EU’s CO2 Emissions Trading Scheme – Benchmarks for Free Allocation from 2013 Onwards 9 September 2010 Hans Bergman DG Climate Action European Commission

Overview 1) Short on the CO2 Emissions Trading Scheme (ETS) 2) Current system for allocation (2005-2012) 3) Base for new rules (2013-2020) 4) Benchmark setting 5) Next steps to get to a decision 6) How the decision will be used by the Member States

EU ETS Overview In force since January 2005, for ~10,000 large installations in the EU (~45% of EU CO2 emissions) Companies have to hand in one emission allowance for each tonne of CO2 emitted. Environmental outcome determined by putting a cap on amount of allowances. Long term reduction of the cap. Economic incentive to reduce emissions (price of carbon). This also leads to cost-effective emissions reductions, because reductions take place where cheapest.

Allocation of allowances 2005- 2012 Large part of allowances distributed for free. Allowances distributed via National Allocation Plans, mainly based on historical emissions Relatively straightforward approach, but: The more emissions, the more free allowances National variations in allocation – risk for distortion of competition within the EU Windfall profits for electricity producers To adress these problems, the revision of EU ETS agreed in December 2008 (Directive 2009/29/EC), included new allocation rules for 2013 onwards

Revised EU ETS from 2013 onwards The Revised ETS Directive sets the main rules, but requires the Commission to decide on detailed rules (implementing measure). The rules have a high economic importance for industry: Around 6 billion allowances will be allocated for 2013-2020. With a market price of 16€, total value is around 100 billion €.

Revised EU ETS from 2013 onwards The decison we talk about is thus the setting of EU-wide harmonised allocation rules to determine free allocation for industry for the period 2013-2020, to be based on CO2 efficiency benchmarks Note: No free allocation for electricity production (but allocation for heat, e.g. district heating, is also part of the decision)

Revised EU ETS from 2013 onwards Link to carbon leakage: Carbon leakage list containing 164 industry sectors was determined in December 2009 These are sectors with higher CO2 costs and higher exposure to international trade Sectors on the list will receive more allocation than those sectors not on the carbon leakage list (100% of benchmark instead of 80% -> 30% of benchmark)

Benchmarks Benchmarks are not emission limits or targets, but thresholds for what installations gets for free. A benchmark value will be multiplied with an historic production figure for an installation, to give the annual amount of free allowances (e.g. 0.3 allowances per ton product*1 million tons=0.3 million allowances/year). Total amount of allowances for all industry is limited (fixed in the Directive).

Benchmarks - Setting the benchmark values: Some principles laid down in ETS Directive: - One product = one benchmark. This means the same allocation for all equal products no matter : How a product is produced (i.e. not take differentiate due to technologies for producing the same product) With what input (different types of raw material or fuel) Where (in which Member State) - Setting the benchmark values: Starting point: Average performance of 10% most CO2-efficient installations in a (sub-)sector in 2007/08 Taking into account other aspects, such as most efficient techniques

Benchmarks In collaboration with industry we identified that some 50 product benchmarks are feasible. They will cover around 75% of relevant emissions. Benchmark setting is based on 2007/2008 emission intensity per sector. Data on emissions intensity per installation collected by European industry associations under Commission guidance, verified by third parties, and compared to best technology etc. Free allowances for products without benchmarks is based on heat or fuel consumption, and if relevant also allocation for process emissions (non fuel related).

Decision List of product benchmarks, and their values The Commission decision will i.a. contain: List of product benchmarks, and their values Benchmarks for heat and fuel use Baseline period (production figures with which to multiply the benchmarks). Specific technical rules for certain sectors (e.g. refineries) Rules on how to allocate for extra allowances for new entrants and for increased capacity Rules for reduced allocation for closure and reduction of activity

Possible reactions Possible reactions: Reaction: Benchmarks are too low, in general. Comment: We will follow what was decided in the Directive. Most benchmarks to be set on 2007/08 technology. Will be less challenging each year as installations improve. It can also be noted that there has been large overallocations in many sectors during the past years due to the recession – less emissions but unchanged allocations. These excess allowances can be banked and used in the future.

Possible reactions Possible reactions: Reaction: Difficulties for the most polluting installations. Comment: The current system favours the most polluting installations , which therefore have low incentives to improve. Those installations need to modernise. EU aims at a low carbon economy, and long term goal is to reach 80-90% reduction of emissions by 2050. Therefore change is needed, in particular for the most emitting installations.

Possible reactions Possible reactions Reaction: Difficulties for Member States using a lot of coal Comment: The ETS directive already foresees redistribution of a large amount of auctioning revenues to governments in the new Member States. These funds can be used to support investments in new technology, renewable energy, energy efficiency, biomass etc and be used to limit any social effects.

Procedure – Comitology decision Numerous meetings with industry sectors have been held Monthly meetings with Member State experts since 2 years Next step: DG CLIMA proposal for Commission-internal consultation Once agreement within the Commission,submission of Commission proposal to Member States Discussions with Member States‘ experts, with a view to reaching a favourable opinion in the Climate Change Committee 3-months scrutiny by European Parliament and Council Formal adoption by Commission College if no objection Deadline 31/12-2010 (some delay likely)

After having established harmonised rules Member States will use the Commission decision to calculate the number of free allowances per installation in their territory (by 30 September 2011). Commission to check the calculations for compliance with the decision. Commission must also ensure that the maximum total amount of free allocation is not exceeded, and calculate a reduction factor if necessary.

Thank you for your attention Any comments, questions?