Lessons from implementing the EU Emission Trading System DG Environment European Commission Side event 2009 Climate Change Summit, 3 March 2009, South Africa
Why was the EU ETS set up? The cornerstone of the EU’s market-based strategy to reduce greenhouse gas (GHG) emissions cost-effectively EU ETS is the main driver for the global carbon market: In 2007 turnover €40 billion (EU ETS €28 billion) In 2008 turnover €92 billion (EU ETS €67 billion)
Initial design of the European Carbon Market phase I and phase II “Downstream” mandatory cap-and-trade system Partial coverage (approx. 50% of emissions) Power plants and large industrial point sources Decentralised and combined cap-setting and allocation via national plans (Largely free allocation of allowances) Robust penalties to ensure compliance (€100 + shortfall) Monitoring rules for direct emissions, independent verification Limited access to CDM/JI
Experience from phase I 2005: The world’s largest carbon market gets off the ground and carbon enters the boardroom (some 10,000 installations) Carbon market infrastructure is established Electronic registry system Over 10,000 installations monitor and report emissions Independent verification of reported emissions A liquid market emerges Market intermediaries – brokers and exchanges But But: Over-allocation occurred Allocations not based on verified emissions Limited damage: absence of banking from phase 1 into phase 2
Main differences in period II There will be fewer allowances in the market Cap set at 6.5% below 2005 verified emissions Aviation to be integrated as of 2012 The first trading schemes paralleling the EU ETS will emerge (e.g. RGGI in 2009) But: cumbersome cap-setting and allocation process long uncertainties on cap no harmonised allocation very limited auctioning (appr. 4%) Conclusion of review process in 2007: More harmonisation and predictability indispensable to fully reap benefits of ETS
Main elements of phase III Strategic element of EU post 2012 climate and energy package Longer trading period Single EU-wide cap instead of 27 national caps New industries (aluminium and ammonia producers) and gases (nitrous oxide and perfluorocarbons) included Fully harmonised allocation rules Auctioning is default allocation method: power sector Phased out free allowances for normal industry Up to 100% free allocation on basis of ambitious ex- ante benchmark for sectors at risk of carbon leakage
Primary feature of the new ETS: A robust EU-wide cap beyond % 2083 Mtyr Gradient: -1.74% Linear decrease of cap: predictable trend-line to 2020 and beyond, factor to be reviewed by 2025
Joint Implementation and the Clean Development Mechanism Links EU ETS with projects in >150 countries Certainty on companies’ potential to use JI/ CDM post 2012 Differentiate between EU’s independent commitment (-20%) to reduce GHG emission and contribution under intern. agreement (- 30%) Independent commitment: Up to 1.6 Gt of credits over (excludes Government purchase) Demand from EU only would reduce market-based incentive to increase energy efficiency, low carbon technology investment EU’s renewables target would become more expensive if EU ETS not contributing to its achievement Once an international agreement is concluded, the EU ETS will increase the use of credits (JI/ CDM/ other) by 50% of the additional reduction effort under that agreement
Lessons learnt from EU ETS Keep emissions trading simple Simple allocation rules (auctioning) Let the market develop without interference (no price caps) Ensure transparency and predictability Set clear guidance for monitoring, reporting and verification Effective compliance regime Use accredited private sector actors for verification Cover only those installations/gases at the outset where sufficiently accurate monitoring is feasible, extend later in line with technical progress on monitoring Use of verified data as basis for any free allocation Emission trading is effective and efficient, but no panacea