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