EU Emissions Trading System

Transcription

1 EU Emissions Trading System Screening Process with Serbia Explanatory meeting- Chapter September 2014

2 Overview The role of the EU ETS Emissions trading: how does it work? Essential elements Reform

3 THE ROLE OF THE EU ETS

4 EU objectives for 2020 " " targets: 20% reduction in EU greenhouse gas emissions from 1990 levels Raising the share of EU energy consumption produced from renewable resources to 20% A 20% improvement in the EU's energy efficiency

5 World's first major carbon market Covering around 45% of EU GHG emissions 28 EU Member States + 3 EEA countries (Iceland, Liechtenstein and Norway) EU market value 36 billion in 2013, EU market volume 8 billion allowances in 2012 (source Thomson Reuters Point Carbon) EU ETS in a nutshell (1)

6 EU ETS in a nutshell (2) Mandatory system in place since January 2005 Largest cap-and-trade system of the world Designed to achieve greenhouse gases (GHG) emission reductions at least cost Covers more than power plants and manufacturing installations as well as emissions from airlines flying between European airports

7 EU ETS in a nutshell (3) Operating in phases : 1 st phase based on National Allocation Plans (NAPs): pilot phase, building up infrastructure, gathering necessary experience; carbon emission became matter of economic considerations 2 nd phase based on NAPs: emission reductions achieved, major review to be in force as from 2013; economic crisis 3 rd phase : new design (main change introduction of an EU cap and shift towards auctioning), 8-yr period

8 EU ETS - scope GHG and sectors covered (scope extended in 2013) Carbon dioxide (CO 2 ) from - Power and heat generation - Energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals etc. - Commercial aviation Nitrous oxide (N 2 O) from production of nitric, adipic, glyoxal and glyoxlic acids Perfluorocarbons (PFCs) from aluminium production

9 Why it is important For environmental reasons: Guaranteed environmental outcome due to the cap Carbon price incentivises all types of clean technology, without distinction ("technology-neutral') The more cost-effective the policy instrument, the greater the reductions that can be made for the same cost For economic reasons: Harnesses market forces for achieving cost-effective and smooth transition to a low carbon economy via an EU-wide price signal A carbon price influences daily operational and strategic investment decisions Liquid market: on average around 26 million allowances traded each day on a number of exchanges and over-the-counter Stable and predictable regulatory framework for businesses with counter-cyclical effect For political reasons: experience in the EU ETS informs and influences new or emerging systems (China, South Korea etc.) Until end 2012 biggest source of demand for credits from projects in developing countries

10 Relevant legislative texts EU ETS Directive : Directive 2003/87/EC as amended in particular by Directive 2009/29/EC and Directive 2008/101/EC Important implementing legislation for phase 3 Registry Regulation (Commission Regulation (EU) No 389/2013) Free Allocation Decision (Commission Decision 2011/278/EU) Decision on MS national implementation measures (Commission Decision 2013/448/EU) Carbon leakage list (Commission Decision 2010/2/EU) Auctioning Regulation (Commission Regulation (EU) No 1031/2010) Monitoring and Reporting Regulation (Commission Regulation (EU) No 601/2012) Accreditation and Verification Regulation (Commission Regulation (EU) No 600/2012)

11 EMISSIONS TRADING: How does it work?

12 Essential ingredients for a wellfunctioning ETS Robust infrastructure "one tonne emitted is equal to one tonne reported" Monitoring: to know how many tonnes are emitted Reporting: to inform authorities Verification: control to safeguard confidence Registry: to account for verified emissions Instruments to represent one tonne of emissions: allowances Limited amount of allowances: cap Clear allocation rules: how emitters receive allowances Scarcity ("cap") and tradability of allowances determine price Ensuring environmental objective at least costs

13 EU ETS: cost-effectiveness Objective of a carbon market Reduce carbon emissions (the cap) in a cost effective way (trade) How does cap-and-trade work? Regulator determines allowed emissions level (cap) It creates and distributes allowances corresponding to the cap Scarcity gives allowances value Carbon market develops (spot and future market) where the price signal guides companies by how much to reduce emissions Companies can choose: To emit allocated emission rights (allowances) or To reduce emissions below allocation and sell or bank To emit more than allocation and buy Regulator enforces rules and levies sanctions, if needed

14 Profit from abatement Functioning of the EU ETS: underlying economics Purchase is cheaper than abatement Investment/abatement costs CO2 price 0 Sell Buy

15 Ensuring compliance and compliance cycle Robust monitoring and enforcing is the backbone of emissions trading No or insufficient surrendering entails high penalties Compliance rate usually higher than 99%

16 EU ETS Compliance cycle Climate Action

17 Roles and responsibilities

18 Important dates

19 Important dates

20 EU ETS : Essential elements

21 The cap how is it set? Single EU-wide cap defined by the EU ETS Directive Linear annual reduction factor of 1.74% Reduction factor constantly decreases the cap beyond 2020 Reduction factor to be reviewed before 2025

22 Starting point: 1974 Mt in 2013 Important element: declining EUwide cap beyond Mt/yr Gradient: -1.74% 1720 Mt -21% Review of the linear reduction factor at the latest by 2025; 2030 framework Disclaimer: all figures are provisionally and and do not account for new sectors in third period

23 Harmonised allocation rules Harmonised allocation rules to ensure an EU-wide level playing field: No distortion of competition Full equal treatment within sectors across EU From 2013 auctioning as the general rule All allowances not allocated free of charge must be auctioned In principle no free allocation for electricity production Remaining free allocation in particular for sectors exposed to significant risk of carbon leakage Heads of State commit to use 50% of the revenues to tackle climate change ( earmarking )

24 Advantages of auctioning Eliminates windfall profits Simplest and most transparent system Level playing field for entrants and incumbents Based on harmonised rules Transparency and non-discrimination Full access for SME

25 Auction platform Regulated market authorised pursuant to EU financial markets legislation Bound by EU law: Market in Financial Instruments Directive (MiFID), Market Abuse Directive (MAD) Two platforms auctioning allowances under the Auctioning Regulation: European Energy Exchange (EEX) in Leipzig - the common auction platform used by 25 Member States, - also used by Germany as opt-out auction platform, Poland and EEA-EFTA States ICE Futures Europe (ICE) in London - the United Kingdom s opt-out auction platform

26 Free allocation in ETS (1) Phasing out free allocation for sectors not exposed to risk of carbon leakage 2012: 80% free allocation 2020: 30% free allocation 100% free allocation on basis of ambitious ex-ante benchmark for (not of emissions) sectors at risk of carbon leakage New entrants allocated once their production is up and running: no need for guesswork & equal treatment

27 Free allocation in ETS (2) Allocation based on product benchmarks (CO 2 emissions/tonne) 52 product benchmarks + fall-back approaches (heat, fuel, process emissions benchmarks) Benchmarks set at the GHG performance of the 10% best performing installations in the EU producing that product feasible levels Basic principle: one benchmark one product No distinction depending on fuel, technology, raw material etc

28 Carbon leakage Sectors «exposed to a significant risk of carbon leakage»: Aim to protect sectors with significant carbon costs exposed to international competition Criteria in the ETS Directive: additional carbon costs and trade intensity Production from such sectors and sub-sectors will receive a higher share of free allowances Commission assesses industrial sectors based on the ETS Directive criteria Commission Decision 2010/2/EU and subsequent additions (2011, 2012, 2013) applicable for 2013 and 2014 New carbon leakage list for

29 Union Registry Ensures the accurate accounting of allowances Allowances are fungible and dematerialised assets (= allowance to emit 1t equivalent) Ownership tracked with electronic accounts in registries The record of the registry constitutes sufficient evidence of title over the allowance To participate in the EU Emissions Trading System, a company or a physical person has to open an account in the Union registry

30 Union Registry Database that records: Registry user details (account holders and their representatives) Account and installation (or aircraft operator) details Allowances allocated free of charge Verified emission reports for installations (or aircraft operators) Annual comparison of allowances surrendered and verified emissions to establish compliance status All transfers of allowances ('transactions')

31 EU level Union Registry is co-managed by Commission and Member States Commission takes regulatory decisions (instructions to Central Administrator) Central Administrator (formally Director General of DG CLIMA) operates and maintains the Registry Member State level Competent authorities (=ministries) take regulatory decisions concerning operators (free allocation and compliance) National administrators manage accounts under their jurisdiction

32 Different account types: Operator/aircraft operator accounts, person holding accounts, trading accounts Different unit types: General allowances (Chapter III), Aviation allowances (Chapter II), CERs and ERUs (can be used up to a certain limit) Different transaction types: transfer, surrender and deletion Different security measures

33 REFORM OF THE EU ETS

34 Reform of the EU ETS Large and persistent market imbalance (surplus >2.1 billion) Back-loading of auction volume only a first, temporary step Proposal to create a market stability reserve from 2021 onwards to make EU ETS more resilient to demand shocks ETS elements of the 2030 framework In conjunction with the proposed 40% greenhouse gas emissions reduction target: Increase linear reduction factor as of 2021 from 1.74 % to 2.2% to align the EU ETS cap to proposed 2030 target Addressing structural reform Improved and better focused rules against carbon leakage

35 The market stability reserve proposal Dual purpose address the current surplus If not addressed, the imbalance would profoundly affect ability to meet the medium-term target in a cost-effective manner make the ETS more resilient to possible future demand shocks More flexible auction supply through putting allowances in the reserve in case of too high surplus releasing allowances from the reserve when allowances get scarce Carbon price will be more strongly driven by the mid- and longterm emission reductions Introduction at the start of phase 4 of the EU ETS in 2021

36 Thank you for your attention! For more information see: For the EU ETS regulatory updates subscribe to: