European Commission

1
Europe Emission Trading Presentation to ICAO
Council, November 2006

• European Commission

2
Overview

• What emission trading is
• EUs EmissionTrading Scheme (EU ETS)
• How it works
• What it covers
• What it has achieved, etc
• Relation to the global carbon market
• Significance of aviation emissions
• Approach to including aviation in the EU ETS
• Legislative process in the EU

3
What is emission trading?

• A market-based policy instrument allowing
  greenhouse gas producers to reduce their
  emissions at minimum cost
• ET schemes available only within a single sector
  are closed those involving trade with other
  sectors are open
• The EU ETS is an open scheme the objective is to
  make it global

4
The EU Emission Trading Scheme (ETS)

• Trading began on 1 January 2005
• Currently covers CO2 emissions from the most
  energy intensive sectors. Therefore covers almost
  half of total EU CO2 emissions
• Most of the rest is subject to control by either
  regulation or taxation
• The scheme may in the future be extended to other
  GHG gases and other sectors. This is under
  review.
• Step on the way to a global carbon market it is
  already linked to over 160 countries through
  Kyoto project mechanisms

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How does the EU ETS work? (1)

• It sets an overall limit on total emissions and
  distributes to companies emission allowances
  related to this limit allowances have to cover
  real emissions
• Allowances are handed out for free, but Member
  States can auction up to 10
• Participants buy, sell or bank allowances
  depending on how their costs of reducing
  emissions compare with those of other
  participants
• Collectively, individual decisions to buy, sell
  or bank lead to a market price for allowances
  which signals the cost per tonne of emissions
  reductions of achieving the limit

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How does the EU ETS work? (2)

• Participants will reduce emissions if the cost of
  making a reduction is less than the market price.
  Any spare allowances can be sold for a profit.
  Ie. there is a financial incentive for companies
  to reduce their emissions below the cap, which
  does not exist in other mechanisms
• Participants will prefer not to reduce emissions
  if the cost of making a reduction is more than
  the market price. Money is saved by purchasing
  allowances instead of being required to make a
  reduction.
• This flexibility saves money. This is why an
  emissions trading scheme is generally preferred
  by stakeholders over other policies and measures.

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What is the schemes legal basis?

• An EU Directive was adopted in 2003 establishing
  a scheme for greenhouse gas emission allowance
  trading (2003/87/EC)
• The legal base for the Directive is the Treaty of
  the European Communities
• The Directive is consistent with the UNFCCC and
  the Kyoto Protocol to that Convention, and aims
  to aid implementation of EC commitments under
  these international agreements.

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What does the current scheme cover ?

• Energy intensive industries
• More than 10,000 installations
• electricity generators
• heat steam production
• mineral oil refineries
• ferrous metals production processing
• cement, lime, glass, bricks and ceramics
• pulp paper sector

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How are emissions monitored?

• Companies
• monitor and report following harmonised rules
• emissions reports are subject to independent
  verification (by a third country)
• Member States
• have established electronic registries for
  tracking transfers of tradable allowances
• European Commission
• has established an electronic log for maintaining
  an overview of all electronic registries

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Can EU ETS be linked to others?

• Companies can also use Kyoto credits (CDM/JI)
  to cover their actual emissions
• A possibility to link the EU ETS with a third
  country scheme
• The Commission is holding informal discussions on
  emissions trading with California, north-eastern
  States of USA, States and Territories of
  Australia, New Zealand, Switzerland, EEA
  countries, Canada, Japan, Ukraine.

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What has the EU ETS achieved?

• It has established a key step towards a global
  carbon market
• In its first year, 2005, it was already worth
  7.2 billion. This was exceeded in just the 1st
  half of 2006 alone.
• In 2005, it was driving 1.9 billion being
  invested in developing countries eg. through the
  Clean Development Mechanism (CDM). This figure is
  set to increase in 2006.
• It has raised the interest of CEOs to reduce
  emissions / new financial and employment
  opportunities presented by the carbon market
• Transfer of clean technology to developing
  countries

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Global Carbon Market and the EU ETSVolumes and
Values

• Volumes Values 2005
• Total 799 Mt, 9.4 billion
• EU ETS 362 Mt, 7.2 billion
• CDM 397 Mt, 1.9 billion
• JI other 36 Mt, 147 million
• Source Point Carbon

• Volumes Values 1st half 06
• Total 684 Mt, 12 billion
• EU ETS 440 Mt, 9.9 billion
• CDM 193 Mt, 1.5 billion
• JI other 48 Mt, 304 million
• Source Point Carbon

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EU ETS Price Traded Volumes
EUA historical closing prices
EUA total volumes OTC and exchanges
Source Point Carbon
14
EU aviation emissions growing rapidly
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But growth in aviation emissions is a global
phenomenon, not a European problem

• GHG emissions from international aviation
  reported by Annex I Parties grew by 52 between
  1990 and 2004
• Latest UNFCCC data do not include data for
  non-Annex I countries, but emissions have
  generally also grown significantly in these
  countries
• All forecasts indicate significant emissions
  growth for decades to come unless action is taken

16
How do aviation GHG emissions compare to emission
from other ETS sectors?

• Source Verified 2005 emissions for ETS
  installations by category of installation (mio
  tonnes of CO2).

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Why emission trading for aviation?

• Europe decided this after
• considering results of ICAO/CAEP studies on
  market-based options
• sponsoring its own feasibility studies into three
  such options (fuel taxation, emission charges and
  emission trading)
• a public and stakeholder consultation
• an impact assessment of a range of other policy
  options as well as market-based options

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Why look at flights between EU and other
countries?

• They are the source of most aviation emissions
  currently
• They are forecast to be the source of most
  emissions growth in future

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Consistency with ICAO policy

• The current ICAO Resolution A35-5
• Endorses the further development of an open
  emissions trading scheme for international
  aviation and
• Requests the Council, in its further work on this
  subject to focus on two approachesUnder the
  other approach, ICAO would provide guidance for
  use by Contracting States, as appropriate, to
  incorporate emissions from international aviation
  into Contracting States emissions trading
  schemes consistent with the UNFCCC process. Under
  both approaches, the Council should ensure the
  guidelines address the structural and legal
  basis for aviations participation in an open
  emissions trading system, including key elements
  such as monitoring, reporting and compliance.

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The EUs legislative process

• Communication (2005) by the EU Commission,
  reactions from EU Council (Dec. 05) and EU
  Parliament (July 06)
• The Commission aims to present a legislative
  proposal to bring aviation into the scheme to the
  European Parliament Council by end of 2006
• The legislative process is expected to take 1-3
  years, and will determine the date of entry into
  force
• In parallel, Europe will continue to support ICAO
  efforts to facilitate wider action, incl.
  guidance on emission trading

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• For more information visit
• http//europa.eu.int/comm/environment/climat/
  
• aviation_en.htm