The EU Emissions Trading Scheme Dr Marzena Chodor, Clima East Key Expert Kishniev, 22 July 2015
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