The EU Emissions Trading

Scheme Dr Marzena Chodor, Clima East Key Expert

Kishniev, 22 July 2015

Contents:

• Cap and trade system: definition

• Cap and trade system: how does it work?

• cap and trade system: why does it work?

• EU ETS: history • Legal framework

• Scope of the EU ETS • ETS: main elements in 2005-2012

• Carbon market in 2005-2012 • Main lessons from 2005-2012

• EU climate policy goals until 2020 • EU approach from 2013 • Aviation in emissions trading

• ETS 2013 – 2020. main features

Cap and trade system: definition

• A system in which annual emissions are capped

• Allowances are distributed or acquired (through auction, market)

– tradeable

– transferable freely/with constraints

– bankable/not bankable

– 1 allowance equals one tonne of CO2

• The system has identified participants: – registered (eg. through permits)

– obliged to comply with rules

• The system has a functioning MRV

Cap and trade system: how does

it work?

• Regulator determines allowed emissions level (the cap), and

creates and distributes allowances corresponding to the cap

• The cap determines stringency

• (in the EU ETS cap on emissions from power stations and other fixed installations is

reduced by 1.74% every year. For aviation it is 5% below the average annual level of

emissions in the years 2004-2006.)

• Scarcity gives allowances value

• Carbon market develops

– Price signal guides companies by how much to reduce emissions

– Regulator has a key role in enforcement

Cap and trade system: why does

it work?

• The emissions allowance is an asset with immediate value

• Some companies find it easier and less expensive to reduce their emissions below their required limits than other

• More efficient companies can sell their surplus allowances to less efficient ones

• Cap and trade systems reward the most efficient companies and provide incentive to increase carbon efficiency over time

• Prices of allowances are visible signals of current cost of

carbon dioxide reductions

EU ETS: history

• The EU ETS started in January 2005

• First EU ETS phase (trial) 2005 -2007

• Second EU ETS phase 2008-2012

• Third EU ETS phase 2013 – 2020 (and beyond)

• December 2014 - start of public consultations on revision

of ETS post-2020

EU ETS: coverage

• About 11 thousand installations

• aviation in the EU and EFTA countries

• Nearly half of total EU GHG emissions

• 28 EU Member States and 3 EEA-EFTA states

• GHGs included:

– Carbon dioxide

– N2O

– PFC

EU ETS: legal framework

• Directive 2003/81/EC (adopting emissions trading)

• Directive 2004/101/EC (linking directive)

• Directive 2008/101/EC (including aviation activities in ETS)

• Directive 2009/29/EC (ETS review – part of the climate and energy package)

• key implementing provisions: – regulations on Union Registry – Monitoring and Reporting Regulation (MRR) with

guldance and templates – Accreditation and Verification Regulation (AVR) with

guidance and templates

Scope of the ETS: activities

• Combustion installations above 20 MW • Oil refineries • Ferrous metals production above 2,5t/hr • Cement production • Glass production above 20 t/d • Ceramics production above 75 t/day • Pulp and paper production above 20 t/d • PFCs from alluminium production and N2O emissions from

chemical plants included from 2013 • Aircraft operators performing aviation activities in the EU and

EFTA states

ETS design

• Simple “downstream” cap-and-trade system for major emitting

industries

• Monitoring rules

• Independent verification

• Robust penalties to ensure compliance

• Electronic registry system to record holdings of allowances

• Market development driven by the private sector

ETS 2005-2012

• Applicable since January 2005

• Environmental outcome determined – puts a cap on emissions from 10,000 energy-intensive installations across EU (25, later 27, and 30 countries, around 2 billion tonnes/ yr)

• Covering around half of EU’s total CO2 emissions

• Companies can choose:

• To emit allocated emission rights (allowances) or • To reduce emissions below allocation and sell or bank • To emit more than allocation and buy

ETS 2005-2012

• Member States initially responsible for National Allocation Plans (NAPs)

• NAPs approved by the European Commission • 25 (in phase II 27) registries • National authorities overseeing compliance • Just 5% of allowances auctioned on average, the remainder

distributed free of charge • Dominant allocation methodology - grandfathering

Compliance

• Member State competence, harmonized elements:

– no permit, no operation

– blocking transfers if no verified emission report by 31 March

– name & Shame if not surrendered sufficient allowances

– €40 penalty and compensate shortfall for insufficient

surrendering

Links to the Kyoto Protocol

mechanisms • Clean Development Mechanism (CDM) from 2005, Joint

Implementation (JI) from 2008

• Supplementarity: from 2008, use limited to % of allocation of allowances to each installation

• Harmonised EU-wide exclusion of nuclear energy projects and temporary forestry credits, national decisions on other types of credits

• Large hydro: MSs to make sure that relevant international criteria and guidelines will be respected during the development phase

• Legal framework:

• Directive 2004/101/EC (linking directive) • Double-counting guidelines – Commission Decision C(2006)5362

volatility of carbon market prices in 2005-2012

Source Point Carbon

ETS cut emissions by 2

% to 5% in Phase1 1

ETS emissions down

13.7% 2007 - 2009 2

1 assessment by Ellerman et al, ‘Pricing Carbon 2010 2 verified emissions data, European Commission

Main lessons from 2005-2012:

• EU ETS developed into the largest carbon market in the world

• Carbon market infrastructure operational: • MRV, institutional capacity in EU Member States, electronic registries

• Strong, harmonised provisions to ensure compliance (€40/tonne)

• Liquid carbon market and reflective carbon pricing

• However: Member States’ NAPs not based on verified emissions + litigation Reductions projected by MS proved insufficient in terms of scarcity,

which led to a price crash

• Long term - a market-based signal for low carbon investments

EU climate policy goals until 2020:

• 20% reduction in EU greenhouse gas emissions from 1990 levels;

• 20% increase in the share of EU energy consumption produced from

renewable resources

• 20% improvement in the EU's energy efficiency

• implemented through a package of binding legislation entering into

force from 2013 - Climate and Energy Package

GHG reduction target:

-20% compared to 1990

-14% compared to 2005

EU ETS

-21% compared

to 2005

Non-ETS sector

-10% compared to 2005

27 national targets, from -20% to +20%

EU approach

Carbon capture and storage Directive

CO2&cars

Renewable Energy Directive

Fuel Quality Directive

-20% vs 1990 levels by

2020

technology specific &

product policies

cross-sectoral

targets & instruments

large industrial installations & aviation

“small emitters”

EU ETS

Effort Sharing Decision

Instruments of

EU emission

reductions from

2013

Aviation in the EU emissions trading

- rationale

Source: EC

0

1250

2500

3750

5000

2005 2010 2015 2020 2025 2031 2036 2041 2046 2051

Mt

CO

2 e

q.

Predicted Global Future Aviation Emissions Growth

(2006 baseline)

2020 63% to 88%

increase

2050 290% to 667%

increase

Aviation in EU emissions trading -

rules:

• All flights to and from EU airports. • in 2012 suspended for flights to and from non-EU countries • flights within EEA covered in 2013-2016

• Small aircraft and certain flights excluded/exemptions for operators with low emissions

• By 2016 ICAO to propose a global market mechanism for international aviation to be implemented from 2021.

• From 2013, total quantity of allowances equivalent to 95% of average annual emissions 2004-6

• Allocation based on commonly-agreed benchmark (T/km) combined with harmonised level of auctioning

– 15% auctioning from 2012 until 2020 – 82 % given free of charge – 3% special reserve for fastest growing lines

• All auction revenues used by Member States to finance mitigation and adaptation

ETS 2013-2020

• Directive 2009/29/EC amending Directive 2003/81/EC • One single EU –wide cap (limit) set on the total GHG emitted by

installations included in the EU ETS – EU ETS cap set at 2,084,301,856 allowances in 2013 – Decreasing by 1.74% anually

– Reduction continued beyond 2020 (to be revised) – Aiming at -21% reduction against 2005 levels

• Harmonised allocation - main allocation method: auctioning – The proportion increasing annually

• The remaining allowances allocated free of charge to industry threatened by carbon leakage, based on benchmarking

• Strengthened MRV • Increased scope (new GHG, new activities)

ETS 2013-2020 – broader scope:

• New sectors – Aluminium – Basic chemical production

• New gases: – PFCs from aluminium – nitrous oxide from certain chemicals

• Broad interpretation of “combustion”, Annex I listing only activities

• Combined effect: approx. 6 - 7% increase of scope compared to current trading period

ETS 2013-2020 – allocation

principles:

• Harmonised allocation rules to ensure a level playing field across the EU: – No distortion of competition – Fully equal treatment within sectors across EU

• Auctioning as the general rule, with transitional free allocation up to 2020

• In terms of allocation rules, three categories of operators: – No free allocations (i.e. full auctioning) – Partial free allocation (no carbon leakage)

– Up to 100% free allocation (carbon leakage – based on benchmarks)

ETS 2013-2020 – auctioning:

• Basic long-term principle for allocation: – Eliminates ‘windfall’ profits – Simplest and most transparent allocation system – Level playing field for new entrants and incumbents

• Auctioning on the basis of harmonised rules: – Transparency and non-discrimination – Full access for SMEs

• Full auctioning for sectors able to pass on costs: – Power sector, except CHP and district heating (except agreed

derogations)

• Revenues to accrue to Member States, with 50% used to address climate change and its effects

ETS 2013-2020 – strengthened

MRV:

• Monitoring and Reporting Regulation • Replaced earlier guidelines

• Verification and Accreditation Regulation – New EU-wide rules replacing regulation on MS level

• Harmonised €100 penalty for non-compliance – requirement to surrender allowances remains

• Single Union registry – MS responsible for operations on MS level

EU ETS Structure

Verifiers

Verification

Operators

Allocation

Permits

Reporting, surrender allowances

Inspections, sanctions

European Union

Legislation

Legislation

EU Member State

Competent Authority

Source: NEA (NL)

source: NEA (NL)

ETS Permit

- Mandatory for operators covered by EU-ETS

- No information about actual emissions or allowances

- Most important element: monitoring plan

Monitoring plan

- Description of monitoring methodology

- Approval before GHG is emitted

- Installation specific application of monitoring requirements

- Operator responsible for content

- Basis for reporting, verification and inspection

General monitoring principles

- All emissions within an installation included (except mobile sources and waste incineration)

- “A tonne must be a tonne”

- Completeness

- Consistency, comparability, transparency

- Accuracy

- Integrity of methodology

- Continuous improvement

- Cost-effectiveness

Monitoring Plan supporting documents

- Uncertainty assessment

- Risk assessment

- Sampling plan formally approved

All must be checked before issuance of permit

Measurement based approach

• Mandatory for N2O-emissions (and CCS)

• Determination of hourly emissions: Σ GHGconcentration [g/Nm3] * Flue gas flow [Nm3]

• Uncertainty requirement for annual average concentration, in principle 2,5 %

• In practice: only relevant if calculation is impossible

• Very rarely applied in NL

Calculation based approach

• Standard methodology (combustion): • CO2-emissions (t) = amount * LHV * EF * OF

• LHV = Lower Heating Value (energy content, e.g. TJ/Nm3)

• EF = Emission factor (e.g. Tonne CO2/TJ)

• OF = Oxidation factor (fraction which is oxidised)

• Specific methodologies for process emissions

• Mass balance approach For all incoming and outgoing fuels/material/products:

• Carbon (t) = amount * carbon content

• CO2-emissions (t) = carbon * 3,664

Relevant for activities where products contain CO2 from input, e.g. steel

production, chemicals

Data management and control

Step 1 • Collection of primary input data • Risk: measurement device out of order

Step 2 • Registration of primary input data • Risk: data is not registered

Step 3 • Registration of primary input data in emissions report • Risk: data are incorrect

Regular maintenance and control

Back up facilities, regular control

Control & corrective actions

Verifier

• Legal entity/person accredited by a National Accred. Body

• Contracted by the operator

Role of verifier

• Check implementation of monitoring plan

• Check data in emissions report

Verification statement (for NEa)

Management letter for the operator

Verification

Verification principles Objective: ensure that data are monitored and reported according to the MRR (validated MP)

• Reliability: correct and free from material misstatements

• Independence: from operator and CA

• Professional scepticism

• Reasonable level of assurance

• Materiality

• Scope of verification

Verification process Strategic analysis

Risk analysis

Verification plan

Process analysis (actual verification)

Addressing misstatements and non-conformities

Internal verification Documentation

Drafting the Verification report

Independent review

Issuing verification report

Verifiers Requirements

• Competence process

• Impartiality and independence

• Other issues

Accreditation

• Competences of verifiers

• Verifications performed in line with AVR

MRV

• more information on

• http://ec.europa.eu/clima/policies/ets/monitoring/index_en.htm

Thank you

contact us on:

Info@climaeast.eu