1. JI in the EU-ETS Building blocks for a global carbon market
JISC, 14 February 2007
Thomas Bernheim
Market-based instruments + EU ETS Unit
European Commission

2. Overview Long term EU climate objectives Recent EU climate initiatives
EU ETS
EU ETS & JI
Double counting guidelines
Outlook

3. Long term EU climate objectives
Limiting global temperature change to 2°C above pre-industrial levels (EU Council, March 2005)
Implies need for global GHG emissions to peak within 2 decades, followed by substantial reductions by 2050
Order of magnitude of reductions by industrialised world
15-30% by 2020
60-80% by 2050

4. Recent EU climate initiatives
On 10 January 2007 the Commission proposed to
encourage developed countries to reduce emissions by 30% by 2020
set a unilateral reduction target for the EU emissions at 20% by 2020
Commission is tabling a wide range of proposals on reducing emissions in the energy and transport sectors
20% increase by 2020 on energy efficiency
20% share by 2020 of renewable energy
Limit average car emissions to 130 g/km
Include aviation into EU-ETS
Increase research efforts in energy
Review process of EU-ETS Directive is beginning

5. EU-ETS Central EU climate policy tool
The cornerstone of the EU’s market-based strategy to reduce GHG emissions cost-effectively (reduces compliance costs by 1/3)
An essential structural element for long-term global strategies
A main driver for the global carbon market currently involving 168 countries and transactions valued at €14.6 billion in 2006

6. EU-ETS Design elements
Applicable since 1 January 2005, covers 27 EU Member States
Mandatory caps on absolute emissions from around 10,000 large energy-intensive installations
Covering roughly 50% EU emissions or 2 billion tonnes CO2
Driver for development of other market based instruments
Linked to JI/CDM
Art 25: Linking expected with Norway, Iceland and Liechtenstein in 2008 though EEA (European Economic Area) Agreement
First phase ongoing – 2005 to 2007
Establishment of registries
Robust emissions monitoring and verification
But signs of important over-allocation

7. Second phase EU-ETS 2008-12 soon to begin
26 NAPs submitted
Equal treatment for all Member States based on
2005 emissions
Growth projections
Carbon improvements
13 decisions were taken with stricter caps than previous assessment period (but scope is now wider)
Extension possible through opt-in
2005 VE
Annual alloc 08-12 NL
80,3
85,8 BE
55,3
58,5 DE
474
453,1 GR 71
69,1 IE
22,3
21,15 LV
2,8
3,3 LT
6,6
8,8 LU
2,6
2,7 MT
1,9
2,1 SK
25,2
30,9 SL
8,7
8,29 SE
19,3
22,8 UK
242
246,2
Total
1012
1012,74

8. EU-ETS legislative review
Nov 2006: Review report “Building a global carbon market”
Improve functioning of the scheme based on practical implementation experience
Streamline current design
More harmonised approach to cap-setting and allocation to installations
More predictability and certainty
More harmonised approach to new entrants and closures
Consider benefits and costs of smallest installations
Expand coverage
Further sectors (aviation) and gases (CH4, N2O) and options (CCS)
Consider developing links to other mandatory emissions trading systems
Next steps
Stakeholder consultation in a dedicated group under ECCP
Proposal amending EU ETS Directive – second half 2007

9. EU ETS & JI Impact EU ETS on JI Impact JI on EU ETS
Generates demand for JI that is large (with tight NAP decisions), quantifiable (with set JI/CDM usage limits) and long term (with the 20% target for 2020)
EU countries investing upwards of €2.7 billion in JI/CDM for national GHG reduction commitments
EU ETS generates potential demand of more than 1 billion ERU/CER (excl. government purchase)
Impact JI on EU ETS
Increases liquidity of EU ETS market and reduces compliance costs
Implies recognition of JI/CDM credits as equivalent to EU allowances
Need to safeguard environmental integrity of EU ETS
Qualitative safeguards: no nuclear or temporary credits from sink projects
Quantitative safeguards: ensure supplementarity to domestic action
Quantitative safeguards: avoid double counting

10. Key issue: double counting
What’s the problem?
JI and CDM projects can be carried out in any installation, reducing emissions and giving ERUs/CERs in return
If the JI/CDM reduction happens in an installation under EU ETS and no account is given for these reductions, the operator can sell the EUAs that were avoided through the JI/CDM project
As a result, the government hands out 2 credits (1 ERU/CER and 1 EUA) in return for a reduction of 1 ton of CO2
Bad deal for the government and could conflict with EU state aid rules

11. Linking Directive Art.11b of EU ETS
(1) Baselines for project activities should comply with acquis communautaire
(2) No ERUs are allowed to be issued for reductions or limitations of GHG that take place in installations under EU ETS
(3) Until 31/12/2012 for projects which reduce emissions directly ERUs/CERs can be issued but only if equal number of allowances are cancelled by the operator
(4) Until 31/12/2012 for projects which reduce emissions indirectly ERUs and CERs may be issued only if an equal number of EUA are cancelled from national registry of the MS of origin

12. Decision on double counting guidelines
Provisions for implementing art.11b of EU ETS
Art 3(1): MS shall create set-aside in NAP for all ERUs to be issued for approved projects (with LoA) taking place in ETS installations
Quantification: JI project’s reductions * % of these reductions under ETS * % of reductions to be issued as ERUs
Allowances in set-aside not converted to ERUs may be sold, or for direct emission reductions may be issued to the installation
Art 3(2): MS may create second set-aside in NAP for all ERUs intended to be issued for planned projects (no LoA)
Allowances in second set-aside not issued as ERUs are cancelled

13. Outlook New opportunities Before EU ETS limited demand for JI/CDM
Now, with a clear long-term price and clear policies on behalf of EU and Member States, more projects can be done
Until recently large-scale energy sector projects “crowded out” other possible JI projects
The EU double counting guidelines give a clear boundary to the areas where JI projects can be done
JI can now focus on areas not covered by EU-ETS covering more than 50% of all emissions
Alternative financing: Green Investment Schemes

14. Outlook (cont.) The global carbon market is slowly but steadily
JI/CDM in EU ETS legislative review
Most likely continue to play role in post 2012
Community-level arrangements for authorisation of projects
accept or not to register projects with countries not signing Kyoto?
Harmonised rules & procedures, additionality guidelines…
Possibility of further harmonising KP project credits accepted by MS
A/R, HFC…
Harmonising the supplementarity percentages of JI/CDM
The global carbon market is slowly but steadily
becoming a reality and both the EU-ETS and JI
are going to play a central role in it

15. More info on EU climate policy: http://europa. eu
Background literature on EU ETS: