European Union Emission Trading Scheme

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The European Union Emission Trading Scheme (EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world and is a main pillar of EU climate policy.

Under the scheme, each participating country has a National Allocation Plan (NAP) specifying caps on greenhouse gas emissions for individual power plants and other large point sources. Each facility gets a maximum amount of emission "allowances" for a particular period (e.g. 2005-2007). To comply, facilities can either reduce their emissions or purchase allowances from facilities with an excess of allowances. Progressively tightening caps are foreseen for each new period, forcing overall reductions in emissions.

Contents

[edit] Allocation

For each phase of the EU ETS each Member State must propose a NAP which is submitted to the EU Commission for acceptance. The Commission then decides if the NAP fulfills the 12 criteria set out in the Annex III of the Emission Trading Directive (EU Directive 2003/87/EC). The first and foremost criterion is that the proposed total quantity is in line with a Member State's Kyoto target. Of course, the Member State's plan can and should also take account of emission levels in other sectors not covered by the EU ETS. For instance, transport is responsible for 21% of EU greenhouse gas emissions, households and small businesses for 17% and agriculture for 10%[1].

[edit] Launch

The scheme, in which all 27 member states of the European Union participate, commenced operation on 1 January 2005. In its first year, 362 million tonnes of CO2 were traded on the market for a sum of €7.2 billion. [2] The price of allowances increased more or less steadily to its peak level in April 2006 of ca. €30 per tonne CO2 [3], but came crashing down in May 2006 to under €10/ton when it became clear that many countries had given their industries such generous emission caps that there was no need for them to reduce emissions. Lack of confidence in allocations under the first phase of the scheme continued through 2006 resulting in a trading price of €1.2 a tonne in March 2007. Consequently, NGO's have accused national governments of abusing the system under industry pressure, and have urged for far stricter caps in the second phase (2008-2012). [4]

[edit] Phase I

In the first phase (2005-2007), the EU ETS includes some 12,000 installations, representing approximately 45% of EU CO2 emissions, covering energy activities (combustion installations with a rated thermal input exceeding 20 MW, mineral oil refineries, coke ovens), production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp, paper and board activities.

[edit] Phase II

The second phase (2008-12) expands the scope significantly:

  • All greenhouse gases, and not only CO2 will be included.
  • CDM and JI credits are expected to be introduced in second phase through the 'Linking Directive'.[5]
  • Aviation emissions will likely be included [6].
  • Four non-EU members, Norway, Iceland, Liechtenstein, and Switzerland, are also expected to join the scheme. [7]

The inclusion of aviation is a move considered important due to the large and rapidly growing emissions of the sector. The inclusion of aviation is estimated to lead to an increase in demand of allowances of about 10-12 million tonnes of CO2 per year in phase two. This in turn is expected to lead to an increased use of JI credits from projects in Russia and Ukraine, which would offset the increase in prices and eventually result in no discernible impact on average annual CO2 prices.[8].

Ultimately, the Commission wishes the post-2012 ETS to include all greenhouse gases and all sectors, including aviation, maritime transport and forestry [9]. For the transport sector, the large number of individual users adds complexities, but could be implemented either as a cap-and-trade system for fuel suppliers or a baseline-and-credit system for car manufacturers[10].

The National Allocation Plans for Phase II, the first of which were announced on November 29, 2006, will result in an average cut of nearly 7% below the 2005 emission levels [11]. The annual Member State CO2 allowances in million tonnes allowances are:

Member State 1st period cap 2005 verified emissions Proposed cap 2008-2012 Cap allowed 2008-2012
Flag of Austria Austria 33.0 33.4 32.8 30.7
Flag of Belgium Belgium 62.08 55.58 † 63.33 58.5
Flag of Czech Republic Czech Republic 97.6 82.5 101.9 86.8
Flag of France France 156.5 131.3 132.8 132.8
Flag of Germany Germany 499 474 482 453.1
Flag of Greece Greece 74.4 71.3 75.5 69.1
Flag of Republic of Ireland Ireland 22.3 22.4 22.6 21.15
Flag of Latvia Latvia 4.6 2.9 7.7 3.3
Flag of Lithuania Lithuania 12.3 6.6 16.6 8.8
Flag of Luxembourg Luxembourg 3.4 2.6 3.95 2.7
Flag of Malta Malta 2.9 1.98 2.96 2.1
Flag of Netherlands Netherlands 95.3 80.35 †† 90.4 85.8
Flag of Poland Poland 239.1 203.1 284.6 208.5
Flag of Slovakia Slovakia 30.5 25.2 41.3 30.9
Flag of Slovenia Slovenia 8.8 8.7 8.3 8.3
Flag of Spain Spain 174.4 182.9 152.7 152.3
Flag of Sweden Sweden 22.9 19.3 25.2 22.8
Flag of United Kingdom United Kingdom 245.3 242.4 ††† 246.2 246.2
Source: EU press release IP/07/459: "Emissions trading: Commission adopts decision on Austria's national allocation plan for 2008-2012" 02/04/2007,[12]

Additional installations and emissions included in the second trading period are not included in this table.

*† Including installations opted out in 2005.
*†† Verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 6 Mt.
*††† Verified emissions for 2005 do not include installations opted out in 2005 which will be covered in 2008 and 2012 and are estimated to amount to some 30 Mt.

The European Commission has started infringement proceedings against Austria, Czech Republic, Denmark, Hungary, Italy and Spain, for failure to submit their proposed National Allocation Plans.

[edit] Overall emission reductions

The environmental effectiveness of the scheme rests on the tightness of the caps. So far, Phase 1 is widely believed to be overallocated ('long' allowances in the technical jargon), implying that no overall emission reductions have been achieved. However, the first phase isn't over and any analysis of the overall emission reductions is therefore preliminary.

Phase I

In 2004, Ecofys analysed the then available preliminary NAPs of all EU countries[13]. The information suggested that the caps for Phase I were lenient; in most countries, the power sector would not need to reduce CO2 emissions as much as the country as a whole, in other words the other sectors must make more ambitious emission reductions than the power sector under the scheme. More strikingly, a few countries (such as the Netherlands) gave more allowances than Ecofys estimated to be needed under a business-as-usual scenario, implying that no 'real' efforts to reduce emissions would be required. In their analysis of the Phase I NAPs, the NGO Climate Action Network called the caps a 'major disappointment'[14], arguing that only two (UK and Germany) of the 25 EU states asked the participating industry sectors to reduce emissions compared to historic levels and found that in the 15 old EU member states as a whole, allocations were 4.3% higher than the base year. In May 2006, when several countries revealed registries indicating that their industries had been allocated more allowances than they could use, trading prices crashed from about €30/ton to €10/ton, and have (after an initial slight recovery) declined further to €4 in January 2007 [15] and below €1 in February 2007.

Phase II

In 2006, Ecofys performed an initial assessment of NAPs for phase II, using the proposed but not-yet-approved NAPs [16]. They found that most member states did not have sufficiently strict caps, and that they be insufficient in assisting the members in meeting their Kyoto targets. They also compared caps with official business-as-usual (BAU) projections and with independent BAU projections to assess stringency of caps. They concluded that the caps were 7% under official BAU but (except for Portugal, Spain, and UK) the proposed cap was "higher" than the independently estimated BAU, suggesting overallocation.

Partly in response to this, the Commission cut eleven of the first twelve Phase II plans it reviewed (accepting only the U.K.'s plan without revision). The commission tightened the caps some 7%[17], also corresponding with 7 per cent below the 2005 emissions. However, as of January 2007, not all plans have been finalized.

[edit] Allocation

Most allowances in all countries were given freely (known as grandfathering). This approach has been criticized as being less efficient than auctioning and providing too little incentive for installing clean, renewable energy[18],[19].

[edit] The inclusion of sinks

Currently, the EU does not allow CO2 credits under ETS to be obtained from sinks (e.g. reducing CO2 by planting trees). However, some governments and industry representatives lobby for their inclusion. The inclusion is currently opposed by NGO's as well as the EU commission itself, arguing that sinks are surrounded by too many scientific uncertainties over their permanence and that they have inferior long-term contribution to climate change compared to reducing emissions from industrial sources[20].

[edit] See also

Portal:energy
 energy Portal

[edit] External links

Official pages

How ETS works

  • UK Defra General overview at the UK Department for Environment, Food and Rural Affairs

Key reports, and assessments

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