The EU Emissions Trading Scheme

1
The EU Emissions Trading Scheme Linking
project credits to the EU Emissions Trading
Scheme

• Leuven, 10 Sept. 2003
• Stefaan.Vergote_at_cec.eu.int

2
Overview

• EU Emissions trading
• Key design features
• Preparing for implementation
• Conclusion
• Linking Kyoto mechanisms

3
The process

• Commission Green Paper in March 2000
• Commission Proposal in October 2001
• 1st reading EP in October 2002
• Common Position Council in December 2002
• Political agreement between Council and European
  Parliament June 2003
• Directive to be formally adopted to be finalised
  in 2003

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What is at stake with ET?

• Set-up of an architecture
• to facilitate development of the largest cap
  and trade programme world-wide
• to provide European business with a tool for
  low-cost compliance
• to offer a blueprint for international
  emissions trading / other domestic schemes

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Key Design Features
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Overview

• Timing
• Participation and coverage
• Allocation (method and quantities)
• Compliance
• Linkage and project mechanisms
• Technical infrastructure
• Market organisation

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Timing

• Three-year mandatory warm-up phase from 2005 to
  2007
• learning-by-doing
• special provisions (temporary and conditional
  exclusion clause for certain installations and
  activities)
• Five-year mandatory Kyoto phase from 2008 to 2012
• in parallel with international (Kyoto) ET

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Participation and coverage

• Harmonised and consistent coverage of five major
  downstream sectors with thresholds
• power, heat and steam generation oil refineries
  iron and steel pulp and paper buildings
  materials (cement, glass, lime etc.)
• Start with carbon dioxide
• EC reviews by end 2004 mid-2006 to look at
  inclusion of other sectors/gases.
• Limited unilateral inclusion in 2005 (below
  thresholds), wider (incl. other gases) in 2008

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Participation and coverage - the pooling concept

• Deviation from the installation-based approach
• Member State may allow a group of installations
  carrying out the same activity to form a pool
• handing over allowances to a trustee
• the trustee takes over all obligations
• except monitoring and reporting obligations
  remain with the installation, as does liability
  if the trustee does not deliver

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Allocation

• The basic questions are
• how many allowances
• go to whom
• how?

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Allocation method how?

• Warm-up phase at least 95 of allowances free of
  charge
• Up-front decision on method for 2008 to 2012
• free of charge allocation of at least 90 ,
  Member States may auction up to 10
• EC review in mid-2006 to look at further
  harmonisation

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Allocation how many?

• Ex-ante principle
• determined periodically
• national allocation plan
• Adhering to common criteria
• see annex III of the Directive
• Subject to scrutiny by the Commission
• National allocation plan may be rejected in part
  or total
• Process and outcome transparency

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Who can receive allowances?

• Existing installations with a greenhouse gas
  permit (at the time the plan is submitted to the
  Commission) falling under the ET Directive
• No allowances to nuclear installations
• No allowances to renewables installations
• No allowances to planned installations
• unless a reserve for new installations is
  established
• which would imply fewer allowances for
  incumbents

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Annex III allocation criteria

• Mix of shall and may provisions
• Leave leeway for Member States
• Commission guidance can and will not change the
  character of these criteria
• but illustrate the scope how they can be
  implemented
• Guidance available by the end of 2003!

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New entrants

• New installations buy needed allowances on the
  market ...
• ... or receive an allocation free of charge out
  of a reserve
• Building a reserve may be appealing
• ... but will be limited
• ... and requires ex-ante rules on access
• Access to allowances shall not be a market entry
  barrier

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Compliance

• Financial penalties of 100 / tonne with a lower
  level of 40 / tonne in the first period
• Plus the obligation to surrender outstanding
  allowances in the subsequent year
• Publication of names of operators in breach of
  requirement to surrender sufficient allowances
  (name and shame)

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Linkage and project mechanisms

• Link to other emission trading schemes by
  bilateral agreements between the EC and other
  Kyoto Protocol Annex B Parties
• Canada, Japan, Switzerland
• Link to Kyoto project mechanisms (JI and CDM)
  through a separate proposal (see further on)

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Market organisation

• Banking in principle allowed
• from pre-phase into Kyoto phase (2007 to 2008) to
  be decided at national level
• No restrictions on purchasing / holding of
  allowances
• incl. cross-border intra-company transfer
• No provisions on how and where to do transactions

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Preparing for implementation
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Tasks for the Commission

• Draft monitoring and reporting guidelines for
  adoption in September 2003
• Draft regulation on registries
• Prepare allocation guidance document by end 2003

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Tasks for Member States

• Transposition by end 2003
• Decision on banking 2007 into 2008
• Start permitting process
• Assign competent authority(ies)
• Prepare national allocation plan
• Build allowance registry

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The national allocation plan

• ... is a statement of intent how many allowances
  a Member State will allocate per installation in
  the period
• is to be prepared ex-ante before any
  allowances are handed out
• is a public document
• is to be submitted to the Commission
• First plans are due in March 2004!

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Monitoring and reporting

• Directive covers direct emissions from activities
  in Annex I installations (incl. process CO2)
• Biomass zero-rated
• Principles established in Annex to the Directive
• Guidelines to be adopted by September 2003
• Commission work is well underway

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Allowance registries

• MS establish national registries
• Central Administrator at EU level maintains
  transaction log
• Regulation will lay down ground-rules
• and is in preparation
• Kyoto registry incorporates national registry

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Conclusions

• Rule-making process is approaching final stage
• Focus is now on implementation work
• Priority is establishment of the cap-and-trade
  infrastructure
• learning-by-doing

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Commission proposalCOM (2003) 403 final23 July
2003Linking JI/CDM to the EU emissions trading
scheme
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What are JI and CDM?

• Project-based instruments governed by
  International Law that generate GHG credits
• Primarily designed to provide flexibility to
  Parties
• Some Member States already prepare their use
  (Dutch ERUPT/CERUPT, Austria, Finland )
• But mainly driven by the private sector

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What does linking mean?

• An indirect link exists as of 2008
• Linking proposal to provide more flexibility and
  certainty to legal entities
• In concrete terms, linking means that JI/CDM
  credits can be used by operators to fulfil their
  domestic obligation
• Linking implies the recognition of JI/CDM credits
  as equivalent to allowances

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Creating a bridge to Kyoto?

• Linking JI/CDM to EU ETS implies a bridge between
  two different frameworks
• Community Cap and Trade / Kyoto Project
  Mechanisms
• Different nature cap and trade of direct
  emissions (ex-ante allocation) / baseline and
  credit (ex-post verification)
• Different regulatory context and institutions
  involved
• Different timing
• Different unit of trade allowances / ERUs and
  CERs
• Different level of certainty EU ETS final /
  ratification of Kyoto Protocol necessary for
  implementation of JI/CDM

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Desirability of linking

• Increase of compliance options for entities
• Reduction in allowance price and compliance costs
• Increase liquidity of the EU emissions trading
  market
• Stimulate demand for JI/CDM credits
• Contribution to host countries Sustainable
  Development
• Promotion of the transfer of environmentally
  sound technologies to third countries
• Drive environmental policy integration in EU
  external policies and contribute to the EU
  Strategy on Sustainable Development

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Avoiding Double counting

• 1 tonne of emission reduction could be rewarded
  twicet
• Creating a surplus allowance
• Generating a JI credit (ERU)
• Activities falling under the scope of the EU ETS
  as listed in Annex I or opted-in
• Example fuel switching in a district heating
  plant
• Other project activities which directly or
  indirectly affect emissions from installations
  covered by the EU ETS
• Example 1 hydro power plant
• Example 2 demand side management project (light
  bulbs or double glazing)
• Transitional period (2004) for on-going JI
  projects

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Special provisions

• Review when credits from project activities reach
  6 of total quantity of allowances
• Excluded projects
• nuclear installatons
• Land use, land use change and forestry projects
• avoiding double counting no ERUs for
  installations covered by the Directive
• Baseline takes into account environmental acquis
  in EU and accession countries
• provisions for control of MS which projects come
  in

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• Commission Climate Change Homepage
• http//europa.eu.int/comm/environment/climat/home_
  en.htm