1. Understanding the proposed revision of the EU ETS Thomas Bernheim DG Environment Unit C.2 European Commission

2. Objectives of EU ETS revision  Ensure a cost-effective contribution of the EU ETS to achieving the 20% GHG reduction for 2020, and to a 30% reduction reached in an international climate agreement  Improvement of the EU ETS based on experience so far  Enhance predictability and certainty for long-term emission reductions  Contribute to developing the international carbon market and encouraging action globally

3. Overview  Key elements of the Commission’s proposal –Scope –Targets / cap setting –Allocation methods –International aspect –Monitoring, reporting, verification  Next steps and key messages

4. Scope  Harmonised coverage of large industrial emitters: extension e.g. to chemical sectors and aluminium  Extension to other GHGs: nitrous oxide (fertilisers), perfluorocarbons (aluminium)  Extension to Carbon Capture & Storage (CCS)  Leading to new abatement opportunities, lower overall costs, and higher efficiency  Potential opt-out of smallest emitters if equivalent emission reduction measures are in place (e.g. tax)  Possibility introduced for Community-level projects

5. Summary of scope effects MtCO2 In % of NAP2 No of installations Extended scope Streamlining40-502 – 2.5n.a. New sectors and gases Up to 97Up to 4.6 n.a. Potentially excluded installations - 16-0.8Up to 5000 Net effect121-1315.8 – 6.3

6. GHG Target

7. Cap setting  A single EU-wide cap rather than 27 caps proposed by Member States  CO 2 allowances available in 2020 (based on current scope): 1720 Mt –- 21% compared to 2005 emissions  Linear decrease –predictable trend-line to 2020 and beyond (annual decrease by 1.74%) –Possible review by 2025 at the latest  Automatic adjustment to greater reduction foreseen in international agreement  Aviation being included, building on December’s Council political agreement

8. Cap setting -20% -30% 2083 Mtyr Gradient: -1.74% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

9. Figures on the Cap  Figures based on –NAP 2 decisions of the Commission –ETS scope as applicable in Phase 2 To be adjusted for: –Opt-ins in Phase 2 –Extended scope in Phase 3 –Inclusion of aviation –Inclusion of Norway, Liechtenstein, Iceland

10. Allocation principles  Harmonised allocation rules to ensure a level playing field across the EU: –No distortion of competition –No state aid risks for operators  Auctioning as the general rule with transitional free allocation  In terms of allocation rules, three categories of operators: –No free allocation (i.e. full auctioning) –Partial free allocation –Up to 100% free allocation  European Commission to report on carbon leakage by 2011 and make any appropriate proposal: - To review free allocation levels and/or - To introduce system to neutralise distortive effects  Binding sectoral agreements to be taken into account  In conformity with principles of UNFCCC and WTO

11. Auctioning  Basic principle for allocation is auctioning: –Eliminates ‘windfall’ profits –Simplest and most transparent allocation system –Level playing field for new entrants and incumbents  Full auctioning for sectors able to pass on costs: –Power sector  Auctioning on the basis of harmonised rules ensuring –Transparency and non-discrimination –Full access for SMEs

12. Auctioning and earmarking  Range of economic situations in Member States means relatively more auctioning rights to MS with lower GDP/capita to balance high investment costs –90% of the auctioning cap is distributed according to the MS share of 2005 Verified Emissions –10% distributed to MS with GDP/cap below 120% of EU average –This distribution takes into account GDP per capita and expected growth rates  Auctions must be non-discriminatory, open to everybody and will be carried out by Member States on the basis of harmonised rules  20% of auction revenues should be used for combating climate change and promoting renewable energies

13. Transitional free allocation  Transitional free allocation to industry –in 2013, 80% of allocations for free of quantities determined in accordance with Community-wide rules –Annual reduction of free quantity  Phased out by 2020 for “normal industry”  Community-wide rules, e.g. benchmarking, for free allocation to be determined taking into account most efficient techniques, substitutes, alternative production processes, use of biomass and CCS  No free allocation for electricity production

14. Higher free allocations  Installations in sectors which are seen, on analysis, to be exposed to a significant risk of carbon leakage  Can receive up to 100% free allocation of the quantity of allowances determined under the general Community-wide rules  Sectors to be determined at the latest in 2010, taking into account inter alia ability to pass on costs without losing market share to non-EU competitors

15. New entrants reserve  5 % of total quantity of allowances  Equal treatment of existing and new installations  Capacity extensions not considered to be new entrants  Implementing rules to be adopted under comitology.  Sufficient size is important for avoiding carbon leakage, in particular for fast growing economies  Remainder to be auctioned

16. Key international aspects of the EU ETS revision  EU’s overall objective: to limit global warming to 2° C above pre-industrial levels  EU wants an international agreement on achieving these levels of emission reductions  This will require contributions from developed countries and major emitting developing countries  Climate / energy package provides incentives for others to join an international agreement

17. Linking  Currently, EU ETS covers 30 countries including Norway, Iceland and Liechtenstein  Linking agreements can be concluded with any other third country listed in Annex B to the Kyoto Protocol which have ratified the Protocol  In revision, Commission proposes to enable EU ETS to also link with other mandatory emission trading system capping absolute emissions: –with any third country, or –in sub-federal and regional systems  Different types of linking arrangements foreseen: –Treaty arrangements –Agreements to link systems e.g. through politically binding MoU –Reciprocal commitments applied through domestic systems

18. Joint Implementation and the Clean Development Mechanism  Links EU ETS with projects in around 150 other countries that have ratified Kyoto Protocol, by providing for companies to use JI/CDM credits for compliance in EU ETS  Revision proposal gives certainty on the potential for companies to use JI/ CDM, whether or not there is an international agreement following Kyoto  Clear need to differentiate between EU’s independent 20% commitment to reduce GHG emission, and the contribution that the EU will make under an international agreement where others are also contributing, e.g. –JI/CDM are an incentive for third countries to join international agreement –Demand for CDM only from the EU would reduce market-based incentive to increase energy efficiency, investment in low carbon technologies –EU’s renewables target would become more expensive if EU ETS not contributing to its achievement

19. JI/ CDM use without international agreement  Revision proposal ensures that: –JI/CDM credits can be used up to 2020, by enabling these to be exchanged for allowances –JI projects can continue beyond 2012, by enabling bilateral/ multilateral agreements with third countries  In a -20% scenario, certainly is given for a total 1.4 billion tons for 2008-2020 (one third of reduction effort over the period) to: –Credits for reductions in the 2008-12 period from project types which were accepted by all Member States –Credits for reductions from 2013- from such projects set up in the 2008-12 period –In addition, credits from such projects from 2013- in any of the 50 Least Developed Countries –And credits from any bilateral/ multilateral agreements with third countries

20. JI/ CDM use without international agreement  In addition, climate/ energy package also provides for Member States to use CDM in respect of non-ETS emissions: –To enhance the equitable geographical distribution –To enhance achievement of international agreement on climate change –Up to 3% annually of their non-ETS emissions –Corresponding to 700 Mt demand from Member States, in a situation without international agreement

21. JI/ CDM once international agreement  Once an international agreement is concluded, the EU ETS will automatically increase the use of credits (JI/CDM/other) by 50% of the additional reduction effort under that agreement  Member States’ use of JI/CDM/other credits will also increase by 50% of the additional non-ETS reduction effort under that agreement  This provides a clear incentive for third countries to join international agreement

22. Monitoring & Reporting, Verification & Accreditation, Compliance  More harmonised rules through Regulations on –monitoring and reporting of emissions by operators –verification of reports and accreditation of verifiers (including mutual recognition)  Non-compliance penalties (€100/ tonne CO 2 ) to increase by inflation rate to maintain deterrent effect  To enhance reliability and thus international credibility of the EU ETS

23. Next steps  Adoption by Council and Parliament aimed for by Spring 2009  Comitology procedure to start after entry in force of revised Directive  Preparatory work already started: various pilot studies being undertaken by MS and Commission  Exposed sectors to be determined by 30 June 2010 at the latest  Community-wide rules to be adopted by 30 June 2011 at the latest  Implementation by MS by 30 September 2011 at the latest  Issuance of first year allocations by 28 February 2013 at the latest

24. Key messages  The ETS is the cornerstone of the EU’s market based-strategy to reduce greenhouse gases cost- effectively  Essential elements of the ETS review: –Fully harmonised approach –Ambitious cap to ensure real emissions reductions –Improvement taking into account past experience  Open and transparent process for implementation