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Understanding the proposed revision of the EU ETS

Understanding the proposed revision of the EU ETS. Thomas Bernheim DG Environment Unit C.2 European Commission. Objectives of EU ETS revision.

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Understanding the proposed revision of the EU ETS

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  1. Understanding the proposed revision of the EU ETS Thomas Bernheim DG Environment Unit C.2 European Commission

  2. 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

  3. Overview • Key elements of the Commission’s proposal • Scope • Targets / cap setting • Allocation methods • International aspect • Monitoring, reporting, verification • Next steps and key messages

  4. 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

  5. Summary of scope effects

  6. GHG Target

  7. 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

  8. Cap setting 2083 Mtyr Gradient: -1.74% -20% -30% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

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