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Experience with the EU ETS and the carbon market

IMO GHG WG3 – Side event – 29th March 201112:45 – Committee Room 10Damien MeadowsHead of Unit B3 (International Carbon Market, Aviation and Maritime)DG Climate Action, European Commission

Introduction

Purpose:

To improve understanding of the EU ETS and share experiences to help IMO discussions on MBM

Presentation on:

EU climate policyEU experience of EU-ETS and broader carbon marketETS vs other measures

Presentation is not:

Indicating a EC or EU preference for an ETS for maritime transport (not covered)There is no EC or EU decision on preferred IMO MBM

EC Information submissions

MEPC 56 Inf. 13 :

Key design elements for designing a ‘cap and trade’ greenhouse gas Emissions Trading Scheme (ETS)

GHG WG 3/INF.3 :

Information on experience with the European Union Emissions Trading Scheme (EU-ETS) and the carbon market

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To limit global climate change is a major challenge

Climate change impacts threaten future growthMore frequent and severe extreme weather - floods, storms, heatwaves, droughts –impacts many sectors (agriculture, tourism, transport, health..)

The global objective is to keep average global temperature increase below 2°C (confirmed in the Copenhagen Accord and again at the Cancun COP)To attain this goal, science says global emissions to be cut by -50% by 2050 compared to 1990

The global emissions pathway in the next 40 years will determine likely warming by the end of the century

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Developed Countries

0%

20%

40%

60%

80%

100%

1990 2000 2010 2020 2030 2040 2050

Baseline Global action

EU

0%

20%

40%

60%

80%

100%

1990 2000 2010 2020 2030 2040 2050

Baseline Global action

Significant emission reductions need to be made globally

EU objective: 80 to 95% reductions largely through domestic measures:

around -80% internal reductions in 2050 compared to 1990

Developed Countries: similar effort

Developing Countries: -5% compared to 1990

All sectors need to contribute (or other countries/ sectors do more)

Developing Countries

0%

100%

200%

300%

400%

500%

1990 2000 2010 2020 2030 2040 2050

Baseline Global action

Equivalent to -80% compared to business as usual

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Efficient pathway:-25% in 2020-40% in 2030-60% in 2040

A cost-efficient pathway for the EU to 2050

An EU 80% domestic reduction in 2050 is feasiblewith currently available

technologies

with behavioural change coming through appropriate pricing

If all economic sectors contribute to a varying degree & pace.

0%

20%

40%

60%

80%

100%

1990 2000 2010 2020 2030 2040 20500%

20%

40%

60%

80%

100%

Current policyPower Sector

Residential & Tertiary

Non CO2 Other Sectors

Industry

Transport

Non CO2 Agriculture

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How to ‘square the circle’?

The EU’s objective is to reduce greenhouse gas emissions by 80-95% by 2050 below 1990 levels, in the context of necessary reductions by other countries

EU existing legislation is in place to achieve a 20% cut in GHG emissions by 2020 below 1990, including the emissions from aviation that have doubled

All other emissions covered by a binding ‘Effort Sharing Decision’setting differentiated caps State-by-State (except land use and maritime…)

Europe uses a variety of policies to cut greenhouse gas

emissions

Command and control (e.g. phase out of HFC-134a in automobile air conditioning, product standards, building regulations)

Voluntary agreements (e.g. with car manufacturers)

Product labelling, information campaigns, targetsAction by individuals and local authorities – congestion charging, planning policy guidance

Market-based mechanisms:

Taxes - eg differential road taxesCharges – eg air passenger duties in Germany and UKSubsidies – eg on building insulation, on electric vehiclesCap and Trade Systems

The EU Emissions Trading System (EU ETS Directive 2003/87/EC)

Mandatory system in place since January 2005

Binding cap on the absolute emissions from around 11,500 of the most energy-intensive installations across EU (30 countries 27 MSs+ 3 EEA)

Covering around half of EU’s total CO2 emissions

Cornerstone of Europe‘s strategy to meet its Kyoto commitments

Major structural element for the post-2012 EU climate strategy

EU ETS design fundamentals

Simple “downstream” cap-and-trade system for major emitting industries Comprehensive policy including other measures Initially, largely free allocation based on historical emissions – moving to benchmarks and auctioning Monitoring rules for direct emissions, independent verificationRobust penalties to ensure compliance (€100 + shortfall)Electronic registry system to record holding, transferring and surrending allowancesMarket development driven by the private sector

Coverage

Related to other commodities

-20%

2083 Mt/yrGradient: -1.74%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Starting point: 1974 Mt in 2013

1720 Mt

Linear factor to be reviewed by 2025Aviation to be included; will change figures correspondingly, but cap not reducedDisclaimer: all figures are provisional and do not account for new sectors in third period

Climate and Energy Package – post 2013

Increased scope

New sectorsAluminiumBasic chemical production

New gases:PFCs from aluminiumNitrous oxide (N2O) from certain chemicals

Combined effect: ca. 6-7% increase of scope

Confirmation that all sectors should contribute to emission reduction commitments

AviationMaritime: future action foreseen to have maritime contribute (COM proposal in 2012 if no international agreement)

Strengthened monitoring, reporting and verification

Monitoring and Reporting RegulationTo replace current guidelinesCOM proposal by 31 December 2011

Verification and Accreditation RegulationRules for accreditation is newCOM proposal by 31 December 2011

Harmonised €100 penalty for non-complianceinflation-linked‘non-libératoire’ (requirement to surrender shortfall of allowances remains)

Single Community registryAmendment of Registries regulation (comitology): adopted in CCC in Feb 2010

Use of auction revenues

Member States should use 100% of revenues for climate and energy related purposes – including in Developing Countries

New Monitoring Mechanism Decision, to be adopted, will include requirement for Member States to report on use of auction revenues

Revenue from auctioning allowances can be used for technology development/demonstration

e.g. 4.5 billion € for investment in Carbon Caputure and Storage and Renewable Energy projects

Quantitative use of JI/CDM

Companies can use CDM/JI credits for compliance for Kyoto period, other than nuclear and temporary credits from forestry

Rights to use credits in 2008-2012 can be used up until 2020: total 1.4 billion tons for 2008-2020

Supplementarity: use of CDM should not exceed 50% of reduction below 2005

Automatic increase of the use of credits (CDM/JI/other) by 50% of the additional reduction effort in case of a new international agreement

But credits from H2O and HFC23 cannot be used for the third trading period (i.e. from 2013)

Use restrictions for international credits

Full use restrictions for credits from HFC23 and adipic acid N2O projects

23 out of about 2700 projectsStrong environmental concerns:• incentive to increase emissions• undermine the Montreal Protocol• disincentivise appropriate action in LDCs

Low value for money: other instruments can reduce these emissions much more cost-efficientlyNeed to limit distortions of competition

Climate Change Committee agreed the proposal on 21 January 2011

Aviation included from 2012

Directive 2008/101/EC on inclusion of aviation in EU ETS agreed in summer 2008 adding appr. 10% of the annual 08-12 EU ETS cap

Cap2012: 97% of 2004-06 emissionsFrom 2013 onwards: 95%

Auctioning: 15% as from 2012

Scope: EU internal as well as inbound/ outbound aviation

Lessons learned from EU experience

The difficulty to agree measures in the UN process is not a barrier to getting started - there is a lot you can do.

Measures can be agreed collectively covering 30 countries and over 450 million people.

Tackling climate change also helps:

Improve air qualityDiversification of energy sourcesStimulate green growth (innovation, R&D, ‘green’ jobs)Improve energy efficiency

Lessons learned from EU ETS experience

Keep emissions trading simple

Need for strong regulator to ensure environmental integrity Cover installations/ gases where accurate monitoring is feasible, extend in line with technical progressCentral cap setting, no more national allocation plans Auction large share of allowances is fairest allocation methodUse revenues from auctioning in fight against climate change Ensure further harmonisation of monitoring, reporting and verificationMaximize transparency and legal certainty – no ex-post regulatory interventionRestrict use of offsets (CDM/JI) to drive investments in low carbon technologies in sectors

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Key differences between emissions trading and taxation

With emissions trading, emissions can grow in return for verified reductions in other sectors

EU ETS allows actors to acquire allowances from other sectors/actors within EU, and use Clean Development Mechanism (CDM) credits, e.g. 25% of which are in India (with a value of credits issued by August 2010 amounting to US$790 million)

Free allocations of emission allowances can be used for investment by companies

Majority of EU ETS allowances are allocated for free

Any government revenues should be used to tackle climate changeAs regards the allowances to be auctioned, EU governments have agreed that 100% of the auction revenues should be used to tackle climate change, including in the transport sector and in developing countries

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Additional differences between EU ETS and other measures

A predictable framework for industry to operate:Emissions trajectory and allocations fixed up to 2020 (only exceptions if EU moves to greater reduction commitments, relating to non-CO2 climate impacts which are not coveredNot prone to sudden changes in course: EU law proposed in 2006, agreed in 2008, first monitoring in 2010, first responsibility for emissions in 2012Similar application across 30 countries (EU 27 + Norway, Iceland, Liechtenstein)Incentive for all methods of emission reduction (e.g. biofuels considered as zero-emission, technologies etc.)

Prices set by the market (EU ETS and Clean Development Mechanism):Carbon price not fixed by governments but relating to stringency of greenhouse gas reduction commitmentsEU ETS now in seventh year of operation, less price volatility than oil, coffee, cocoa etc.

Achieving the same reductions through other measures would be more costly

Possible EU action on maritime emissions

Full EU support for agreement on global measures in IMO / UNFCCCEU Member States and European Parliament request for proposal if no agreement in IMO/UNFCCC in 2011EU maritime transport emissions should be - 40% by 2050 (from 2005) – Transport White Paper 28th March 2011

Preparations for a possible proposal in 2012 on-going:

Stakeholder consultation – please contribtehttp://ec.europa.eu/clima/documentation/eccp/second_stakeholder_en.htm

Technical analysis No decision yet on policy or measure / scope

Thank you for your attention!

http://ec.europa.eu/environment/climat/emission.htm