Allowance allocation in the EU ETS

1
Allowance allocation in the EU ETS

• IDDRI
• 16 October 2003
• Fiona Mullins
• Associate Fellow, Royal Institute of
  International Affairs

2
Structure of presentation

• Challenges of the allocation process
• Comparison of national approaches

3
EU Emissions Trading Scheme

• First period 2005-2007, second period 2008-2012
• Learning pre Kyoto
• Defines participants, gases and sources
• Defines processes
• methods and timing for monitoring, reporting,
  compliance processes
• registry form and function
• compliance timing and methods
• Defines penalties
• Defines regulatory basis (IPPC permitting)
• Defines unit of trade EU Allowance full
  transferability of EUAs within EU
• Defines some sort of linking JI, CDM, non-EU
  schemes

4
Allocation Challenges

• Number and complexity of decisions
• Tight timeframe
• Need for coordination on some issues
• Allocation defines environmental outcome and
  price
• Approx 5 billion tCO2 allocated over three years
  (2005-2007)
• Prices Euros 5 to 15 per tonne?

5
Number complexity of decisions

• Allocation and consultation processes
• Information and data required
• Banking, auctioning, pooling, opt out
• Closure and new entry
• Other policies, longer term considerations
• Lack of capacity, awareness and time

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Timing
Annex III guidance
Final NAPs
Monitoring registries guidance
Approved NAPs
Transposition (?)
Aug Sep Oct Nov Dec
Jan Feb Mar Apr May Jun Jul
2003
2004
Industry consultation
Issue permits
Aug Sep Oct Nov Dec
Jan Feb Mar Apr May Jun Jul
Aug Sep Oct Nov Dec
Jan Feb Mar Apr May Jun Jul
2005
2004
Issue 2005 EUA
Decide allocations
Surrender allowances
Aug Sep Oct Nov Dec
Jan Feb Mar Apr May Jun Jul
2006
2005
2006
2005
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Coordination needed/useful on

• Banking
• New entry closure
• Definition of installation
• Definition of allowance

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Allocation different levels
1
Size of the national pie Kyoto or national
2
EU ETS
transport
domestic
3
Elec
Iron/steel
Minerals
Paper
4
Installation 1
Installation 2
Installation 3
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General trends in allocation

• Total, top-down allocation
• Politics dictates Kyoto targets (or Kyoto plus)
• Sectoral, top-down allocation
• data and modelling constraints dictate
• modelling projections regulatory info
• Allocation to installations data constraints
  dictate
• Allocation (historic emissions /-
  adjustment) x correction factor
• Adjustments for CHP, early action, process
  industry expansion, performance against benchmark

10
Germany Top down

• Major controversy
• Inter-linked with prior policy commitments
• Will affect prices and environmental integrity of
  the EU ETS
• General principle
• Same reduction as for VAs 45mtCO2 pa by 2010
  (less approx10mt for non EU ETS industry)
• VAs provide the basis
• ie regulatory basis rather than projected
  emissions
• emissions for 2005-2007 can be calculated back
  (growth rate implied in VAs, fuel mix and energy
  efficiency assumptions)
• VAs do not specify targets for EU ETS industry
  sectors (or installations)
• Participation in VAs is as low as 50 in some
  sectors, close to 100 in others

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Germany bottom up

• Data constraints
• Wide range of options
• Base-year or base-period of emissions 2000-2002
• Different approach for process industries than
  for fuel combustion
• Grand-fathering alone (less x) possible for some
• Bench-marking likely where data available
  Additional allowances for any that beat benchmark
  eg CO2/kWh for base-period or BAT
• NO auctioning for first or second periods
• NO opt-out envisaged as limited to first period
• Set aside for new entrants

12
Netherlands Top-down

• Using official projection
• Approx 90mtCO2 (not including coal covenant and
  second LTA on energy efficiency)
• Precise portion of EU ETS industry cap relative
  to non EU ETS is being calculated
• Assumes 50 imported emission reductions to meet
  Kyoto target
• NO separate EU ETS sector constraint (?)

13
Netherlands bottom up

• Two main options
• Historic base-year or base-period (fall-back
  option) with some flexibility on choice of
  base-year possible
• Historic plus benchmark coefficient
• Many variations possible
• Benchmarks
• Available from LTAs but difficult to translate
  them to absolute CO2
• May use LTA benchmarks to reward more efficient
  installations with more allowances
• May use forecasts for major industrial companies
  to adjust allocation
• Allocation methods define share ie must add up to
  total

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Sweden top-down

• Flexmex Commission 2 proposal
• 24.3mt CO2
• Ceiling allows for projected emission increases
  and new entry
• EU ETS installations emit 19mt currently

Sector/activity mtCO2
Fuel combustion 10.8
Non-substitutable emissions plus forecast expansion 6.2 2.3
Statistical uncertainty 2
Capacity expansion 2
New entry (nearing completion now) 0.6
Total 23.4
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Sweden bottom up

• All installations have right to 1998-2001
  emissions level
• 4 yr avg (3 yr if special circumstances)
• Additional allowances allocated in priority
  order
• 1998-2001 emissions allocated to all
• Producers with non-substitutable emissions to
  allow for forecast production expansion
• New entry set aside (allocated on basis of
  forecast emissions)
• Benchmarking could be considered, although data
  constraints limit possibilities

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Comparison of approaches
Issue Fr It Ge Ne Sw UK
Total
Kyoto target Y Y Y Y Poss Poss
National target N N N N ? Poss
Import KM units N Y N Y N N
Sectoral
Historic basis Y ? N Y Y N
Projection basis Y ? Y Y Y Y
Regulatory basis N N Y Y N Y
Installations
Historic basis (1997) 2002 Y? 2000 - 2002 1999 - 2002 1998 - 2001 1998 -2002
Benchmarks N (?) N(?) N(?) Yes N(?) N
Auctioning N (?) N N N N N (?)
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Source European Environment Agency
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Contact details

• Fiona Mullins
• Associate fellow (climate change)
• Royal Institute of International Affairs
• Tel [phone]
• email fiona.mullins_at_tiscali.co.uk