Revision of the EU Emissions Trading System Thomas Bernheim Policy Officer DG Environment European Commission

Objectives of EU ETS review  Cost-effective contribution to -20% GHG target for 2020, or to stricter target under international climate agreement  Improvement of the EU ETS based on experience  A clear long-term carbon price

Overview  Scope  Cap setting  Allocation methods including EII  Redistribution of auctioning rights  Use of credits  Monitoring, reporting, verification

Scope

Streamlining the scope of the EU ETS  Environmentally, no difference between emissions from combustion and processes, therefore not treated separately  Codifying broad interpretation of combustion installation by –Explicit definition of combustion installation –Listing some activities explicity for further clarification  Legal certainty and level playing field

New sectors and gases - Principles  Enhancing environmental effectiveness and reducing competitive distortions  General consideration: attaching a price to carbon  Additional criteria for inclusion: –Significance of the source –Feasibility to monitor emissions –Proportionality of transaction costs –Interaction with existing policies and regulation –Compliance costs

New sectors and gases – included from 2013 onwards  CO2 emissions from petrochemicals production, ammonia and other chemicals including process emissions  CO2 and PFC emissions from the production of aluminium  N2O emissions from the production of nitric, adipic and glyoxal and glyocylic acid production  Carbon capture and storage –Not exactly emissions, but widening the scope

Small installations  Improving cost-effectiveness of small installations  Opt-out of installations on condition that –less than 25 MW –less than tonnes CO2 per year –Equivalent measures to reduce GHG at national level –Monitoring arrangements are in place  Opt-out granted through –Application by Member States –Tacit consent of the Commission after 6 months  Aggregation clause

Summary of scope effects MtCO2 In % of NAP2 No of installations Extended scope Streamlining – 2.5n.a. New sectors and gases Up to 97Up to 4.6 n.a. Potentially excluded installations Up to 5000 Net effect – 6.3

Cap setting

 New: single EU-wide cap instead of 27 caps set by Member States  CO 2 allowances available in 2020: 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 stricter target  Aviation to be included in line with political agreement

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 method including EII

Allocation principles  Harmonised allocation rules ensure level playing field across the EU: –No distortion of competition  Auctioning as the rule with free allocation for a transitional period  In terms of allocation rules, 3 categories of operators: –No free allocation (i.e. full auctioning) (category 1) –Partial free allocation (category 2) –Up to 100% free allocation (category 3)

Category 1: 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 (category 1):  –Power sector –Exemption: heat produced through high efficiency cogeneration with a view to avoiding distortions of competition  Auctioning on the basis of harmonised rules ensuring –Transparency and non-discrimination –Full access for SMEs

Category 2: Free allocation as a transitional measure  All industrial installations not falling under category 3 (see below)  Maximum amount to be allocated for free: –Incumbents: share of VE corresponds to share of cap –New sectors: must not exceed VE  Community-wide rules (benchmarks) 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  Partial free allocation to industry as a transitional measure: –80% of allocations determined in accordance with Community-wide rules for free in 2013 –Yearly reduction –Phased out by 2020

Category 3: full free allocation  Installations in sectors which are exposed to a significant risk of carbon leakage  Up to 100% free allocation  Number of allowances determined by Community-wide rules  Sectors determined in 2010 taking into account ability to pass on costs without losing market share to non-EU competitors –particularly vulnerable to international competition (‘carbon leakage’)  Further criteria: –Increase in production costs through auctioning –Potential to reduce emission levels (most efficient techniques) –Market structure, product market, exposure to international competition –Effect of climate change and energy policies

Review in 2011: further measures  2011: situation of exposed energy intensive industries (category 3) to be reviewed  European Commission to submit an analytical report –in the light of international developments –Following consultations with all relevant social partners  Report to be accompanied by any appropriate proposals: –Adjusting free allocation –Introducing system to neutralise distortive effects („importers“) –Binding sectoral agreements have to be taken into account  Conformity with principles of UNFCCC and WTO

Use of auctioning revenues  At least 20% of auction revenues should be used to –Reduce GHG emissions –Adapt to the impacts of climate change –Fund research and development for reducing emissions and adaptation –Develop RES to meet the EU‘s 20% target –Increase energy efficiency by 20% –CCS –Deforestation –Social aspects –Administrative expenses of the ETS management  Measures to be notified (monitoring)

Redistribution of auctioning rights

Re-distribution of auctioning rights  Wide range of different economic situations in Member States  Different treatment of Member States under the Community system is inappropriate, in order to eliminate distortions and to ensure highest possible degree of efficiency  Only different treatment that is possible is the share that each Member State can auction from the overall auctioning cap

Underlying principles of distribution of auctioning rights  Auctioning principle –90% of the auctioning CAP is distributed according to the MS share of 2005 Verified Emissions –10% distributed to Member States that have a GDP per capita below 120% of EU average –This distribution takes into account GDP per capita and expected growth rates

Basic ruleDistribution 10%Total auctioning 90% x cap x 2005 ETS share Increase on top of 90% % x cap x 2005 ETS share abc = a x (1 + b) Italy90%2%92% Spain90%13%102% Portugal90%16%104% Greece90%17%105% Cyprus90%20%108% Slovenia90%20%108% Malta90%23%111% Hungary90%28%115% Czech Rep.90%31%118% Poland90%39%125% Slovakia90%41%127% Estonia90%42%128% Lithoania90%46%131% Bulgaria90%53%138% Romania90%53%138% Latvia90%56%140%

Distribution of auctioning rights  Rich Member States receive 90% of proportional auctioning cap  Member States close to EU GDP/Capita average, receive around 100% of proportional auctioning cap  Poor Member States receive more than 100% of proportional auctioning cap  Three exceptions to this auctioning distribution rule: –Three member states are projected to have high direct costs when implementing the package, even taking into account full access to renewables trade and access to JI/CDM. –Direct costs in Belgium, Luxemburg and Sweden are projected to be above 0.7% of GDP –Therefore Belgium, Luxemburg and Sweden receive 10% more auctioning rights on top of the 90% basic rule

Direct costs package Cost efficient achievement RES and GHG + targets Non- ETS redistributed + right to auction redistributed + access to JI/CDM (≤ 30 €) + targets RES distributed and trading of GOs EU270,580,61 0,45 AT0,660,860,820,580,34 BE0,760,830,930,690,70 BG2,161,09-0,350,14-1,25 CY0,090,08-0,04-0,030,07 CZ1,120,490,030,20-0,51 DK0,290,570,500,220,11 EE1,591,090,410,58-0,53 FI0,470,530,560,520,22 FR0,39 0,370,320,47 DE0,570,470,600,490,57 EL0,970,740,530,600,59 HU1,220,460,290,36-0,40 IE0,470,610,630,470,45

Cost efficient achievement RES and GHG + targets Non- ETS redistributed + right to auction redistributed + access to JI/CDM (≤ 30 €) + targets RES distributed and trading of GOs IT0,490,991,050,510,66 LV1,101,601,500,88-0,18 LT1,020,520,360,43-0,72 LU0,540,890,910,590,70 MT0,310,17-0,36-0,210,00 NL0,280,340,430,280,32 PL1,240,480,320,380,02 PT0,870,480,540,570,51 RO0,950,370,29 0,04 SK1,170,790,740,600,26 SI0,861,110,860,470,53 ES0,701,201,080,620,42 SE0,660,690,700,740,78 UK0,490,36 0,340,41 Direct costs package

The international dimension of the EU ETS  EU to lead negotiations of ambitious international agreement  Overall objective: limiting global warming to 2° C above pre-industrial level  Requires contribution from developed and major emitting developing countries  Need to provide incentives to join an ambitious international agreement  Possible to link EU ETS not only to other national emission trading systems, but also to sub-federal and regional systems

Use of credits

Credits in the 2 nd trading period and their possible impact on 3 rd trading period  Allowed use of JI/CDM in second trading period: –NAP 2 allocations 5.7% below 2005 VE, but access to credits up to 13.5% of Phase 2 cap (1.4 bn t CO2) –Theoretically, EU emissions could be 7.8% above 2005 levels –Potential loss of credits not used in Phase 2  Reasons for limiting use of credits in phase 3 if there is no international agreement: –Without international agreement, no incentives for investment in low carbon technologies –No incentives to increase energy efficiency –RES target very expensive

Credits in the 3 rd trading period  Absence of an international agreement: –Credits from can also be used from corresponding to one third of reduction effort over the period –Certainty for operators: credits imported in can be used until 2020 Credits from projects launched before 2013 can be used –Other credits to be used may emerge from Agreements concluded with third countries New projects in LDC  Total amount of credits (1.4 Bt) must not be exceeded More than one third of reduction effort can be met by credits from

Credits and an international agreement  Access to credits will be automatically increased by one half of the additional reduction effort  Example: cap reduced by 200 Mt would mean an additional import of 100 Mt in the form of credits  This provides an incentive to join international agreement, in order to benefit more from higher levels of credits

Monitoring, reporting, verification

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)  This will enhance reliability and thus international credibility of the EU ETS  Non-compliance penalties (€100/ton CO 2 ) to increase by inflation rate to keep deterrent effect

Conclusions EU ETS  Emission reduction objectives of the Community require most efficient approach  A more harmonised EU ETS can exploit the benefits of emissions trading to the full  The proposal –ensures significant contribution by ETS to overall targets –provides a predictable and reliable long-term perspective for industry to take the necessary investment decisions –is sufficiently simple to be attractive for other countries to join –credibly underlines EU leadership