1. Lessons from implementing the EU Emission Trading System Liva.Andersone@ec.europa.eu DG Environment European Commission Side event 2009 Climate Change Summit, 3 March 2009, South Africa

2. 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)

3. 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

4. Experience from phase I 2005-2007  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

5. Main differences in period II 2008-2012  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

6. Main elements of phase III 2013-2020  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

7. Primary feature of the new ETS: A robust EU-wide cap beyond 2020 -20% 2083 Mtyr Gradient: -1.74% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Linear decrease of cap: predictable trend-line to 2020 and beyond, factor to be reviewed by 2025

8. 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 2008-2020 (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

9. 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