Prospects for Cooperation in

German-Russian Energy Partnership. Analysing Angela Merkels First Chancellor Mandate, Bucharest University Press:

2010. E-mail: [email protected].

ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol. 11, No. 3, 2011

Introduction

The European Emission Trading Schemecould be a possible answer to climate changechallenges in the European Union. But is themechanism designed to reduce greenhousegas emissions sufciently enough to achieveEuropes role as an international leaderin climate change action? The limitationswithin the framework of the scheme, aswell as the obstacles encountered, such as

low international commitment, could affectthe emission trade mechanism, although itrecorded good results in emission reductiontrend of the last two years.

We begin our study by explaining the

prior legislation and the methodology of theemission trading scheme, then in anothersection we discuss about the rst two phasesof the allocation system and the way theEuropean Union gained experience in theimplementation process at national level.Part four deals with the aws of the EUETS, while the fth section refers to possiblerecommendations and measures to improvethe mechanism, and also debates over the

post-2012 period as a turning point for theenergy and environmental policy of the EU.The article concludes with a case-study onthe Romanian implementation process ofthe scheme, if the implementation process
mailto:slate.acarmen%40yahoo.com?subject=mailto:slate.acarmen%40yahoo.com?subject=


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EUROPEAN EMISSION TRADING SCHEME AT A TURNING POINT FROM THE PILOT PHASETO POST-2012

was successful and the greenhouse gasemissions have been reduced.

EU ETSis the abbreviation forEuropean

Union Emission Trading Scheme. Theinitiative to start such a programme is statedin the preamble of theDirective 2003/87/EC.But the rst ofcial document to announceit was the Green Paperreleased in March2001 which [] launched a debate acrossEurope on the suitability and possiblefunctioning of greenhouse gas emissionstrading within the European Union. TheSixth Community Environment ActionProgramme (Decision No 1600/2002/EC)

[] identies climate change as a priorityfor action and provides for the establishmentof a Community-wide emissions tradingscheme by 2005. Climate change and thegas emission reduction with 8% by 2012in contrast with 1990 levels have beenthe main concerns of the European Unionsince the Kyoto Protocol was adopted in1997. However, the major motivationthat led to the development of the EU

ETS as a possible mechanism to respondenvironmental challenges was the UnitedNations Framework Convention on ClimateChange in 1992, which purpose was toestablish a scheme for trading emissions inorder to avoid dangerous manifestations inthe climate system.

The main European legislation for theEU ETS consists of several Directives, suchas: Directive 2003/87/EC of the EuropeanParliament and of the Council of 13

October 2003, establishing a scheme forgreenhouse gas emission allowance tradingwithin the Community and amendingCouncil Directive 96/61/EC, Directive2004/101/EC of the European Parliamentand of the Council of 27 October 2004,amending Directive 2003/87/EC inrespect of the Kyoto Protocols projectmechanisms, Directive 2008/101/EC of theEuropean Parliament and of the Council of

19 November 2008, amending Directive2003/87/EC, and also Directive 2009/29/EC of the European Parliament and of

the Council of 23 April 2009, amendingDirective 2003/87/EC. The main legislationwill serve us a very useful purpose byproviding signicant information about thescheme.

2. Prior legislation and allocationmethodology of the EU ETS

In the document entitled Preparingfor Implementation of the Kyoto Protocol

(COM (1999) 230), 19 May 1999, theEuropean leaders expressed the intentionto ght against climate change for the nextdecades. The European Union proved tobe an international leader in environmentalactions at the decision-making level anddeveloped a practical dimension byestablishing a comprehensive monitoringand evaluation system in the implementationprocess: Ambition, however, has to be

complemented by concrete action andtangible results. When assessing the currentsituation, the conclusions are not verypositive. Emissions are again on an upwardtrack. Therefore, more needs to be done inorder to curb this trend and for the EU tostand a chance of meeting its commitment.This requires more action and more effortson all fronts and at all levels (EuropeanCommission, 1999).

From the beginning, the mechanism

EU ETS was designed to function inaccordance with a coherent package ofpolicies implemented by the MemberStates in terms of taxation as a suitable pathto limit dangerous gas emissions. Initially,only sectors like energy and transportindustry were held responsible for high gasemissions, therefore installations in thesesectors were rst to be established in theMember States. The trading scheme covers


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energy-intensive industries, including steel,glass industry, paper industry, cementindustries, as well as large combustion

installations, including power generators.The EU ETS consists of two phases, a

mandatory phase (Asselt& Biermann, 2007, pp. 497-498) and asecond phase starting the year of 2008.Since the effort to reduce emissions cannotbe accomplished only by the MemberStates and the EU as an entity, the Directive2003/87/ECannounced that the strategy forclimate change mitigation should be builton a balance between the Community,

domestic and international action. TheDirective came into force in 2005, on 1stof January, and no installation was allowedto carry out any activities without a permit,issued only if the operator or the holder wasable to monitor and to report the emissions,released by the Member States legalauthority.

We must also take into account theeconomic benets that an emission trading

scheme inside the EU brings for the entireCommunity and for its Members. Emissiontrading is a mechanism that allocatesallowances to companies in order to stopgreenhouse gas emissions according toeach countrys environmental target.The quotas, permits or caps, asthe allowances are called in the GreenPaper from March 2000, are allocatedto companies included in the scheme.The method of allocation is based on

auctioning and allocation free of charge.Allocation free of charge is also knownto be the grandfathering principle ofthe Kyoto Protocol. (In a strict sense, a right is not related to thenotion of the allocation free of charge of arealisable asset, but rather to a historical rightto do something (European Commission,2000, p. 18)). Encountering a great deal ofcriticism, the grandfathering principle of

the Kyoto Protocol charges as responsiblefor the climate change difculties just theindustrialized countries (Annex I Parties in

Kyoto Protocol) that need to take actionbefore the developing countries. Theyimposed the so-called differentiatedresponsibility (Mller, 2005, p. 3) and thecommitment architecture of the allocationmechanism of the international tradingscheme. Anyway, the mechanism agreesthat the companies can emit more than theirpermits if they can nd another companythat emits less than its permits that havebeen allocated in the national plan and that

is ready to sell permits to the company inneed. Therefore, not only a new regime ofthe international environmental governancewas sketched with the trading scheme,but also companies could enhance theirprots and invest in new technologies andinnovation programmes.

In order to provide a better understandingof our study it would be necessary toenumerate a few denitions of the concepts

that are going to be discussed over thepresent paper. The denitions are providedaccording to the Directive 2003/87/EC, theprimary document of the EU ETS.

(a) allowance means an allowanceto emit one tone of carbon dioxideequivalent during a specied period,which shall be valid only for thepurposes of meeting the requirementsof the Directive;(b) emissions means the release of

greenhouse gases into the atmospherefrom sources in an installation or therelease from an aircraft performing anaviation activity;(c) greenhouse gases means thegases listed in Annex II and othergaseous constituents of the atmosphere,both natural and anthropogenic, thatabsorb and re-emit infrared radiation;(d) greenhouse gas emissions permit


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means the permit issued in accordancewith Articles 5 and 6;(e) installation means a stationary

technical unit where one or moreactivities listed in Annex I are carriedout and any other directly associatedactivities which have a technicalconnection with the activities carriedout on that site and which could havean effect on emissions and pollution;(f) tonne of carbon dioxideequivalent means one metric tonneof carbon dioxide (CO2) or an amountof any other greenhouse gas listed in

Annex II with an equivalent global-warming potential;(g) combustion means any oxidationof fuels, regardless of the way in whichthe heat, electrical or mechanical energyproduced by this process is used, andany other directly associated activities,including waste gas scrubbing;(h) electricity generator means aninstallation that, on or after 1 January

2005, has produced electricity for saleto third parties, and in which no activitylisted in Annex I is carried out other thanthe combustion of fuels;

3. The EU gains experience in the pilotphase 2005-2008 and demands more inthe second phase 2008-2012

The rst period of the EU ETS began inJanuary 2005 and it was nished in late 2007.

The document of paramount importance forthis rst phase is the Directive 2003/87/ECwhich provides not only the methodologyof allowances allocation, but also thecontinuity of the trading scheme after theending period of the Kyoto Protocol in year2012. Likewise it is a very ingenious pieceof legislation since it covers a large periodof time and commits the EU to take actionin accordance to Kyotos targets, it makes a

connection between EU and other countriesinterested to develop a similar market forcarbon allowances like the United States

that did not ratify the Kyoto Protocol, andabove all, the most important thing, itprovides a design for the rst internationalmechanism for reducing GHG built ona competitive basis among MemberStates, because the purpose beyond GHGreduction is increasing energy efciencyand innovation.

The particularity of the pilot phasewas the difculty to nd the best path toa coherent methodology for the national

allocation plans or as they are called NAPs,not always designed in order to meet Kyototargets. NAPs were established by thecompetent national authorities and weresupposed to set the total number of gasemission permits which the governmentof each Member State inclines to allocatein the emission trading framework, aswell as the allocation methodology forthe permits to each installation covered

by the present Directive. NAPs alsoshowed the implication rate of each stateto achieve Kyotos target and the industriesheld responsible for gas emissions. NAPsencountered impediments in 2007 whenthey faced price volatility, as carbon pricesfell below 1 per tonne (Tilford, 2008, p.16). This especially affected the investmentsin new technologies of energy efciency.

The second problem of NAPs was

that they lacked enough control in theallocation process. It is important to knowthat the allocation at the national levelis made according to historical data andrisk prognoses. Moreover, the allocationis made in two stages: the rst one isallocation with gas emission permits foreach industrial sector, and the second oneis allocation for each installation integratedinto the scheme. Since the rst phase of


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EU ETS was at its starting time, NAPs weretoo relaxed as the Kyoto targets required.For instance, countries like Germany were

affected by tight allocation permits, whereascountries like Spain or Portugal announcedless ambitious NAPs. Despite the fact thatthe methodology of the EU ETS mechanismtook into account the differences amongMember States or even different levels ineconomic development, relaxed NAPswere on the verge to endanger Kyotos 8per cent reduction target assumed by theEU. This was the dilemma which everydeveloped country faced, namely how

not to affect economic growth but stillreducing emissions. Anyway, the perverseresults of varying degrees of commitmenton the part of EU Member States (Tilford,2008, p. 20) advantaged countries withhigh caps and even the companies comingfrom countries with low caps. Companieswhich were allocated not enough permitsfor their activity used to buy allowancesfrom companies that faced undemanding

caps, that led to prots for less developedcountries but also was more than anadvantageous opportunity for companiesthat chose to purchase allowances and notto reduce pollution rates.

Due to the misinterpretations that hadbeen made in the rst phase of nationalallocation plans 2005-2008, the EU neededto strengthen the directives and to providemore demanding emission reduction.One important document is the Directive

2004/101/EC of the European Parliamentand of the Council of 27th October 2004which was amending Directive 2003/87/EC, linked directly to the use of certiedemission reductions (CERs) and emissionreduction units (ERUs) starting 2008. Thelessons to be learnt from the rst phase of theEU ETS are stressed in the Communicationfrom the Commission (COM (2005) 703nal, Brussels, 22. 12. 2005) Further

guidance on allocation plans for the2008 to 2012 trading period of the EUEmission Trading Scheme. The document

is relevant for the Commissions review ofthe allocation plans, which extends a rathertechnical analysis of the rst year of the EUETS. The aim of the Commission guidanceplan is [] to achieve more coherence inthe second trading period, to the extentthat the divergent progress by MemberStates towards their individual Kyoto targetsallows for. The guidance document isan opportunity for the Commission toaccomplish a strategic review of the EU ETSand to express further proposals to improvethe trading scheme in the near future.But the central motivation, for which thisguidance Communication was released,was to consider critical opinions about thenational allocation plans that proved to bedysfunctional in terms of loose caps. TheCommission urges Member States to worktowards simpler plans for the second tradingperiod, since simple allocation plans

boost the understanding of the instrumentamong stakeholders and also increasetransparency and predictability. To provethe Commissions rigorous methods,the EU provided a set of standardiseddata, a set of tables (Annexes, part of theCommunication document), which areregarded as integrated parts of the secondphase of national allocation plans. TheMember States are expected to co-ordinatetheir activity in terms of national allocation

with the set of standardised data and of theCommon Format, which was elaborated forthe use of the rst phase.

Seen as a learning period, the rstphase revealed all-important characteristicsthat were supposed to aggregate the MemberStates in their future struggle to achieveKyotos targets. According to the Summaryof Experience (European Commission,2005, p. 3) gained from allocation plans


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for the rst phase (2005-2007) the GeneralLessons for the second phase (2008-2012)enumerate a few observations: it is advisable

to avoid the lack of transparency in thedesign of the allocation plans, loose targets,too restrictive measures for the powergenerators installations and less restrictivemeasures for other sectors covered by theEU ETS, but to increase the use of emissionstrading which is necessary to meet theKyoto targets cost-effectively.

The guiding lines for the second phaserefer especially to the national allocationplans. First, as already stated before, therst recommendation is the progress toKyoto targets. The last cited documentstresses that the emissions in year 2005 aswell as the gap between Kyoto targets andwhat had been achieved until that momentwas increasing. Some Member States areeven denounced as being too far fromtheir commitments to Kyoto targets. Thisis why the Commission encouraged theMembers to use in a proper way the trading

scheme. Second, setting national caps forthe second period is another importantissue in the document. National allocationplans are designed according to forecastsand prognoses that use two evaluationfactors, such as economic growth (higherthe GDP, higher the emissions) and carbonintensity. The methodological designfollows this logic: a developed economydrives to new technology, which drives tothe development of the tertiary sector and

the decline of the secondary sector and allamounts to a low carbon emission trend.

4. How to address emission tradingschemes faws? Limitations and

recommendations

The need of an EU-wide cap is ofparamount importance for the future ofemission trading scheme. This means that

national governments will no longer decidetheir national caps that have broughtdoubts on the trading scheme as a viable

mechanism for emission reduction. Itwould be necessary to provide the EU witha specialized body which can set not onlya standardized EU-wide cap but also toencourage the Member States to strengthentheir policies in order to achieve Kyotosaim.

Furthermore, many experts argue overthe implementation of longer periodsand phases, since short periods of timeare disadvantageous for companiesinvestments. It is also argued about the factthat longer periods will lead to the certaintythat new technologies of carbon storage orcarbon capture, for example, prove to be asuccess in the emission reduction process.

Other specialists argue about the factthat only bigger industrial energy usersshould be kept in the scheme because it isinappropriate to address the same demandsto small consumers such as car owners

or road transport sector. The argument infavour of this is that car emissions haverisen for the last decade and measures mustbe taken inside the transport sector.

Moreover, in order to change thepath from a fossil-based economy to anenvironmental friendly one, the EU musttake serious measures for the developmentof renewable sources of energy and newtechnologies of lowering carbon emissions.The most innovative of all is carbon capture

and storage or CCS which requires highinvestments. However, CCS together withrenewable sources of energy will make adifference in the foreseeable future and helpthe EU to decrease its emissions with 50%until 2050 and to make its contribution toprevent global warming with 2 degrees C.

The importance of the EuropeanCouncil in March 2007 under the GermanPresidency was a crucial starting point in


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the revision of the EU ETS and setting new,ambitious targets. German Presidency ofthe EU announced in late December of

2006 a few objectives that were supposedto re-evaluate the energy policy: the revisionof the Energy Action Plan, monitoringthe results in the Energy Packages,trying to achieve greater commitment inenergy sector of the Member States. Twoimportant moments that took place underthe German Presidency were the EnergyCouncil Meeting in February 2007 andthe Conference Completion of the SingleEuropean Market for Electricity and Gas -

striking the balance between competitionand energy security (Glos, 2007) openedby the German Minister of Economy andTechnology in Berlin. The energy dossieropened by the German Presidency of theEU is considered to be a success since itcovers not only short-term objectives, butalso long-term objectives such as a perpetualdialogue between the Member States onenergy and climate topics. In the following

lines we present the essential documentsof high importance for the future of tradingschemes function that are considered to bethe result of the European Council in March2007 under the German Presidency.

A reforming document of the EUETS is 20 20 by 2020 Europes climatechange opportunity, which was elaboratedduring the March Summit in 2007 underthe German Presidency of the EU. It is adening moment to start to build Europes

leadership in climate change policies andto transform Europes economy into amodel to be followed by other countries insustainable policy sector. This documentaddresses also to the enhancement of theEU ETS mechanism. Two targets wereannounced by the Working Group of theMarch Summit: A reduction of at least 20%in greenhouse gases (GHG) by 2020 risingto 30% if there is an international agreement

committing other developed countries to, and A 20%share of renewable energies in EUenergy consumption by 2020 (EuropeanCommission, 2008, p. 2). Although mucheffort was invested in order to design andto prepare the Communication as one ofthe most important documents regardingthe reform of the emission trading scheme,we have to search for substantial measures

covered by the document which wereannounced at the beginning of the text byan inspiring speech: The earlier Europemoves, the greater the opportunity to useits skills and technology to boost innovationand growth through exploiting rst moveradvantage. The trend of global opinionis clear, and the EU can take the lead inpointing the way to an international climateagreement for the post 2012 period

(European Commission, 2008, p. 3). Isthe rst mover advantage going to dilutethe substance of the document? This canonly be discussed over the limitations andsuccesses of the third phase of the EU ETS.

As for the EU ETS mechanism,20 20 by2020 Communicationdelivers the updatingof the trading scheme and the preparationsfor the beginning of the third period.This cap and trade system, a pioneeringinstrument to nd a market-based solution

to the climate change, needed to bestrengthened because of the generousnumber of allowances handed out in therst phase (2005-2007) and because ofthe national allocation plans which broughtdistortions in terms of market competition.Four recommendations are made in thedocument regarding the reform of thetrading scheme: the rst one refers to theinclusion of other greenhouse gases under


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the mechanism, other gases than CO2

, the second one refers to the inclusionof all major industrial emitters into the

scheme, the third issue refers to the nationalallocation plans that were going to bereplaced by auctioning or free allocationthrough single EU-wide rules, cutting theallocations year by year in order to reduceemissions in the EU with 21% by 2020, andthe forth issue addresses to the commitmentof the Member States to bring areas likebuilding, transport, agriculture, waste andindustrial plants under the coverage of thepresent scheme.

Directive 2008/101/EC of the EuropeanParliament and of the Council of 19November 2008underlines the importanceof achieving a global target of limitingtemperature increase with no more than2 0C above the pre-industrial levels. Thisaspect was discussed in the Working Groupof the European Council in March 2007,but was inspired from the Limiting GlobalClimate Change to 2 degrees Celsius.

The way ahead for 2020 and beyond,which is rather a long-term document.The hope that a strong agreement signedunder international consent was underpreparations for the post-2012 period,European leaders wanted to shape theso-called highly energy-efcient and lowgreenhouse gas-emitting European Unionuntil a post-Kyoto agreement entered intoforce. Therefore, they announced evenmore ambitious targets: that is to reduce

the emissions with at least 20% below1990 levels by 2020. For the third phase,the emissions from aviation sector turnedout to be the central issue since it is statedthat aviation has an essential contribution togreenhouse gases: Aviation has an impacton global climate through releases of carbondioxide, nitrogen oxides, water vapour andsulphate and soot particles, whereas acomprehensive package of measures should

also include operational and technologicalmeasures, improvements in air trafcmanagement under the Single European

Sky, research into new technologies,including into methods for improving fuelefciency of aircraft (European Parliamentand the Council, 2008). Moreover, aviationemissions need to be included into aninternational scheme and the MemberStates must strive to achieve agreements forglobal measures in this respect.

Directive 2009/29/EC of the EuropeanParliament and of the Council of 23 April2009 is also a result of the European

Council of March 2007 and has as its mainobjective to set a predictable path to reduceemissions. This Directive is centred on theconcept of greenhouse gas and recommendsthe alignment of the denition under thecurrent scheme with the one in UNFCCC.Ironically, the document lacks a properdenition of the concept. There are twoways to improve the EU ETS mechanismafter having experienced the rst trading

period and the national allocation plans forthe second period, and these are, on theone hand, the imperative to harmonise theemission trading scheme in order to betterexploit the benets of emission trading, toavoid distortions in the internal market andto facilitate the linking of emissions tradingsystems, and on the other hand, to ensuremore predictability by including newsectors and gases under the scheme: TheCommunity scheme should be extended to

other installations the emissions of whichare capable of being monitored, reportedand veried (European Parliament and theCouncil, 2009).

But the most innovative measure issetting a Community-wide quantity ofallowances, that is expected to decreasein a linear manner beginning from the mid-point of the period from 2008 to 2012,ensuring that the emissions trading system


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delivers gradual and predictable reductionsof emissions over time (European Parliamentand the Council, 2003). This will lead

by 2020 to a reduction of emissions with20%. Considering the fact that the rst twophases reported distortions in the marketcompetitiveness, the present Directiveencourages the development of a newsolidarity and growth mechanism (88% ofthe total quantity of allowances distributedamong the Member States according to theiremission rates, 10% distributed among theMember States with low income levels perhead to adapt to climate change).

5. Third phase after 2012 is the EU ETSa viable mechanism to reduce emissions?

Since the greenhouse gas emissionsin the EU-27 account for 10.5% of globalanthropogenic emissions, and since thelargest emitters are Germany, UnitedKingdom, Italy, France and Spain (EuropeanEnvironment Agency, 2008), and theresponsible polluters are the industriesoriented to the production of electricity,heat, transport, fossil fuel combustionfrom households, iron, steel production,mechanisms such as the emission tradingscheme must be implemented andmonitored within the framework of acoherent methodology.

For the rst phase the EU ETS mechanismproved to work successfully in emissionreduction despite its aws commented in

the previous section. There were taken intoaccount a number of 10675 installationsfor the rst period. The following charts arebased on the Annual European CommunityGreenhouse Gas Inventory Reportsubmitted to the UNFCCC in 2008 whichconsists of the emissions from the EU andall the Member States between years 1990-2006, the Initial Report on the EuropeanCommunity submitted to the UNFCCC

in 2007, the reports submitted by all theMember States to the Commission, theCommunity Independent Transaction Log

(CITL) for veried emissions under the EUemission trading scheme, second nationalallocation plans (European EnvironmentAgency, 2008). The charts demonstratethat greenhouse gas emissions decreasedbetween 2005 and 2006 by 0.3% in the EU-27 and by 0.8% in the EU-15. The decreasewas estimated in France, Italy, Spain andBelgium (main polluters) and the increasein Poland, Finland and Denmark (EuropeanEnvironment Agency, 2008).

As the rst chart shows, there are threeactivities that are covered by the schemeand are responsible for the largest emissionsin the EU in the rst year of the pilot phase:public electricity and heat production(27.1%), road transportation (18.0%)and households (fossil fuels combustion)(9.4%). When the pilot phase ended, thesecond phase needed adjustments, becausethere were problems with the price settingon the certicate market, and with thecerticates for the power generation system,since is the largest emitter activity coveredby the scheme. There were also reporteductuations in the CO2 prices due to the factthat the Member States were the distributorsin the allocation process which caused,according to specialists (Drge, 2007, p. 3),a decrease in the price transparency. If weadd to this inconvenient the fact that lessauctioning caused less transparency about

the undisclosed price of the certicates,all led to economic and competitivedisadvantages among companies.

For the year 2009 (complete data aboutthe emissions for the year 2010 are not readyyet) the European Environment Agencyestimates that the emission reduction inEU-27 has decreased with 6.9% comparedto the year 2008 (European EnvironmentAgency, 2010). The reductions show that


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Share of 2006 greenhouse gas emissions in the EU 27, by main activity

Chart 1

Source: European Environment Agency, 2008, p. 17

Share of 2006 greenhouse gas emissions in the EU 27, by gas

Chart 2

Source: European Environment Agency, 2008, p. 17


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they have decreased with 17.3% belowthe levels of 1990 and if the EU Memberskeep enforcing even better measures and

implement domestic policies it will be aneasy target to achieve emission rate with20% below 1990 level in the year 2020.Three dimensions were combined toachieve progress in decreasing emissions:domestic policies and measures, use ofKyoto mechanisms and use of LULUCFactivities (land use, land-use change andforestry). The rst dimension of policiesand measures at a domestic level to bepromoted: enhancing energy efciency,

protecting and enhancing carbon stocks,promoting sustainable agriculture,promoting renewable energy, carbonsequestration and other environmentally-sound technologies, tackling transportsector emissions, controlling methaneemissions through recovery and use inwaste management (European EnvironmentAgency, 2008). In order to achieve theKyoto targets, the Member States must

combine the domestic policies with theuse of Kyoto-mechanisms that can beused in the second phase between 2008and 2012: Joint Implementation (JI), CleanDevelopment Mechanism (CDM) andinternational trading scheme. JI and CDMare used by developed countries in orderto invest in environmental and renewabletechnologies programmes in developingcountries. CDM and JI provides developedcountries with useful mechanisms to achieve

their emission targets and even providessustainable development programmes anda more competitive internal market for thedeveloping countries in energy efciencyeld. As for the international tradingscheme, it is a methodology a country canapply in order to sell its emission reductionsto a country that nds it difcult to achieveits target, only after the former country haseven better results than those required

under Kyoto for the present year.However, one must add the effects of the

economic recession on the Member States

capacity to reduce emissions. The recessionproved to help the emissions decrease butit also meant that the Member States didnot invest as much as it was expected ininnovation and renewable technologies.As the Climate Action CommissionerConnie Hedegaard said, Due to the crisisthe signicant drop in emissions does notcome as a surprise. [] And we must alsorealise that because of the crisis it suddenlybecame easier to reduce emissions and that

is good. Unfortunately that also means thatEuropean business din not invest nearlyas much as planned in innovation, whichcould harm our future ability to competeon promising markets (Hedegaard, 2010).The ETS mechanism is more than a cap-and-trade system: it encourages innovationand investment in the renewable energiesall over the world and of course in Europe,too. The companies are striving not only

to reduce the emissions according tothe allocation plans, but also to reduceemissions by integrating new technologiesin their daily activities, an engine forinnovation and energy efciency.

The third phase of emission tradingscheme announce drastic changes (Bruynet al, 2010, p. 35) that have been proposedcompared to the second phase. First, therevision consists of a centralized EU-widecap on emissions, which are going to be

reduced with 1.74% that will result in atotal reduction of 21% by 2020. Second,allowances will be auctioned in such away that 50% of emissions will fall underan auction regime. Third, the most affectedwill be the electricity production sectorsince all emissions here will be auctioned.All these measures covered by theDirective2009/29/EC put pressure on all energy-intensive industrial installations integrated


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into the scheme. It is expected that thethird phase will cause improvement in theinnovation and competitiveness sector of

the EU as an impact of the changes after theyear of 2012.

High expectations are likely to fullin the next years under the third phase ofthe EU ETS that are vital to the future ofthe new environmental regime. To beginwith, from 2013 heavy industry will bringits contribution to the scheme in orderto cut emissions, and by heavy industrywe understand sectors like electricitygeneration, coking, mineral-oil reneries,

ferrous-metal production, cement, lime,ceramics, bricks, glass, pulp and paper.After that, no emission permits will begiven for free to industry sectors, but onlyby purchasing the permits in auctionsstarting gradually with 20% in 2013, 70%in 2020 and 100% in 2027. But will allthe Member States be able to achieve thetarget? The decision-makers thought thatstates which encounter problems in the

transition to a low-carbon economy willreceive an amount of 12% permits more toauction. Furthermore, the investment in thethird phase is close to 300 million emissionallowances at an estimated value of EUR6 to 9bn (Council of the European Union,2009). 50% of the total amount of money asa result of the EU ETS revenue is expectedto be mobilised in a coherent manner toinnovation and research areas aimed atboosting the effectiveness of Member States

(European Council Conclusions, 2011, p.9) through climate-related projects.

The third phase of the EU ETS will startin 2013, although preparations were madein year 2007 at the European Council inMarch as we have already showed. Thesepreparations may prove not to be satisfactoryenough due to the lack of commitment atthe international level towards the mainissues that need to be tackled with as

soon as possible. One example, were theoverestimated results of the CopenhagenConference at the beginning of the year

2009. In the forthcoming of the Conference,the EUs commitment to increase reductionof emissions moved from 20% to 30% by2020. But the Conference proved not tobe as successful as expected and viableinternational climate policy without thelargest polluters of the world, such asUnited States, China, India, and others isnot possible. The EUs pioneering role inthe international climate policy and all itsefforts (Drge, 2008) will be less successful

in the absence of global commitment.

6. How did Romania face theimplementation of the EU ETS. Case study

Common efforts are expected tobe implemented in order to achievesuccessful results of the trading scheme inthe emission reduction aspects: emissionallowances trading should form part of

a comprehensive and coherent packageof policies and measures implementedat Member State and Community level(European Parliament and the Council,2003). All sectors of the European Unioneconomy were covered by the scheme,in particular, industry and energy, alsoall sectors that are subject of intensiveemissions, all these require complementarymeasures of the Member States to those ofthe Community to meet the Kyoto targets.

Romania, as well as Bulgaria, the twonew Member States starting 1st January2007, faced a real challenge since they hadto adjust to the scheme and to develop anational allocation plan in the middle ofthe pilot phase. We are going to analysethe Romanian case from the perspectiveof national legislation. Romania becameMember of the EU in year 2007. Therefore,the rst national allocation plan was


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designed to cover only the last year of thepilot phase. The Ministry of Environmentchose to elaborate the second national

plan for the period 2008-2012 in the sametime with the rst one, in order to submitthem both to the Commissions acceptanceas one document. The motivation, as itis stated in the Discussion Document Romania National allocation plan,was the efciency issue. We mustadd, that the national authority used thesame methodology for both plans: []using as much as it is possible, the samemethodology (Ministry of the Environment

and Water Management, 2006).Considering all these, it is likely that manyproblems could have risen in the process ofimplementation. The amount of emissioncerticates for the year 2007 was of 81 317000 and for the second period 2008-2012,457 391 000. The national plans modusoperandi was a combination of methods,the historical one and the prognoses one,using data of 2003 as a base-year. Historic

emissions refer to the period between2001-2004, taking 2003 as a base-yearaccording to the National Inventory Report(Ministry of Environment and SustainableDevelopment, 2008).

The rst draft for the national allocationplan was designed in 2006 as part of thepreparations made by the Romaniangovernment before the adherence tothe EU. This draft is considered to be thelegal instrument for the implementation

of the Directive 2003/87/EC, which wastransposed in the national legislationframework by the Government Decision

780/2006. The rst version of the nationalplan was published in August 2006, then itwas notied by the European Commission

in December 2006, some claricationswere made in February and July 2007 andthe revised NAPs were again notied inAugust 2007.

Two national allocation plans wereproposed to the Community by RomanianMinistry of Environment in 2006 for the year2007, the last year of the pilot phase and forthe period 2008-2012 as the second phase.In accordance with the Directive 2003/87/EC, the Ministry of Environment is the legal

national authority responsible for the EUETS implementation in Romania. The rststep was to develop a national allocationplan that had to be notied by the EuropeanCommission. The national allocation planset the total amount of emission allowancesthat the Romanian government intendedto allocate in the scheme framework aswell as the allocation methodology of thecerticates to the installations covered by

the scheme.The allocation was made in two stages,rst allocation for each industry sector, the so-called allocation at sector level, and secondallocation for each installation, allocationat installation level. The latter allocation iscalculated by historical approach, relevantemissions for the installation in the base-year, meeting the criterion the allocationis not more than the expected needs(Ministry of Environment and Sustainable

Development, 2008).


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Chart 3Source: Ministry of Environment and Sustainable Development, 2008, p. 10.

Chart 4

Source: Ministry of Environment and Sustainable Development, 2008, p. 10.

The national allocation plan covered theenergy generator sector (the largest emitterin the scheme for Romanian case) makingpredictions for the emissions of GHG forthe foreseeable future. The Ministry usedthe data of ENPEP Programme (Energy andPower Evaluation Programme) and analysedenergy production, energy import, energyconversion in electricity and heating,

energy consumers. For other sectors, theGHG amount was evaluated according tothe evolution of the gross national product,the evolution of all the sectors includedin the scheme, domestic measures thatare considered to be complementary tothe Communitys legislation, and energydemand.


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Share of GHG emissions by main source and by gas in 2008:

Chart 5

Source: European Environment Agency, 2008, p. 92.

Share by sector of 2010 GHG according to the With existing measures projections:

Chart 6

Source: European Environment Agency, 2007, p. 14.

For the Romanian case, energy andtransport sectors are responsible for thelargest emissions of GHG, as we can see formthe charts, both for the projected emissionsfor the year 2010 and for the complete data

of the year 2008. According to expertsopinion Romania is expected to meet Kyototarget with signicant margin even withoutadditional measures. If additional measuresare to be introduced then further signicant


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reduction is expected. The evolution of theemissions trend for year 2010 is subject offuture studies, since we lack standardised

data at the moment.

Conclusions

According to our assumption atthe beginning of the study, the EU ETSmechanism was invested with great relianceas being more than a system that reducesgreenhouse gas emissions. On a deeperresearch of the main legislation of the ETSas well as of the data provided by European

authorities, the emission trading schemeprove to be an innovative instrumentin dealing with climate change facingboth advantages and aws. It is a uniquemechanism which gives Europe the chanceto be an example in the internationalenvironment regime.

The EU ETS is a mechanism functioningin a global market and is designed to face thenew challenges of the climate change. The

ETS is not the only one responsible for GHGreductions in the European Union becauseMember States develop similar projectsat national level in the same purpose. Asa conclusion, the EU ETS bridged the gapbetween Member States and Communitydemands in what proves to be an efcientmechanism.

The main body of legislation consistsof several directives that were subject ofdebate in the previous parts of our study.

The documents are projected for long-termobjectives, for long periods of time whichmeans that the system will be perfectedover the years as the pilot phase undergonechanges. Also, the interrelated documentsare binding together in a circular policydesign, each directive strengthening themeasures of the previous one.

The emission trading scheme convincedcompanies to settle the path of a less energy-

intensive industry and to create a Europeancarbon market which is rather a strongdriver to a low-carbon investment. The

greatest advantages of the scheme are theregulations imposed in the energy sector,which is the largest emitter of GHG in theEuropean Union. This will increase energyefciency, competitiveness, the formationof the European energy internal market. Asa result of considerable investments withinthe framework, innovation in renewabletechnologies was achieved.

There are also obstacles to overcomewhich consists of aws in the mechanism

design and low commitment to theinternational environmental governance.

First, the EU ETS is a possible answer toclimate change, as an economic instrumentto be implemented in the Member States, butit could become an inessential mechanism ifthe international feedback and commitmentto GHG reduction of the greatest polluters isinsignicant.

Second, a design aw is the predictable

feature of the EU ETS system. Based onpredictions made according to the base-years, the mechanism could bring distortionsin the understanding of the methodology,implementation, evaluation and thesecould cause failures in meeting the GHGtargets. The EU ETS known as the volume-based scheme (Llewellyn, p. 35), is not easyto implement as an efcient mechanism,because of the credibility and predictabilityissues: stability in the price uctuation and

in the allocation of permits or quotas.Third, the EU ETS is only an economic

instrument and it is impossible to ask it tocover in its framework all the problemscaused by climate change in terms ofemission reduction. The system could beimproved by extending the list of dangerousgases that need to be reduced and byachieving a greater cooperation betweenthe Member States.


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