The EU Emissions Trading Scheme and its review

Thomas Bernheim

DG Environment, unit C.2

European Commission

Why was the EU ETS set up?

• The cornerstone of the EU’s market-based strategy to reduce greenhouse gas (GHG) emissions cost-effectively

• The main driver for the global carbon market involving 168 countries and transactions valued at some €33 billion ($50 billion) in 2007

• An essential structural element for long-term global strategies to avoid dangerous climate change

Targets for emission reductions

• European objective is for global temperature increase not to exceed 2º Celsius above pre-industrial levels

• This requires industrialised countries to reduce GHG emissions by 30% below 1990 levels by 2020, domestically or through emissions trading mechanisms, increasing

to 60-80% reductions by 2050

EU ETS design fundamentals

• Simple “downstream” cap-and-trade system for major emitting industries that is part of a comprehensive policy mix

• Initially, allocation largely devolved to Member States, with Commission assessment of national allocation plans against agreed common criteria:

consistency with actual and projected emissions, consistency with potential to reduce emissions, on track to achieve emission reduction commitments, not unfairly discriminating

• Monitoring rules for direct emissions, independent verification• Robust penalties to ensure compliance (€100 + shortfall)• Electronic registry system to record holdings of allowances• Market development driven by the private sector

Stages of development of EU ETS

• 2005-7: Start-up phase

Allocations to be in line with reducing emissions and on path to Kyoto reductions

Allowances mostly allocated for free (auctioning limited to 5%) Robust emissions monitoring and verification, efficient electronic

registry system Sound market development but lack of scarcity

• 2008-12: Aligned with Kyoto Protocol’s first commitment period

Allocations to be in line with achieving Kyoto targets Cap set at 6.5% below 2005 emissions But JI/CDM limit at 13.5% of 2005 emissions Auctioning possible up to 10% Linking taking place with Norway and other Kyoto ratifiers Harmonised inclusion of climate change impacts from aviation

Objectives of EU ETS review

• Cost-effective contribution to -20% GHG target for 2020, or to stricter target under international climate agreement

• Improvement of the EU ETS based on experience

• More predictability for long-term emission reductions

• Stepping stone to development of a global carbon market

Scope

• Cover all big industrial emitters: extension e.g. to chemical sectors and aluminium

• Extension to other GHG: nitrous oxide (fertilisers), perfluorocarbons (aluminium)

• Potential “opt-out” of small emitters, if equivalent emission reduction measures in place (e.g. tax)

Cap setting

• Single EU-wide cap instead of 27 caps set by MS

• Annual caps with linear decrease of 1.74% per year to 2020 and beyond

• In 2020 ETS emissions 21% below 2005 level

• Cap adjusted when international climate agreement concluded

Cap setting

-20%

-30%

2083 Mtyr

Gradient: -1.74%

Allocation principles

• Harmonised allocation rules ensure level playing field across the EU

• Basic principle for allocation is auctioning: Eliminates windfall profits Most efficient and transparent allocation system

• Full auctioning for sectors able to pass on costs Power sector

Allocation principles

• Partial free allocation to industry as a transitional measure

Phased out (from 80% to 0) by 2020 for “normal industry” Possibly higher levels (up to 100%) of free allocation to

industries particularly vulnerable to international competition (‘carbon leakage’)

Sectors to be determined no later than 2010

• European Commission to report on ‘carbon leakage’ by 2011 and make a proposal, if appropriate:

To review free allocation levels and/or To introduce system to neutralise distortive effects

Auctioning and earmarking

• Auctioning rights distributed to Member States Relatively more rights to MS with lower GDP/capita to

ensure fairness

• Auctions non-discriminatory, carried out by Member States on basis of harmonised rules

• 20% of auction revenues should be earmarked for combating climate change, promoting renewable energies and addressing social impacts

• Large sums involved

Monitoring & Reporting, Verification & Accreditation,

Compliance

• More harmonised rules on

monitoring and reporting of emissions by operators

verification of reports, mutual recognition of verifiers, accreditation

International aspects: JI/CDM

• Companies can already use credits from Joint Implementation and Clean Development Mechanism projects for compliance

• “Left-over” credits from 2008-2012 can be used 2013-2020: total 1.4 billion tons for 2008-2020, one third of reduction effort over the period

International aspects: JI/CDM, linking

• When int’l agreement is reached, substantial additional use of credits allowed, to meet a stricter target

Only credits from countries which have ratified the agreement

Important incentives for global climate agreement

• Possible to link EU ETS not only to other national emission trading systems, but also to sub-federal and regional systems

In conclusions…

• Emission reduction objectives of the Community require most efficient approach

• A more harmonised EU ETS is able to fully exploit the benefits of emissions trading

• The proposal

ensures significant contribution by ETS to overall targets provides a predictable and reliable long-term perspective for

industry to take the necessary investment decisions takes into account competitiveness and risk of carbon leakage makes ETS attractive for other countries to join credibly underlines EU leadership