Allowance allocation in the EU ETS

IDDRI

16 October 2003

Fiona MullinsAssociate Fellow, Royal Institute of International Affairs

Structure of presentation

1. Challenges of the allocation process

2. Comparison of national approaches

EU Emissions Trading Scheme• First period 2005-2007, second period 2008-2012

• Learning; pre Kyoto

• Defines participants, gases and sources• Defines processes:

• methods and timing for monitoring, reporting, compliance processes• registry form and function• compliance timing and methods

• Defines penalties• Defines regulatory basis (IPPC permitting)• Defines unit of trade: EU Allowance; full transferability of EUAs

within EU• Defines some sort of linking: JI, CDM, non-EU schemes

Allocation Challenges

Number and complexity of decisions

Tight timeframe

Need for coordination on some issues

Allocation defines environmental outcome and price Approx 5 billion tCO2 allocated over three years (2005-2007)

Prices: Euros 5 to 15 per tonne?

Number & complexity of decisions

• Allocation and consultation processes • Information and data required• Banking, auctioning, pooling, opt out• Closure and new entry• Other policies, longer term considerations

Lack of capacity, awareness and time

Timing

2003

Aug Sep Oct Nov Dec

Transposition (?)

Aug Sep Oct Nov Dec

Approved NAPs

2004

Jan Feb Mar Apr May Jun Jul

Industry consultation

Final NAPs

Issue permits

Jan Feb Mar Apr May Jun Jul

Monitoring & registries guidance

Aug Sep Oct Nov Dec

Issue 2005 EUA

2005

Jan Feb Mar Apr May Jun Jul

2004

20062005Aug Sep Oct Nov Dec

2006

Jan Feb Mar Apr May Jun Jul

2005

Decide allocationsSurrender allowances

Annex III guidance

Coordination needed/useful on:

1. Banking

2. New entry & closure

3. Definition of “installation”

4. Definition of “allowance”

Allocation: different levels

EU ETS

Size of the national pie: Kyoto or national

transportdomestic

Elec Iron/steel Minerals Paper

Installation 1 Installation 2 Installation 3

1

2

3

4

General trends in allocation• Total, top-down allocation:

• Politics dictates: Kyoto targets (or Kyoto plus)

• Sectoral, top-down allocation: • data and modelling constraints dictate• modelling projections + regulatory info

• Allocation to installations: data constraints dictate:

Allocation = (historic emissions +/- adjustment) x correction factor

Adjustments for: CHP, early action, process industry expansion, performance against benchmark

Germany: Top down Major controversy

Inter-linked with prior policy commitments Will affect prices and environmental integrity of the EU ETS

General principle: Same reduction as for VAs: 45mtCO2 pa by 2010 (less approx10mt

for non EU ETS industry) VAs provide the basis

ie regulatory basis rather than projected emissions emissions for 2005-2007 can be calculated back (growth rate

implied in VAs, fuel mix and energy efficiency assumptions) VAs do not specify targets for EU ETS industry sectors (or

installations) Participation in VAs is as low as 50% in some sectors, close to

100% in others

Germany: bottom up Data constraints Wide range of options

Base-year or base-period of emissions 2000-2002 Different approach for process industries than for fuel combustion Grand-fathering alone (less x%) possible for some Bench-marking likely where data available: Additional allowances for

any that beat benchmark eg CO2/kWh for base-period; or BAT

NO auctioning for first or second periods NO opt-out envisaged as limited to first period

Set aside for new entrants

Netherlands: Top-down

Using official projection Approx 90mtCO2 (not including coal covenant and second LTA

on energy efficiency) Precise portion of EU ETS industry cap relative to non EU ETS

is being calculated

Assumes 50% imported emission reductions to meet Kyoto target

NO separate EU ETS sector constraint (?)

Netherlands: bottom up

Two main options: Historic base-year or base-period (fall-back option) with some

flexibility on choice of base-year possible Historic plus benchmark coefficient

Many variations possible Benchmarks:

Available from LTAs but difficult to translate them to absolute CO2

May use LTA benchmarks to reward more efficient installations with more allowances

May use forecasts for major industrial companies to adjust allocation

Allocation methods define share ie must add up to total

Sweden: top-down

Flexmex Commission 2 proposal:

24.3mt CO2

Ceiling allows for projected emission increases and new entry

EU ETS installations emit 19mt currently

Sector/activity mtCO2

Fuel combustion 10.8

Non-substitutable emissions

plus forecast expansion

6.2

2.3

Statistical uncertainty

2

Capacity expansion

2

New entry (nearing completion now)

0.6

Total 23.4

Sweden: bottom up All installations have right to 1998-2001 emissions level

4 yr avg (3 yr if special circumstances)

Additional allowances allocated in priority order: 1998-2001 emissions allocated to all Producers with non-substitutable emissions to allow for forecast

production expansion New entry set aside (allocated on basis of forecast emissions)

Benchmarking could be considered, although data constraints limit possibilities

Comparison of approaches

Issue Fr It Ge Ne Sw UKTotal:

• Kyoto target Y Y Y Y Poss Poss

• National target N N N N ? Poss

• Import KM units N Y N Y N N

Sectoral:

• Historic basis Y ? N Y Y N

• Projection basis Y ? Y Y Y Y

• Regulatory basis N N Y Y N Y

Installations:

• Historic basis (1997+) 2002

Y? 2000 - 2002

1999 - 2002

1998 - 2001

1998 -2002

• Benchmarks N (?) N(?) N(?) Yes N(?) N

Auctioning: N (?) N N N N N (?)

Source: European Environment Agency

Contact details

Fiona MullinsAssociate fellow (climate change)Royal Institute of International Affairs

Tel: 01865 292983email: fiona.mullins@tiscali.co.uk