Lessons learned from EU Emissions Trading Scheme (ETS) Dina Kruger Director, Climate Change Division Office of Atmospheric Programs U.S. Environmental.

Lessons learned from EU Emissions Trading Scheme (ETS)

Dina KrugerDirector, Climate Change DivisionOffice of Atmospheric ProgramsU.S. Environmental Protection Agency

NARUC WINTER MEETINGJoint ERE-Electricity Committee SessionFebruary 19, 2008

2

Overview

• Background on EU Climate Policy• EU Emission Trading Scheme (ETS)• Lessons learned from “Trial period” of ETS• Looking forward

3

European Union (EU)

• Within EU– 27 Member states– 23 countries have Kyoto

targets as “Annex B” parties, Malta and Cyprus do not have targets

• Original 15 EU Member States have– Collective Kyoto target of

(8% below 1990 levels), but – Differentiated

responsibilities under the EU Burden Sharing Agreement

4

Emissions and GDP in 2005

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005

Mill

ion

met

ric

tons

CO2e

EU-27

United States

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2005

Billion

s of

US

dol

lars

EU-27

United States

EU emissions are 40% below US emissions while GDP is about 10% higher than US GDP

5

EU Burden Sharing Agreement

6

EU Climate Change Policy

• EU is using a portfolio of policies to meet goal across all sectors through the EU Climate Change Program (ECCP)– Cross-cutting cap and trade – Regulation– Incentives – Voluntary approaches

• Updated goals and binding measures for ECCP portfolio announced January 23, 2008:– Energy supply measures: increase share of renewable energy to 20% by 2020– Energy demand measures: 20% reduction in energy consumption through energy efficiency– Transportation, buildings, agriculture: reduce emissions 10% below 2005 levels

• Commitments by car makers to reduce CO2 emissions rate from new passenger cars by 25% below 1995 levels by 2008/2009• Increase share of sustainable biofuels to 10% of overall petrol and diesel consumption

– Improved EU ETS

Source: Point Carbon, European Climate Change Program, http://ec.europa.eu/environment/climat/eccp.htm

Overall EU Goal: Reducing its overall emissions to at least 20% below 1990 levels by 2020

7

EU Emissions Trading Scheme (ETS)

• EU ETS currently addresses nearly 50% of all CO2 emissions (~40% of total annual GHG emissions)

• EU Directive currently outlines provisions for initial trading periods

1. “Trial” period (2005-2007)2. First commitment period (2008-2012)

• Proposed amendment for third period (2013-2020) with commitment for subsequent phases

8

EU Emissions Trading Scheme (ETS)

• 2005-2007: Trial Period– Cap: set by member states, 2.2 billion allowances issued annually– Covers only CO2 emissions– Coverage: combustion and process emissions from electricity generation and

selected industries• Energy activities, mineral oil refineries, coke ovens (installations with “rated

thermal input” ≥ 20 MW)• Production and processing of ferrous metals • Minerals industry (includes cement, glass, ceramics, lime)• Pulp and paper production

– Point of regulation• Downstream

– Allocation Approaches• 95% of allowances must be allocated freely, 5% can be auctioned

– Compliance and penalties • Penalties 1st period = €40/excess ton CO2

• 2008-2012: Kyoto Commitment Period – Cap: set by member states, 2.083 billion allowances annually– Also covers only CO2. but other gases are opt-ins– Allocation Approaches

• 90% of allowances must be allocated freely, 10% can be auctioned– Compliance and penalties

• Penalties 2nd period = €100/excess ton CO2

• Use of Kyoto mechanisms (% of CDM credits allowed to be set by member states)– qualitative limitations – no nuclear and sinks credits– quantitative limitations – in phase 2 credit import is limited to 10% of the Member

state’s total allowances

9

Prices and Volumes

General factors contributing to price volatility:• Fuel prices• Weather• Policy developments

10

Evaluating Emissions Trading

• Does it meet the environmental goal?– Are caps achieved?– Is monitoring accurate?

• Does the market work efficiently?– Sufficient sources for a liquid market?– Long-term certainty for investment planning?

• Is it a workable program administratively?

11

“Trial” Period Design and Implementation Lessons

• Lesson 1: Need high quality emissions data to set environmental goals– Phase 1 caps based on limited data– Phase 2 caps take advantage of better data– Complementary policies needed for non-capped sectors

• Lesson 2: Consistency and predictability are important– Large variability in allocation method among member states– Failure to credit plant shutdowns creates perverse incentives

• Lesson 3: Keep scope manageable and consider contribution to emissions– Inclusive of largest emitters and sufficient sources for trading, but– Large number of small installations included

• ~36% of total installations, responsible for ~ 0.7% of emissions• 7.5% of total installations, responsible for ~60% of emissions

– Third phase of ETS will allow small installations < 25MW and emitting <10,000 tons to opt out

12

• Lesson 4: Need to have flexibility and provide long term-certainty– Sources did not have temporal flexibility due to lack of banking

between phases– Phase 3: Trading extended to (2013-2020) for long-term investment

certainty– Banking will be allowed between Phase 2 and 3

• Lesson 5: Program implementation should be efficient – Infrastructure for transfer of CDM credits not in place– Monitoring protocols clear, but not all reporting is electronic– Initial release of monitoring data not coordinated– Role of third-party verifiers affects timing of data submissions

• Lesson 6: Transparency is important for credibility– Functioning registry system to track allowances and ownership, but

allowance transfers are not public data– Annual reporting (quarterly reporting in U.S.)

EU ETS is looking to harmonize program design across all participating countries…

“Trial” Period Design and Implementation Lessons

13

EU Climate Policy Looking Forward

• Further improvements to EU ETS– Single EU-wide cap instead of 27 national caps

• Average 1.846 billion metric tons CO2/year– Increasing share of auctioning (full auctioning of power sector allowances in

2013)– Community-wide new entrant reserve (5% of cap)– Expanding to include other sectors and gases

• Aviation • Aluminum (PFCs) and Chemicals (N2O)• Recognize carbon capture and storage (CCS)

– Domestic Offsets?

– Linking• Phase 2: Norway, Iceland, and Liechtenstein • International Carbon Action Partnership (ICAP)

– Discussions with the Northeast Regional Greenhouse Gas Initiative (RGGI), California, Australia, New Zealand and Canadian Provinces

• With global agreement, EU will commit to 30% below 1990 levels by 2020

14

For more information

• Point Carbon: www.pointcarbon.com• Caisse desDepots: http://www.caissedesdepots.fr/• EU ETS: http://ec.europa.eu/environment/climat/emission.htm

Thank you!

Dina KrugerDirector, Climate Change DivisionOffice of Atmospheric Programs

[email protected]/climatechange