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 ¬ 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 Mt. CO 2 Extended scope Streamlining New sectors and gases Potentially excluded installations Net effect 40 -50 Up to 97 - 16 In % of NAP 2 2 – 2. 5 Up to 4. 6 -0. 8 121 -131 5. 8 – 6. 3 No of installations n. a. Up to 5000

GHG Target

Cap setting ¬ A single EU-wide cap rather than 27 caps proposed by Member States ¬ CO 2 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 ¬ 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

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 Ø Binding sectoral agreements to be taken into account Ø 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 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 Mo. U – 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 CO 2) 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