Allowance allocation in the EU ETS IDDRI 16 October 2003 Fiona Mullins Associate Fellow, Royal Institute of International Affairs

Structure of presentation 1.Challenges of the allocation process 2.Comparison of national approaches

EU Emissions Trading Scheme First period , second period 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

Allocation Challenges Number and complexity of decisions Tight timeframe Need for coordination on some issues Allocation defines environmental outcome and price Approx 5 billion tCO 2 allocated over three years ( ) Prices: Euros 5 to 15 per tonne?

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

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

Coordination needed/useful on: 1.Banking 2.New entry & closure 3.Definition of “installation” 4.Definition of “allowance”

Allocation: different levels EU ETS Size of the national pie: Kyoto or national transportdomestic ElecIron/steelMineralsPaper Installation 1 Installation 2Installation

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

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: 45mtCO 2 pa by 2010 (less approx10mt for non EU ETS industry) VAs provide the basis ie regulatory basis rather than projected emissions emissions for 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

Germany: bottom up Data constraints Wide range of options Base-year or base-period of emissions 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 CO 2 /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

Netherlands: Top-down Using official projection Approx 90mtCO 2 (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 (?)

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 CO 2 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

Sweden: top-down Flexmex Commission 2 proposal: 24.3mt CO 2 Ceiling allows for projected emission increases and new entry EU ETS installations emit 19mt currently Sector/activitymtCO 2 Fuel combustion10.8 Non-substitutable emissions plus forecast expansion Statistical uncertainty 2 Capacity expansion 2 New entry (nearing completion now) 0.6 Total23.4

Sweden: bottom up All installations have right to emissions level 4 yr avg (3 yr if special circumstances) Additional allowances allocated in priority order: 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

Comparison of approaches IssueFrItGeNeSwUK Total: Kyoto targetYYYYPoss National targetNNNN?Poss Import KM unitsNYNYNN Sectoral: Historic basisY? NYYN Projection basisY?YYYY Regulatory basisNNYYNY Installations: Historic basis( ) 2002 Y? BenchmarksN (?) YesN(?)N Auctioning:N (?)NNNN

Source: European Environment Agency

Contact details Fiona Mullins Associate fellow (climate change) Royal Institute of International Affairs Tel: