Slide 1

Report
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
Extended scope
Streamlining
New sectors
and gases
Potentially
excluded
installations
Net effect
40-50
Up to 97
- 16
In % of
NAP2
2 – 2.5
Up to
4.6
-0.8
121-131 5.8 – 6.3
No of
installations
n.a.
n.a.
Up to 5000
GHG Target
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
2083 Mtyr
Gradient: -1.74%
-20%
-30%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Figures on the Cap
EU ETS cap and reductions
2.500
Mio t CO2 eq
2.000
1.500
1.000
1.974
1.937
1.901
1.865
1.829
1.792
1.756
1.720
2017
2018
2019
2020
500
0
2013
2014
2015
2016
year
Allowances

Figures based on
–
–
NAP 2 decisions of the Commission
ETS scope as applicable in Phase 2
•
reduction
To be adjusted for:
–
–
–
–
Opt-ins in Phase 2
Extended scope in Phase 3
Inclusion of aviation
Inclusion of Norway, Liechtenstein,
Iceland
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 costeffectively
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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