The EU Emissions

Trading Scheme- EU

ETS

Presentation by Yvon Slingenberg

Head of Unit

Implementation of the EU Emission Trading

System

This Presentation

The EU ETS:

Part 1: an essential part of a wider package of climate and energy policies

Part 2: emissions reductions and improvements to the system

Part 3: building block of the international carbon market

1. The EU ETS: an essential part of a wider package of climate and energy policies

EU ETS basics

Mandatory system in place since January 2005

Environmental outcome guaranteed: cap on emissions from ~11,500 energy-intensive installations across EU

Covering around 50% of EU CO2 emissions

Direct: regulated at source of pollution

Simple market system- no price intervention

5

EU ETS : cap and trade

Operators must report verified emissions each year & hand in 1 emission allowance for each tonne of CO2 emitted

A mandatory cap on the number of allowances for all installations covered by the system (sum of 27 MS caps)

Emission allowances can be traded (so no cap per installation)

Carbon price: long term incentive to reduce emissions

Cost-effective: reductions take place where cheapest

EU ETS part of a larger Climate & Energy Policy

Package

Carbon capture and storage Directive

CO2&cars

Renewable Energy Directive

Fuel Quality Directive

-20% / -30% wrt 1990 levels by 2020

technology specific &

product policies

cross-sectoral

targets & instrumentslarge industrial installations & aviation

“small emitters”

EU ETS

Effort SharingDecision

From 2013

GHG Target by 2020:

-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%

Scope and timing

Three-year learning-by-doing phase from 2005-7, including power, heat and steam generation, oil refineries, iron and steel, pulp and paper, buildings materials (cement etc.)

Five-year “Kyoto” phase from 2008-12, with tighter caps and established infrastructure

Coverage of aviation from January 2012 (all departing flights, and incoming except where measures by departure country recognised as equivalent)

EU ETS revision applicable from 2013 onwards, inclusion of more sectors (Aluminium, basic chemicals) and gases (eg PFC, N20)

2. The EU ETS is working and improving: lessons for better systems

EU ETS putting a price on carbon and reducing

emissions

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 20102 verified emissions data, European Commission

EU ETS emissions reductions

2005-2007 -2% to -5% emissions reductions due to ETS (Ellerman et al)

-13.74% 2007-2009Point Carbon Surveys

In 2006 5% of participants took future cost of carbon into account for investment

By 2007 this had risen to 65%By 2010, long term carbon price a decisive factor for

new investments for 47% (61% for large polluters). 54% say ‘EU ETS has already caused emissions reductions in my company’

Revised EU ETS: 2013-2020 phase & beyond

EU-wide cap fixed in law up to 2020 and beyond (linear trajectory)

Auctioning becoming default over time More than 50% of allowances auctioned

Political commitment to use 50% revenues to tackle climate change

Level playing field within EU, auctioning rights linked to costs/GDP

EU-harmonised ex-ante benchmarks for all free allocation, based on 10% top performers

-20%

2083 Mt/yr

Gradient: -1.74%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

EU-wide cap from 2013, more certainty into the future

Starting point: 1974 Mt in 2013

1720 Mt

Linear factor to be reviewed by 2025 Aviation to be included; will change figures correspondingly, but cap not reduced Disclaimer: all figures are provisional and do not account for new sectors in third period

Environmental effectiveness and competiveness

• The best solution for environment and competitiveness is countries taking action under a global agreement

• However transitional solutions exist via domestic policy:• Emissions trading is itself a least cost way to meet

emissions reduction targets• Use of international offsets for cost containment• Free allocation of allowances instead of auctioning

Allocation and carbon leakage

Free allocation given in 2005-7 and largely in 2008-12 periods, rules decided by MS

Independent ex post analysis1 for 2005-2007 detects no statistical evidence of delocation due to ETS

In revision to EU ETS, move to harmonised EU-wide allocation with revised approach (benchmarks)

1 Ellerman et al ‘Pricing Carbon’

EU-wide rules for free allocation

In terms of allocation rules, three categories of operators: No free allocation: power sector (except for heat) Partial free allocation: industry 100% free allocation of benchmark: industry exposed to risk

of carbon leakage

Phasing out free allocation for sectors not exposed to risk of carbon leakage: 80% of benchmark in 2013

30% of benchmark by 2020

With a view to reaching full auctioning in 2027

Benchmark: average performance of 10% most efficient installations in a

(sub-)sector

G3 aluminium

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

installations

kg

CO

2/

t p

rod

uc

t

Benchmark

Addressing differences in development

From 2013, no free allocation for power production, following windfall profits => large auctioning revenues. Possibly € 30 billion per year (depending on C price)

Auctioning allows redistribution based on level of development:88% of auction rights distributed according to

Member States’ emission shares12% distributed to new member states for purpose

of solidarity and growth

Option of transitional free allowances in power sector

10 new Member States qualify: maximum 14% of EU power generation

Existing installations onlyConditional on national plan to modernise energy

infrastructure, clean technologies, diversification of energy mix

Total amount in 2013: maximum 70% of 2005-2007 verified emissions, decrease to zero in 2020

Individual allocation based on 2005-2007 verified emissions or benchmark

Applications by Member States by September 2011, Commission can reject within 6 months

Auction Revenue Benefits

Several billion dollars for carbon capture and storage and renewables projects (using 300 million allowances set aside from the EU ETS new entrants reserve)

50% of EU ETS auction revenues should be invested to tackle climate change and shift to low-emission technologies

3. The EU ETS: building block of the international carbon market

A robust international carbon market

In parallel to and supporting the UN process

To get as close as possible to an international price for carbon

A robust market:provides incentives for more ambitious

action in developing countries is an important source of climate finance for

developing countries

23

Building a robust international carbon market

Through bottom up linking of cap and trade systems in developed countries

Inclusion of advanced developing countries and competitive sectors by 2020

Reform of Clean Development Mechanism (CDM), focus CDM on Least Developed Countries (LDCs), replacement over time by a more ambitious sectoral mechanism for advanced developing economies and sectors

Sectoral crediting as a stepping stone to ETS Addressing surplus AAUs

Need to address surplus AAUs

A virtual international market for 2008 to 2012

suffers from a serious imbalance: supply (of AAUs) by far exceeds demand

Large scale AAU sales (government to

government) can affect European carbon price

A solution to surplus AAUs is needed