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									   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      In % of       No of
                                NAP2     installations
Extended scope
     Streamlining     40-50    2 – 2.5            n.a.
     New sectors    Up to 97    Up to             n.a.
     and gases                     4.6
Potentially             - 16      -0.8   Up to 5000
excluded
installations
Net effect          121-131 5.8 – 6.3
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




               2.000




               1.500
Mio t CO2 eq




               1.000    1.974       1.937       1.901         1.865          1.829          1.792       1.756      1.720




                500




                  0
                        2013        2014        2015          2016           2017           2018        2019        2020

                                                                      year

                                                            Allowances       reduction




                Figures based on
                                                                       •     To be adjusted for:
                   –   NAP 2 decisions of the Commission
                                                                              –      Opt-ins in Phase 2
                   –   ETS scope as applicable 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 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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