Revision of theEU Emissions

Trading System

Thomas BernheimPolicy Officer

DG Environment

European Commission

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

A clear long-term carbon price

Overview

ScopeCap settingAllocation methods including EIIRedistribution of auctioning rightsUse of creditsMonitoring, reporting, verification

Scope

Streamlining the scope of the EU ETS

Environmentally, no difference between emissions from combustion and processes, therefore not treated separately

Codifying broad interpretation of combustion installation by– Explicit definition of combustion installation– Listing some activities explicity for further

clarification

Legal certainty and level playing field

New sectors and gases - Principles

Enhancing environmental effectiveness and reducing competitive distortions

General consideration: attaching a price to carbon

Additional criteria for inclusion:

– Significance of the source– Feasibility to monitor emissions– Proportionality of transaction costs– Interaction with existing policies and regulation– Compliance costs

New sectors and gases – included from 2013 onwards

CO2 emissions from petrochemicals production, ammonia and other chemicals including process emissions

CO2 and PFC emissions from the production of aluminium

N2O emissions from the production of nitric, adipic and glyoxal and glyocylic acid production

Carbon capture and storage

– Not exactly emissions, but widening the scope

Small installations

Improving cost-effectiveness of small installationsOpt-out of installations on condition that

– less than 25 MW– less than 10.000 tonnes CO2 per year– Equivalent measures to reduce GHG at national level– Monitoring arrangements are in place

Opt-out granted through– Application by Member States– Tacit consent of the Commission after 6 months

Aggregation clause

Summary of scope effects

MtCO2 In % of NAP2

No of installations

Extended scope

Streamlining 40-50 2 – 2.5 n.a.

New sectors and gases

Up to 97 Up to 4.6

n.a.

Potentially excluded installations

- 16 -0.8 Up to 5000

Net effect 121-131 5.8 – 6.3

Cap setting

Cap setting

New: single EU-wide cap instead of 27 caps set by Member States

CO2 allowances available in 2020: 1720 Mt– - 21% compared to 2005 emissions

Linear decrease – predictable trend-line to 2020 and beyond (annual decrease by

1.74%)– possible review by 2025 at the latest

Automatic adjustment to stricter target

Aviation to be included in line with political agreement

Figures on the Cap

Figures based on – NAP 2 decisions of the Commission– ETS scope as applicable in Phase 2

• To be adjusted for:– Opt-ins in Phase 2– Extended scope in Phase 3– Inclusion of aviation– Inclusion of Norway, Liechtenstein,

Iceland

EU ETS cap and reductions

1.974 1.937 1.901 1.865 1.829 1.792 1.756 1.720

0

500

1.000

1.500

2.000

2.500

2013 2014 2015 2016 2017 2018 2019 2020

year

Mio

t C

O2

e

q

Allowances reduction

Allocation method including EII

Allocation principles

Harmonised allocation rules ensure level playing field across the EU:– No distortion of competition

Auctioning as the rule with free allocation for a transitional period

In terms of allocation rules, 3 categories of operators:– No free allocation (i.e. full auctioning) (category 1)– Partial free allocation (category 2)– Up to 100% free allocation (category 3)

Category 1: Auctioning

Basic principle for allocation is auctioning:

– Eliminates windfall profits – Simplest and most transparent allocation system– Level playing field for new entrants and incumbents

Full auctioning for sectors able to pass on costs (category 1):

– Power sector– Exemption: heat produced through high efficiency cogeneration with

a view to avoiding distortions of competition

Auctioning on the basis of harmonised rules ensuring

– Transparency and non-discrimination– Full access for SMEs

Category 2: Free allocation as a transitional measure

All industrial installations not falling under category 3 (see below)

Maximum amount to be allocated for free:

– Incumbents: share of VE 05-07 corresponds to share of cap– New sectors: must not exceed VE 05-07

Community-wide rules (benchmarks) for free allocation to be determined taking into account most efficient techniques, substitutes, alternative production processes, use of biomass and CCS

No free allocation for electricity production

Partial free allocation to industry as a transitional measure:

– 80% of allocations determined in accordance with Community-wide rules for free in 2013

– Yearly reduction– Phased out by 2020

Category 3: full free allocation

Installations in sectors which are exposed to a significant risk of carbon leakage

Up to 100% free allocation Number of allowances determined by Community-wide rules Sectors determined in 2010 taking into account ability to pass

on costs without losing market share to non-EU competitors– particularly vulnerable to international competition (‘carbon

leakage’)

Further criteria:– Increase in production costs through auctioning

– Potential to reduce emission levels (most efficient techniques)

– Market structure, product market, exposure to international competition

– Effect of climate change and energy policies

Review in 2011: further measures

2011: situation of exposed energy intensive industries (category 3) to be reviewed

European Commission to submit an analytical report

– in the light of international developments– Following consultations with all relevant social partners

Report to be accompanied by any appropriate proposals:

– Adjusting free allocation– Introducing system to neutralise distortive effects

(„importers“)– Binding sectoral agreements have to be taken into account

Conformity with principles of UNFCCC and WTO

Use of auctioning revenues

At least 20% of auction revenues should be used to– Reduce GHG emissions– Adapt to the impacts of climate change– Fund research and development for reducing emissions and

adaptation– Develop RES to meet the EU‘s 20% target– Increase energy efficiency by 20%– CCS– Deforestation– Social aspects– Administrative expenses of the ETS management

Measures to be notified (monitoring)

Redistribution of auctioning rights

Re-distribution of auctioning rights

Wide range of different economic situations in Member States

Different treatment of Member States under the Community system is inappropriate, in order to eliminate distortions and to ensure highest possible degree of efficiency

Only different treatment that is possible is the share that each Member State can auction from the overall auctioning cap

Underlying principles of distribution of auctioning

rights

Auctioning principle– 90% of the auctioning CAP is distributed

according to the MS share of 2005 Verified Emissions

– 10% distributed to Member States that have a GDP per capita below 120% of EU average

– This distribution takes into account GDP per capita and expected growth rates

Basic rule Distribution 10% Total auctioning

90% x cap x 2005 ETS share

Increase on top of 90%

% x cap x 2005 ETS share

a b c = a x (1 + b)

Italy 90% 2% 92%

Spain 90% 13% 102%

Portugal 90% 16% 104%

Greece 90% 17% 105%

Cyprus 90% 20% 108%

Slovenia 90% 20% 108%

Malta 90% 23% 111%

Hungary 90% 28% 115%

Czech Rep. 90% 31% 118%

Poland 90% 39% 125%

Slovakia 90% 41% 127%

Estonia 90% 42% 128%

Lithoania 90% 46% 131%

Bulgaria 90% 53% 138%

Romania 90% 53% 138%

Latvia 90% 56% 140%

Distribution of auctioning rights

Rich Member States receive 90% of proportional auctioning cap

Member States close to EU GDP/Capita average, receive around 100% of proportional auctioning cap

Poor Member States receive more than 100% of proportional auctioning cap

Three exceptions to this auctioning distribution rule:– Three member states are projected to have high direct costs

when implementing the package, even taking into account full access to renewables trade and access to JI/CDM.

– Direct costs in Belgium, Luxemburg and Sweden are projected to be above 0.7% of GDP

– Therefore Belgium, Luxemburg and Sweden receive 10% more auctioning rights on top of the 90% basic rule

Direct costs package

 

Cost efficient achievement

RES and GHG

+ targets Non-ETS

redistributed

+ right to auction

redistributed

+ access to JI/CDM (≤ 30 €)

+ targets RES distributed and trading of GOs

EU27 0,58 0,61 0,61 0,45 0,45

AT 0,66 0,86 0,82 0,58 0,34

BE 0,76 0,83 0,93 0,69 0,70

BG 2,16 1,09 -0,35 0,14 -1,25

CY 0,09 0,08 -0,04 -0,03 0,07

CZ 1,12 0,49 0,03 0,20 -0,51

DK 0,29 0,57 0,50 0,22 0,11

EE 1,59 1,09 0,41 0,58 -0,53

FI 0,47 0,53 0,56 0,52 0,22

FR 0,39 0,39 0,37 0,32 0,47

DE 0,57 0,47 0,60 0,49 0,57

EL 0,97 0,74 0,53 0,60 0,59

HU 1,22 0,46 0,29 0,36 -0,40

IE 0,47 0,61 0,63 0,47 0,45

 

Cost efficient achievement

RES and GHG

+ targets Non-ETS

redistributed

+ right to auction

redistributed

+ access to JI/CDM (≤ 30 €)

+ targets RES distributed and trading of GOs

IT 0,49 0,99 1,05 0,51 0,66

LV 1,10 1,60 1,50 0,88 -0,18

LT 1,02 0,52 0,36 0,43 -0,72

LU 0,54 0,89 0,91 0,59 0,70

MT 0,31 0,17 -0,36 -0,21 0,00

NL 0,28 0,34 0,43 0,28 0,32

PL 1,24 0,48 0,32 0,38 0,02

PT 0,87 0,48 0,54 0,57 0,51

RO 0,95 0,37 0,29 0,29 0,04

SK 1,17 0,79 0,74 0,60 0,26

SI 0,86 1,11 0,86 0,47 0,53

ES 0,70 1,20 1,08 0,62 0,42

SE 0,66 0,69 0,70 0,74 0,78

UK 0,49 0,36 0,36 0,34 0,41

Direct costs package

The international dimension of the EU ETS

EU to lead negotiations of ambitious international agreement

Overall objective: limiting global warming to 2° C above pre-industrial level

Requires contribution from developed and major emitting developing countries

Need to provide incentives to join an ambitious international agreement

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

Use of credits

Credits in the 2nd trading period and their possible

impact on 3rd trading period

Allowed use of JI/CDM in second trading period:

– NAP 2 allocations 5.7% below 2005 VE, but access to credits up to 13.5% of Phase 2 cap (1.4 bn t CO2)

– Theoretically, EU emissions could be 7.8% above 2005 levels

– Potential loss of credits not used in Phase 2

Reasons for limiting use of credits in phase 3 if there is no international agreement:

– Without international agreement, no incentives for investment in low carbon technologies

– No incentives to increase energy efficiency– RES target very expensive

Credits in the 3rd trading period

Absence of an international agreement:– Credits from 2008-12 can also be used from 2013-2020 corresponding to one third of

reduction effort over the period– Certainty for operators:

• credits imported in 2008-12 can be used until 2020• Credits from projects launched before 2013 can be used

– Other credits to be used may emerge from • Agreements concluded with third countries• New projects in LDC

Total amount of credits (1.4 Bt) must not be exceededTotal amount of credits (1.4 Bt) must not be exceeded

Reduction effort and JI/CDM

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

% o

f 2005 em

issio

ns

Total reduction effort

1/3rd of reduction effort

JI/CDM limit if consumed on an equal yearly basis

More than one third of reduction effort can be met by credits from 2008-2020

Credits and an international agreement

Access to credits will be automatically increased by one half of the additional reduction effort

Example: cap reduced by 200 Mt would mean an additional import of 100 Mt in the form of credits

This provides an incentive to join international agreement, in order to benefit more from higher levels of credits

Monitoring, reporting,

verification

Monitoring & Reporting, Verification & Accreditation,

Compliance

More harmonised rules through Regulations on – monitoring and reporting of emissions by operators– verification of reports and accreditation of verifiers (including

mutual recognition)

This will enhance reliability and thus international credibility of the EU ETS

Non-compliance penalties (€100/ton CO2) to increase by inflation rate to keep deterrent effect

Conclusions EU ETS

Emission reduction objectives of the Community require most efficient approach

A more harmonised EU ETS can exploit the benefits of emissions trading to the full

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

– is sufficiently simple to be attractive for other countries to join

– credibly underlines EU leadership