Understanding the proposed

revision of the EU ETS

Thomas Bernheim

DG Environment Unit C.2

European Commission

Objectives of EU ETS revision

Ensure a cost-effective contribution of the EU ETS to achieving the 20% GHG reduction for 2020, and to a 30% reduction reached in an international climate agreement

Improvement of the EU ETS based on experience so far

Enhance predictability and certainty for long-term emission reductions

Contribute to developing the international carbon market and encouraging action globally

Overview

Key elements of the Commission’s proposal– Scope

– Targets / cap setting

– Allocation methods

– International aspect

– Monitoring, reporting, verification

Next steps and key messages

Scope

Harmonised coverage of large industrial emitters: extension e.g. to chemical sectors and aluminium

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

Extension to Carbon Capture & Storage (CCS)

Leading to new abatement opportunities, lower overall costs, and higher efficiency

Potential opt-out of smallest emitters if equivalent emission reduction measures are in place (e.g. tax)

Possibility introduced for Community-level projects

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

GHG Target

GHG Target:

-20% compared to 1990

-14% compared to 2005

EU ETS-21% compared

to 2005

Non ETS sectors -10% compared to 2005

27 Member State targets, stretching from -20% to +20%

Cap setting

A single EU-wide cap rather than 27 caps proposed by Member States

CO2 allowances available in 2020 (based on current scope): 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 greater reduction foreseen in international agreement

Aviation being included, building on December’s Council political agreement

Cap setting

-20%

-30%

2083 Mtyr

Gradient: -1.74%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

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 CO2 eq

Allowances reduction

Allocation principles

Harmonised allocation rules to ensure a level playing field across the EU:– No distortion of competition– No state aid risks for operators

Auctioning as the general rule with transitional free allocation In terms of allocation rules, three categories of operators:

– No free allocation (i.e. full auctioning) – Partial free allocation– Up to 100% free allocation

European Commission to report on carbon leakage by 2011 and make any appropriate proposal:

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

Binding sectoral agreements to be taken into account In conformity with principles of UNFCCC and WTO

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:

– Power sector

Auctioning on the basis of harmonised rules ensuring

– Transparency and non-discrimination– Full access for SMEs

Auctioning and earmarking

Range of economic situations in Member States means relatively more auctioning rights to MS with lower GDP/capita to balance high investment costs

– 90% of the auctioning cap is distributed according to the MS share of 2005 Verified Emissions

– 10% distributed to MS with GDP/cap below 120% of EU average– This distribution takes into account GDP per capita and

expected growth rates

Auctions must be non-discriminatory, open to everybody and will be carried out by Member States on the basis of harmonised rules

20% of auction revenues should be used for combating climate change and promoting renewable energies

Transitional free allocation

Transitional free allocation to industry

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

– Annual reduction of free quantity

Phased out by 2020 for “normal industry”

Community-wide rules, e.g. benchmarking, 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

Higher free allocations

Installations in sectors which are seen, on analysis, to be exposed to a significant risk of carbon leakage

Can receive up to 100% free allocation of the quantity of allowances determined under the general Community-wide rules

Sectors to be determined at the latest in 2010, taking into account inter alia ability to pass on costs without losing market share to non-EU competitors

New entrants reserve

5% of total quantity of allowances

Equal treatment of existing and new installations

Capacity extensions not considered to be new entrants

Implementing rules to be adopted under comitology.

Sufficient size is important for avoiding carbon leakage,

in particular for fast growing economies

Remainder to be auctioned

Key international aspects of the EU ETS revision

EU’s overall objective: to limit global warming to 2° C above pre-industrial levels

EU wants an international agreement on achieving these levels of emission reductions

This will require contributions from developed countries and major emitting developing countries

Climate / energy package provides incentives for others to join an international agreement

Linking

Currently, EU ETS covers 30 countries including Norway, Iceland and Liechtenstein

Linking agreements can be concluded with any other third country listed in Annex B to the Kyoto Protocol which have ratified the Protocol

In revision, Commission proposes to enable EU ETS to also link with other mandatory emission trading system capping absolute emissions:

– with any third country, or – in sub-federal and regional systems

Different types of linking arrangements foreseen:

– Treaty arrangements– Agreements to link systems e.g. through politically binding MoU– Reciprocal commitments applied through domestic systems

Joint Implementation and the Clean Development Mechanism

Links EU ETS with projects in around 150 other countries that have ratified Kyoto Protocol, by providing for companies to use JI/CDM credits for compliance in EU ETS

Revision proposal gives certainty on the potential for companies to use JI/ CDM, whether or not there is an international agreement following Kyoto

Clear need to differentiate between EU’s independent 20% commitment to reduce GHG emission, and the contribution that the EU will make under an international agreement where others are also contributing, e.g.

– JI/CDM are an incentive for third countries to join international agreement– Demand for CDM only from the EU would reduce market-based incentive to

increase energy efficiency, investment in low carbon technologies– EU’s renewables target would become more expensive if EU ETS not

contributing to its achievement

JI/ CDM use without international agreement

Revision proposal ensures that:

– JI/CDM credits can be used up to 2020, by enabling these to be exchanged for allowances

– JI projects can continue beyond 2012, by enabling bilateral/ multilateral agreements with third countries

In a -20% scenario, certainly is given for a total 1.4 billion tons for 2008-2020 (one third of reduction effort over the period) to:

– Credits for reductions in the 2008-12 period from project types which were accepted by all Member States

– Credits for reductions from 2013- from such projects set up in the 2008-12 period

– In addition, credits from such projects from 2013- in any of the 50 Least Developed Countries

– And credits from any bilateral/ multilateral agreements with third countries

JI/ CDM use without international agreement

In addition, climate/ energy package also provides for Member States to use CDM in respect of non-ETS emissions:

– To enhance the equitable geographical distribution– To enhance achievement of international agreement

on climate change– Up to 3% annually of their non-ETS emissions– Corresponding to 700 Mt demand from Member

States, in a situation without international agreement

JI/ CDM once international agreement

Once an international agreement is concluded, the EU ETS will automatically increase the use of credits (JI/CDM/other) by 50% of the additional reduction effort under that agreement

Member States’ use of JI/CDM/other credits will also increase by 50% of the additional non-ETS reduction effort under that agreement

This provides a clear incentive for third countries to join international agreement

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)

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

To enhance reliability and thus international credibility of the EU ETS

Next steps

Adoption by Council and Parliament aimed for by Spring 2009

Comitology procedure to start after entry in force of revised

Directive

Preparatory work already started: various pilot studies being

undertaken by MS and Commission

Exposed sectors to be determined by 30 June 2010 at the latest

Community-wide rules to be adopted by 30 June 2011 at the

latest

Implementation by MS by 30 September 2011 at the latest

Issuance of first year allocations by 28 February 2013 at the

latest

Key messages

The ETS is the cornerstone of the EU’s market based-strategy to reduce greenhouse gases cost-effectively

Essential elements of the ETS review:

– Fully harmonised approach – Ambitious cap to ensure real emissions reductions– Improvement taking into account past experience

Open and transparent process for implementation