The ETS paradox. Emissions trading for industrial NO x and SO 2 in the EU: consequences for the European cement sector

Transcription

1 The ETS paradox Emissions trading for industrial NO x and SO 2 in the EU: consequences for the European cement sector OUR MISSION: A SUS TAI N ABLE ENERGY SUPPLY FOR EVERYONE

2 The ETS paradox Emissions trading for NO x and SO 2 in the EU: consequences for the European cement sector Final version, 8 March 2010 Bart Wesselink, Timme van Melle and Sebastian Klaus (Ecofys) Arend Smit and Marc van Gent (Emission Care) Project number: PCMANL Contact: b.wesselink@ecofys.com Ecofys 2010 by order of: CEMBUREAU, The European Cement Association ECOFYS INTERNATIONAL BV, A PRIVATE LIMITED LIABILITY COMPANY INCORPORATED UNDER THE LAWS OF THE NETHERLANDS HAVING ITS OFFICIAL SEAT AT UTRECHT AND REGISTERED WITH THE TRADE REGISTER OF THE CHAMBER OF COMMERCE IN UTRECHT UNDER FILE NUMBER OUR MISSION: A SUS TAI N ABLE ENERGY SUPPLY FOR EVERYONE

3 OUR MISSION: A SUS TAI N ABLE ENERGY SUPPLY FOR EVERYONE

4 Executive Summary Industrial emissions of NO x and SO 2 in the EU, including those in the cement sector, have dropped substantially since the mid 1990s. This has been achieved through the legal enforcement of Emission Limit Values for individual emissions sources. Recently, the Commission has reinforced this approach in its proposal for an Industrial Emissions Directive (IED). In parallel to the proposed IED, the Commission is investigating the idea of introducing an Emissions Trading Scheme (ETS) that could potentially replace the IED. The title of this report, the ETS-paradox, refers to a main policy dilemma associated with such introduction. This dilemma is that ETS for NO x and SO 2 would be introduced at a relatively late stage, at which emissions have already been substantially abated by existing instruments. Simultaneously, the introduction of a new policy instrument will add another element to the existing complexity of air pollution policies that the Commission was intending to simplify. Despite the fact that introduction of ETS for NO x and SO 2 may increase the effective implementation of BAT technologies and may also, in theory, be a cost-efficient policy for the cement sector, our study suggests that, in practice, the window of opportunity for introduction of ETS for NO x and SO 2 is small and therefore risky. The European Commission is searching for new ways to improve policies on industrial emissions, in order to achieve full exploitation of Best Available Techniques (BAT). In its Communication, Towards an improved policy on industrial emissions (EC Commission, 2007), the Commission announced that it would investigate the policy option of introducing EU rules for an emission trading scheme on NO x and SO 2 for industrial emissions (including emissions from the energy sector). The European Cement Association (CEMBUREAU) asked Ecofys and Emission Care to investigate whether the option of introducing ETS would be efficient and effective in comparison to continuation and improvement of the current Integrated Pollution Prevention and Control (IPPC 1 ) legislation. We assessed the central research question from the perspective of the combined industry and energy sectors participating in an ETS as well as the cement sector in specific. In our analysis, we assumed that the policy option of ETS will function as a combination with IPPC; the latter will enforce at least upper-limit (least stringent) Best Available Technology standards for individual industrial sources. Hereafter, we summarize the main conclusions from our study. 4/75 1 The IPPC Directive will be integrated into the Industrial Emissions Directive (IED) which is currently undergoing the co-decision procedure.

5 Environmental trends in the EU: Full implementation of current EU emissions policies will result in 90% (SO 2 ) and 65% (NO x ) reduction of total NO x and SO 2 emissions in the EU 2 in 2020, in comparison to to This is the co-called baseline development, which assumes full implementation of the IPPC Directive, to the upper-end (least stringent) Best Available Technology requirements. The implementation of IPPC-requirements to these levels will reduce total industrial emissions by more than 60% (SO 2 ) and more than 40% (NO x ) in 2020, compared to The remaining policy gap in 2020, between the baseline emissions development and the emissions levels required by the environmental targets from the Thematic Strategy for Air Pollution is rather small and, therefore, uncertain. Despite these reductions, excess nitrogen deposition on nature remains a widespread EU problem in The problems of ozone exposure, acidification and health-fine particles persist, but are increasingly of a regional or even local nature. The share of industrial NO x and SO 2 emissions in environmental problems In 2020, industrial NO x emissions are expected to contribute some 12% to the overall problem of eutrophication in the EU. The contribution of international shipping to total NO x -emissions is included in this estimate. In 2020, industrial NO x and SO 2 emissions are expected to contribute some 20% to the overall problem of acidification. The contribution of international shipping to total SO 2 -emissions is included in this estimate. In 2020 industrial SO 2 emissions are expected to contribute less than 50% to overall SO 2 emissions. The contribution of international shipping to total SO 2 - emissions is included in this estimate. International shipping will become a dominant SO 2 source that contributes more than 30% in large areas of Europe and up to 50% in vulnerable areas. Compared to the land-base industry and energy sectors, international shipping holds an untapped abatement volume of NO x and SO 2 that is larger and cheaper than emissions reductions in the industry and energy sectors. Abatement potentials and costs of full implementation of BAT in the cement sector The full BAT abatement potential of NO x is about 250 kton compared to current emissions levels of approximately 400 kton. The current abatement cost of NO x in the cement sector is, on average, 0,3 /ton-clinker. Full enforcement of upper-limit BAT will increase the average abatement costs to 0,7 /ton-clinker. 5/75 2 Emissions from all sectors according the NEC-Directive definition. This excludes emissions from international shipping. 5

6 Further enforcement to lower limit BAT will increase the average abatement costs to 0,9 /ton-clinker. The full BAT abatement potential of SO 2 is approximately 70 Kton compared to current emission levels of approximately 95 kton. The current abatement cost of SO 2 in the cement sector is, on average, 0,8 /ton-clinker. Full enforcement of upper-limit BAT will increase the average abatement costs to 2,1 /ton-clinker. Further enforcement to lower limit BAT will increase the average abatement costs to 3,2 /ton-clinker. The abatement costs show a substantial spread among individual installations, see Table 1. It should be noted, that in the investment practice of cement firms, shorter depreciation periods and higher discount rates may be used instead of the ones applied in the current study. This would result in higher cost estimates at the individual plant level than shown in Table 1. Table 1: Key results for NO x and SO 2 abatement in the EU cement sector. Numbers between brackets indicate cost range at the individual plant level. Abatement cost at various emission levels NO x [ /ton clinker] SO 2 [ /ton clinker] Current emission level 0,3 (0,1 1,7) 0,8 (0,2 4,7) Upper BAT emission level 0,7 (0,1 2,9) 2,1 (0,2 6,8) Lower BAT emission level 0,9 (0,2 3,7) 3,2 (1,4 10,7) Empirical Lessons from market based instruments for air pollutants From an analysis of the characteristics of six applications of market based instruments (including ETSs) for air pollutants, we conclude that in most cases, multiple regulation is applied, i.e. ETS acts as a combination with Commandand-Control instruments such as BAT requirements for technologies and air quality standards (US ETS for NO x and SO 2, Dutch ETS for NO x ). The mixing of these instruments was introduced in each case at a stage when the emissions from the targeted sectors were still comparatively high. This is different for the idea of introduction of NO x and SO 2 ETS in the EU, which holds the risk of conflicting with existing policy instruments (see below). Only centralized and harmonized ETSs have a high assurance of compliance with the emissions cap and can thus be regarded as an effective instrument. Opportunities and risks ETS creates for the cement sector Potentially, the cement sector can provide substantial NO x emission reductions under ETS, at low costs in terms of per ton of abated NO x - in comparison to other participating sectors. Because of this, the cement sector would have a low exposure to ETS allowance price fluctuations. The overall cost-impact on the cement sector strongly depends on the ETS scheme and its design and most importantly, whether allowances are allocated free of charge or auctioned. In case of free allocation of allowances, the comparatively cheap NO x abatement in 6

7 the cement sector could, in theory, offer the opportunity to obtain revenues from selling excess allowances. Introduction of ETS for SO 2 imposes a clear risk for the cement sector. The sector already has a good SO 2 -performance. The small fraction of plants that do emit SO 2 face either high abatement costs (with marginal costs up to 10 /tclinker) or a risk of price exposure under ETS. Significantly, all cement producers will face increased electricity costs under SO 2 -trade which are more than 5 times higher than the electricity prices increases under NO x -trade. Introduction of the ETS instument will create extra costs for monitoring, reporting and verification in the cement sector of 0,16 /ton-clinker. Power suppliers will participate in the ETS and it is probable that they will forward the costs of NO x - and SO 2 -allowances into the electricity price. As a result, electricity costs for the cement sector may increase by 0,1 /ton-clinker from NO x -trade and with 0,6 /ton-clinker from SO 2 -trade. Overall evaluation of ETS for NO x and SO 2 The introduction of an Emissions Trading Scheme (ETS) for industrial SO 2 and NO x could increase the effective implementation of BAT and complies with the general ambition of the Commission to promote the use of market based instruments in environmental policies. ETS is, however, likely to conflict with existing policies, such as the IPPC Directive, the NEC Directive, the Natura 2000 policies and local air quality requirements (resulting from air quality legislation or from individual permit procedures). These policies will limit the flexibility of Emissions Trading and decrease its potential efficiency. The introduction of a new policy instrument will also add another element to the existing complexity of air pollution policies, which the Commission is aiming to simplify. ETS for industrial SO 2 may not be a proportional instrument, because acidification will change from a regional to a local problem in 2020, to which industrial SO 2 emissions only contribute 11%. In addition, SO 2 emissions are strongly associated with CO 2 -intensive fuels (coal, oil). It is likely that, at least in the long-term, climate policies will provide an additional incentive for reduced use of these fuels. 7

8 Table of contents 1 Introduction to the report Background Key research question Identifying the environmental problem Environmental problems from air pollution: Baseline air pollutant emissions development until Contribution of industry to emissions in Policy targets for 2020: the thematic strategy on air pollution Do policy targets for 2020 require additional policies? Summary overview The policy objective, the policy options and the context of these options The objective of the Commission Short overview of EU air pollutant policies Theoretic considerations concerning Emission Trading Systems Practical experiences with market based instruments for air pollutants General conclusion from theory and practice of MBIs Impacts: BAT in energy and industry potentials and costs Impacts: BAT in the cement sector potentials and costs NO x abatement technologies in the cement sector SO 2 abatement technologies in the cement sector Cost analysis methodology Emission abatement cost for individual cement plants Cost-curves for the EU cement sector Extra cost for the cement sector for implementing ETS Cost exposure of cement sector under ETS Cost overview for the cement sector Comparing the policy options Overarching criteria Overall assessment

9 7 List of Acronyms Works Cited... 3 Annex 1: Data behind analysis of timing of introduction of instruments

10 1 Introduction to the report 1.1 Background The introduction of an EU-wide (or regional) NO x and SO 2 Emissions Trading Scheme (ETS) for IPPC installations is an idea which has been on the agenda of the European Commission for a long time. In a Communication accompanying the proposed renewed IPPC directive, the Commission announced in 2007 that it would continue to work on developing possible EU-wide rules on emissions trading for NO x and SO 2 for industrial installations (EC Commission, 2007). The research supporting this development is currently ongoing and being enacted by the consultancy ENTEC. CEMBUREAU, the European cement association, is seeking for parallel research to enrich the Commissions line of research and is considering its position in respect to a possible future proposal for ETS. This research was carried out by Ecofys and Emission Care and is presented in the current report. 1.2 Key research question The leading question for this project is formulated as: would it be efficient and effective to introduce NO x (and SO 2 ) trade in the EU, compared to continuation and improvement of current IPPC legislation? This research question is analysed according to the elements provided by the Commissions Impact Assessment Guidelines (EC, 2009): 1 First we identify the nature and extent of the environmental problem to which new policies are targeted (Chapter 2). We assess trends in emissions of air pollutants and the resulting development in environmental quality. The remaining environmental problems in 2020, under a so-called baseline development, are identified as well as the contribution of the ETS sectors to these problems. Finally, this baseline of NO x and SO 2 emissions in 2020 is compared to the provisional emissions ceilings that are required to meet the ecosystem and health protection targets from the Thematic Strategy on Air Pollution (EC, 2005). The aim of this chapter is to assess the policy gap in Next, in chapter 3 we identify the policy objective of the Commission, which is to achieve full implementation of Best Available Techniques (BAT) for emission abatement in industry. The Commission sees two policy options to achieve this objective: reinforcement of current industrial emissions policies or introduction of an emissions trading scheme for NO x and SO 2 from industrial sources. We place the policy options of ETS in the context of existing policies and assess theory and practice of market based instruments for air pollutants. 3 Next, in chapter 4 we assess the impacts of the policy objective on the industry and energy sectors. In specific we analyse the abatement potentials and costs associated with full implementation of BAT. 4 In chapter 5 we do the same, but now focus on the cement sector. Here, a new detailed bottom-up inventory of abatement potentials and costs is presented. 5 Finally, in chapter 5 we evaluate the policy option of ETS, using criteria provided by the Commissions Impact Assessment. These criteria are effectiveness, efficiency, simplicity, coherence and proportionality. 10

11 2 Identifying the environmental problem 2.1 Environmental problems from air pollution: Air pollution is considered to be a multi-pollutant, multi-effect problem (see Figure 7). Major air pollutants are: sulphur dioxide (SO 2 ), nitrogen oxides (NO x ), ammonia (NH 3 ), particulate matter (PM) and non-methane volatile organic compounds (NMVOC). These pollutants cause acidification and eutrophication of ecosystems, high concentrations of ground-level ozone, and have significant health implications. Air pollutants are transported through the atmosphere over long distances. Therefore, mitigation strategies require international action. International actions such as the Convention on Long-range Transboundary Air Pollution (CLRTAP) and a range of EU legislations have successfully reduced air pollution in the EU since the mid-1980s. However, problems still persist, as is illustrated in Figure 1. Here, the environmental risks are expressed as exceedance of so-called critical loads of nitrogen on ecosystems (eutrophication), the exceedance of critical loads of acid deposition on ecosystems (acidification) and the loss in statistical life expectancy from fine particle air pollution. Figure 1: Environmental problems in 2000, eutrophication (left graph), acidification (middle graph) and fine particles (right graph) (source: Figure 31 from CIAM (2007)). 2.2 Baseline air pollutant emissions development until 2020 During the past decades, emissions of air pollutants in the European Union have declined substantially (Centre for Integrated Assessments, 2007) (see Figure 2). Emissions are expected to further decline until 2020, as a result of implementation of current EU policies, see Table 1 (IIASA, (2008) and more details in section 2.5). 11

12 SO2 - EU27 all land-based sources NOx - EU27 all land-based sources kton kton Figure 2: Emissions trends of SO 2 and NO x in the EU 27. Projections for 2020 include the expected future impacts of current EU-policies (IIASA, 2008). As a result of these emissions reductions, the exposure of humans and ecosystems to excess air pollution will continue to decrease towards This is illustrated in Figure 6. Table 1: Emissions of air pollutants in the EU27 under the NEC Directive. Kton * SO NO x NH VOC PM * Source: NEC-6 report, current policy scenario (IIASA, 2008). Note that emissions sources under the NEC-directive exclude international shipping. 12

13 2.3 Contribution of industry to emissions in 2020 Contribution of industrial NO x emissions 3 to eutrophication Eutrophication is the problem of excess (anthropogenic) nitrogen loads on ecosystems, e.g. forests and surface waters. In 2020, industrial emissions will contribute 42% to the total NO x emissions in the EU (as defined by the National Emissions Ceilings Directive (NEC)). When international shipping is included (not part of the NEC Directive), the share of industrial emissions drops to 23%. Most relevant to the problem of eutrophication, however, are the total emissions and subsequent deposition of Nitrogen, including NH 3 emissions from agriculture. When both the emissions of NH3 and NO x are expressed in units of Nitrogen (N), the contribution of industrial emissions to the total N-emission drops to 12% (this includes N(O x ) from international shipping) NOx emissions land-based NOx emissions land-based + int. shipping N emissions land-based + int. shipping kton transport a.o. E&I kton int. shipping transport a.o. E&I kton int. shipping agriculture transport a.o. E&I Figure 3: Left-hand side: share of industrial emissions (E&I) in total NO x emissions according to NEC definition. Middle graph: share in total EU NO x emissions including emissions from international shipping. Right-hand graph: share in total Nitrogen emissions (N-NO x and N-NH 3 ). Contribution of industrial SO 2 and NO x emissions to acidification The contribution of SO 2, NO x and NH 3 to acidification of soils and surface waters can be compared by expressing emissions in acid equivalents 4. Figure 4 shows the contribution of industry to the overall emissions of acidity. The share of industrial emissions is 29% when only land-based emissions sources are considered and drops to 20% 5 when NO x and SO 2 emissions from sea ships are included. 13/75 3 Throughout this report, emissions from industry and energy sectors are estimated from the SNAP sectors 1, 3 and 4 (e.g. IIASA, 2008) indicated as total industrial emissions. 4 1 kg of NH 3 equals 59 acid equivalents, 1 kg of SO 2 equals 31acid equivalent and 1 kg of NO x equals 21 acid equivalents. 5 The 20% can be split into 11% from industrial SO 2 and 9% from industrial NO x. 13

14 acid equivalent emissions land-based sources acid equivalent emissions land- and sea based sources Mt acid eq transport, agric. a.o. E&I Mt acid eq int shipping transport, agric. a.o. E&I Figure 4: Left-hand side: share of industrial emissions (E&I) in total EU land-based emissions of acidifying emissions (SO 2, NO x, NH 3 ). Right-hand graph: share in total acidifying emissions, including NO x and SO 2 emissions from sea ships. Contribution of industrial SO 2 emissions to SO 2 deposition In 2020, the contribution of industrial emissions to total SO 2 emissions (as defined by the NEC Directive) is >90%. If international shipping is included (no part of NEC), the share drops to below 50%. Figure 5 shows that in 2020, the contribution of international shipping to sulphur deposition in the EU will be greater than 30% in large areas of Europe and up to 50% in vulnerable areas (IIASA, 2007b). Note, that many marine emission reduction options for NO x and SO 2 are more cost-effective than additional measures on land, see also chapter 4 (Centre for Integrated Assessments, 2007; IIASA, 2007b). Figure 5: Percentage of sulphur deposition originating from international shipping in 2000 (left-hand) and 2020 (right-hand) (Source: Centre for Integrated Assessments, 2007). 2.4 Policy targets for 2020: the thematic strategy on air pollution The Thematic Strategy on Air Pollution (TSAP) sets health and environmental objectives and emission reduction targets for the main pollutants; SO 2, NO x, NH 3, PM and VOC. These objectives will be delivered in stages, and will make it possible to 14

15 protect EU citizens from exposure to particulate matter (PM) and ozone in air, and protect European ecosystems more effectively from acid rain, excess nutrient nitrogen, and ozone 6 (EC Commission, 2005). Making comparisons to the situation in 2000, the Strategy is able to set specific long-term objectives (for 2020): 47% reduction in loss of life expectancy as a result of exposure to particulate matter 10 % reduction in acute mortalities from exposure to ozone 74% reduction in excess acid deposition in forest areas 39% reduction in excess acid deposition in surface freshwater areas 43% reduction in areas or ecosystems exposed to eutrophication One of the main legislative routes to achieve the TSAP targets is the revision of the Directive on National Emissions Ceilings (2001/81/EC) applying new emissions ceilings for 2020, for the components of NO x, SO 2, NH 3 and VOC. In order to translate the TSAP targets for improved environmental quality into national emissions ceilings for 2020, the Commission utilises its primary assessment tool; the GAINS optimization model (for a short description of this model, see Textbox IIASA s Gains model). Figure 6: Environmental problems in 2000 (upper graphs) and in 2020 (lower graphs) after implementation of current EU air policies (Source: figure 13 from Centre for Integrated Assessments, 2007). 15/75 6 Text in this paragraph largely from 15

16 (Scale of) remaining environmental problems in 2020 Even after implementation of the TSAP targets, excess nitrogen deposition, causing eutrophication of ecosystems, will remain a widespread EU-problem in 2020, although, exposure to fine particles (Eastern EU, Benelux, Italy), excess ozone (Mediterranean) and acidification (Benelux, central EU, Scandinavian lakes) will have become a more regional problem (Centre for Integrated Assessments, 2007). Please note that, measured against the legal standards of the current EU Air Quality Directive, the over-exposure to fine particles is a more localised problem in 2020 than is apparent from Figure 6 (lower right panel) 7. 16/75 7 Note, that air pollution computer models are too generic to assess compliance of baseline air quality developments in 2020 with legal air quality standards (which are defined e.g. in maximum number of days exceedance of a certain concentration). 16

17 IIASA s GAINS model Since the 1990s, EU air pollution policies have been based heavily on the scientific underpinning of the integrated modelling approaches of IIASA (International Institute for Applied Systems Analysis, Laxenburg Austria). In the 1990s, IIASA developed the RAINS model (Regional Air Pollution Information and Simulation) to study costefficient strategies to control air pollution in Europe. Over the last few years, the RAINS model was extended to capture (economic) interactions between the control of conventional air pollutants and climate-relevant gases. This extended model is called GAINS (Greenhouse gas and Air pollution Interactions and Synergies) and incorporates SO 2, NO x, NH 3, PM and VOC-carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide (N 2 O), the so-called F-gases and black and organic carbon (BC and OC), see Figure 7. The model analyzes the cost-efficiency of policies and measures within a scope of 10 to 30 years for air pollutants and climate relevant gases. The model covers all European countries as individual emission sources. The model includes not only add-on control technologies, but also fuel and technology substitution and energy saving options. If run in the optimization mode, the model specifies cost-efficient emission reductions for each country that enables them to meet policy targets for air quality and greenhouse gases in a cost-efficient way. Figure 7: Illustration of multi-pollutant multi-effect GAINS model 2.5 Do policy targets for 2020 require additional policies? Our key research question requires an exploration into the current policies and how effectively they meet the TSAP-targets for 2020 when they are fully implemented, or whether additional policies are required. As part of the NEC review process, IIASA has drafted a series of six reports (called the NEC reports) which examine cost-effective emissions ceilings (NO x, SO 2, VOC, NH 3, fine particles) for 2020 that should lead to TSAP-target achievement. Below, we have used data from the latest publicly available IIASA study, the NEC6- study (IIASA, 2008). Figure 8 shows the expected emissions reductions resulting from full implementation of current policies, as well emission levels required to reach TSAP s multiple targets. Current policies refers to existing EU legislation 17

18 implemented up to the end of 2006 as well as more recent EU-decisions that will be implemented towards The most important legislations are (for a precise overview, we refer to IIASA, 2008): Directive on the sulphur content in liquid fuels Large Combustion Plants Directive IPPC requirements (referred to as less strict BAT case, hereafter called upperlimit BAT) National Emissions Ceilings Directive (with ceilings for 2010) EURO -5 and -6 standards for light duty vehicles EURO-II and EURO-III standards for heavy duty vehicles The 2008 Climate & Energy package (European Parliament and Council, 2009) emissions SO baseline SO TSAP ceiling SO emissions NOx 2020 baseline NOx 2020 TSAP ceiling NOx kton kton Figure 8: GAINS model results for total NO x (left) and SO 2 (right) emissions in the EU27 under full implementation of current policies (upper line) and reductions required to reach TSAP environmental quality targets (lower line) (IIASA, 2008). The general conclusion from the results in Figure 8 is, that the implementation of current EU policies can create more than 90% of the emissions reductions between 2000 and 2020, required to reach the TSAP targets. The uncertainties in this policy gap are assessed in the next section. Uncertainties in remaining distance to target in 2020 Figure 9 illustrates the uncertainties associated with the baseline prediction of NO x and SO 2 emissions in 2020 and the uncertainties in the assessment of the TSAPceilings; the emissions levels that are required to achieve the targets from the Thematic Strategy for air pollution (TSAP). 18

19 emissions SO baseline SO TSAP ceiling SO emissions NOx 2020 baseline NOx 2020 TSAP ceiling NOx kton kton Figure 9 Total emissions of SO 2 and NO x in 2000 and 2020 in the EU27 and uncertainties in 2020 emissions (source: IIASA, 2008). For explanation, see main text. Uncertainties in the 2020 baseline emissions reflect the continual downward adjustments of NO x and SO 2 prognoses in the IIASA NEC reports that were published in the period These adjustments reflect re-assessment of current policies impact, due to ongoing policy decisions in the EU in the field of air pollution (e.g. latest EURO emission controls for vehicles) and climate change (notable the 2008 Climate & Energy package (European Parliament and Council, 2009)). The central value of the baseline emissions in 2020 as shown in Figure 9 is the value reported in the NEC6 report by IIASA (2008). Most recent provisional results from an ongoing study by IIASA suggest that current policy emissions in 2020 will even drop below this central value 8. The (upward) uncertainty in the (provisional) TSAP-ceilings reflects the uncertainty in the boundary conditions that govern the optimization of the GAINS model towards multiple environmental targets (acidification, health protection, eutrophication). When e.g. a reduction is assumed in SO 2 emissions from international shipping, in accordance with recent IMO decisions, the NEC-ceiling for SO 2, calculated from landbased sources, can be relaxed somewhat. Similarly, the baseline assumes partial implementation of the Nitrates Directive, which reduces NH3 emissions in agriculture. When full implementation is assumed, NH3 emissions in 2020 will drop which relaxes the required reductions for NO x (source: IIASA, 2008). 19/75 8 Currently (end of 2009) IIASA is re-assessing the NEC6 calculations (IIASA, 2008) as part of the preparations for the review of the Gothenburg protocol, due in This revision is based on a new, yet unpublished, PRIMES energy baseline for the EU which includes the impacts of decreased economic activity (the recession) on Europe s energy system and associated greenhouse gasses. Preliminary results suggest that current policy emissions of NO x and SO 2 in 2020 will reduced below values reported in the NEC6 report (IIASA, 2008). (see: baseline.pdf). 19

20 In summary, Figure 9 shows that in 2020 a rather small gap remains between the baseline emissions and TSAP-ceilings. The uncertainties in the gap appear to be larger than the central value of the gap. 2.6 Summary overview In this chapter we reviewed baseline emission developments, environmental targets and policy gaps for SO 2 and NO x in The analysis is entirely based on the public information used as a basis for the Commissions air quality policies. Our main findings are: Full implementation of current emissions policies will result in a 90% (SO 2 ) and 65% (NO x ) reduction of total land-based emissions in the EU in 2020, from This is the co-called baseline development, which assumes full implementation of the IPPC Directive, to the upper-end (least stringent) Best Available Technology requirements. The implementation of IPPC-requirements to these levels will reduce total industrial emissions by more than 60% (SO 2 ) and 40% (NO x ) in 2020, from The policy gap, in 2020, between the baseline emissions development and the emissions levels required to reach environmental targets from the Thematic Strategy for Air Pollution, is rather small and, therefore, uncertain. Despite these reductions, excess nitrogen deposition in the natural environment remains a widespread EU problem in The problems of ozone exposure, acidification and health-fine particles persist, but will increasingly become a regional or even local issue. In 2020, industrial NO x emissions are expected to contribute approximately 12% to the overall problem of eutrophication in the EU. The contribution of international shipping to total NO x -emissions is included in this estimate. In 2020, industrial NO x and SO 2 emissions are expected to contribute approximately 20% to the overall problem of acidification. The contribution of international shipping to total SO 2 -emissions is included in this estimate. In 2020 industrial SO 2 emissions will contribute less than 50% to overall SO 2 emissions. The contribution of international shipping to total SO 2 -emissions is included in this estimate. International shipping will become a dominant SO 2 source, contributing more than 30% in large areas of Europe and up to 50% in vulnerable areas. The main conclusion from this chapter is, that the identified problem is not necessarily an insufficient number of policies reaching the EUs environmental TSAP targets in 2020, but that the Commission has stated a risk of insufficient implementation of policies, specifically for industrial emissions (EC, 2007). Based on this problem identification, the next chapter defines the precise policy objective of the Commission and the associated policy options. 20

21 3 The policy objective, the policy options and the context of these options 3.1 The objective of the Commission The policy objective of the Commission is formulated in its Communication Towards an improved policy on industrial emissions (EC Commission, 2007): to address the specific problem of shortcomings in the implementation of current legislation that hinders the full exploitation of Best Available Techniques. The objective is intended to improve policies, in order to achieve full exploitation of Best Available Techniques. For this objective to be achievable, the Commission sees two policy options: 1. Revision of current legislation on industrial emissions and reinforcement of the Commission s Action Plan on implementation 2. Introduction of EU rules for an emission trading scheme on NO x and SO 2. Policy option 2, which will be described in more detail in the next section, is expected to be applied on top of the current IPPC 9 legislation, with the option to potentially replace it 10 in the long-term. The phrase, on top of implies that, to some extent, BAT-requirements for local emission sources will remain and that ETS will function to achieve reductions beyond this minimum BAT-requirement. The next sections provide context to both policy options. Section 3.2 describes the existing policy in respect to air quality to provide greater insight of the policy landscape in which the Commission s proposal will need to fit. Section 3.3 reflects on the theoretic considerations of applying ETS and section 3.4 provides lessons from practical experiences with market based instruments in air pollution policies. Finally, section 3.5 draws conclusions from the theory and practice of ETS, and market based instruments, in relation to the Commissions policy option of introducing ETS for NO x and SO 2 in the EU. 3.2 Short overview of EU air pollutant policies This section will give an overview of the EU air pollutant related legislation. It ends with some conclusions about the characteristics of the legislation and any trends that can be observed. 21/75 9 The IPPC Directive will merge into the Industrial Emissions Directive (IED) which has entered the last phase of the EU co-decision procedure. 10 Quote from Specifications to the Invitation to Tender DG ENV.C.4/SER/2008/0019, following the publication of information notice in OJEU 2008/S of 22/03/2008 and the contract notice in OJEU 2008/S of 10/05/

22 IPPC Directive (2008/1/EC) The Directive concerning Integrated Pollution Prevention and Control (IPPC Directive) sets certain Emission Limit Values (ELVs) for industrial installations. The implementation of these requirements takes place through the permitting procedures of the Member States; the directive obliges Member States to make a conditional permit based on the emissions of the applicant. The Emission Limit Values are based on what is considered to be the Best Available Technique (BAT) for the reduction of emission in a particular industry. The BATs are defined in the BAT Reference (BREF) documents, which are based on a consensus between technical experts from Member States and those from industrial and environmental NGOs. The IPPC Directive first came into effect in It will be replaced in the short-term by a Directive on Industrial Emissions, which will also replace a number of other related directives (see below). NEC Directive (2001/81/EC) The NEC Directive came into effect on 23 October, Its sets limits (also called ceilings ) for total emissions of NO x, SO 2 and other pollutants in individual Member States These limits are to be achieved by the Member States. The Directive does not include a specific instrument for enforcing the targets it sets. It does however leave in place all other legislation regarding emissions limits, such as the IPPC directive. In this respect, it can be seen as a safety structure that openly allocates the responsibility for meeting these targets to the Member States. Closely linked to Gothenburg protocol The levels that are set by the NEC Directive are closely linked to those agreed upon in the Gothenburg Protocol 11. A revision of the Gothenburg Protocol is currently taking place and is expected to result in a political agreement in December The revised protocol will set new emissions ceilings for 2020 for 51 parties under the protocol, including the EU Member States. A review of the NEC will start in the near future 12 and will take place simultaneously with the revision of the Gothenburg Protocol. The practice of the previous round of revisions was that agreement on the NEC Directives follows agreement on the Gothenburg protocol, and the emission levels of the Gothenburg protocol are adopted in the NEC-Directive. If the same course of events takes place for the current reviews, a reviewed NEC-Directive can be expected to enter into effect after /75 11 Protocol under the Convention on Long-range Transboundary Air Pollution (CLRTAP). The Protocol has been signed by 31 countries (among which the EU Member States) and sets emission ceilings for 2010 for four pollutants: sulphur, NOx, VOCs and ammonia. 12 In fact, the NEC-review has been postponed to await for full clarification on EU climate policies (that will also impact on air pollutants). 22

23 Natura The Habitats Directive (92/43/EEC) is a cornerstone of Europe s nature conservation policy. The Directive establishes the Natura 2000 network, a European network of nature protection areas. The Habitats Directive and the Birds Directive (79/409/EEC) provide a high level of protection to the Natura 2000 network by taking a precautionary approach to controlling polluting activities. Plans and projects can be permitted only if they are shown to have no significant adverse effect on a Natura 2000 site, unless there is an overriding public benefit. While emphasis has been placed on reducing on-site activities, there is also a requirement for the assessment of off-site activities, including the polluting effect of local and transboundary air pollution sources. Emissions of nitrogen from industrial combustion and agricultural processes clearly present off-site pressures on the Natura 2000 network (see Figure 6 for presentation of large scale exceedance of critical Nitrogen loads in the EU). An application for a permit under the IPPC Directive can therefore give rise to a plan or project under the definition of the Habitats Directive. In some cases, the sources may be many kilometres away from the potentially affected site(s). The implementation of this nitrogen impact assessment provision in the Habitats Directive is considered to still be in a preliminary phase because impacts are often not addressed accurately or systematically. To what extent the Habitat Directive could actually limit the flexibility of a future ETS is yet unknown, but clearly ETS will introduce a new element (of complexity) in the integral interpretation of IPPC- Habitats Directive interactions. Large Combustion Plant Directive (2001/80/EC) The Large Combustion Plant (LCP) Directive came into effect on 27 November The LCP Directive sets Emission Limit Values for SO 2, NO x and dust emissions. It does so concurrently with the IPPC Directive, which means that merely meeting the obligations set in the LCP Directive is not always sufficient to comply with all legal requirements. Because the LCP Directive does not follow the BAT approach, it actually sets a less stringent limit than the IPPC Directive. in most cases. Waste Incineration (2000/76/EC) Similarly to the IPPC and the LCP Directive, the Waste Incineration Directive also sets Emission Limit Values for, among other pollutants, NO x and SO 2. In its sectoral application, it overlaps with the IPPC Directive and is very similar in its approach: the directive demands for all incineration or co-incineration plants to be authorized 23/75 13 Text largely based on: Nitrogen deposition and Natura 2000: Science & practice in determining environmental impacts. Findings of a European Workshop linking scientists, envrironmental managers and policy makers May 2009, Brussels. For workshop summary, see 23

24 through a permit system which has minimum requirements. The Waste Incineration directive came into effect on 28 December New Air Quality Directive (2008/50/EC) The new air quality directive ( Directive on ambient air quality and cleaner air for Europe ) is the result of a number of existing air quality regulations merging into a single directive. It contains a set of standards for air quality (NO 2, SO 2, PM10, PM2.5 and ozone standards), and how air quality should be measured and monitored. Member States must ensure that these standards are met. Despite the fact that air pollutant emissions in the EU continue to decrease (EEA, 2009a,b) and that air pollution becomes a more regional and local problem (see chapter 2), exceedances of ground-level ozone and fine particle standards remain persistent and wide spread (EEA, 2009). NO x contributes to ozone formation and both NO x and SO 2 contribute to, secondary, fine particle emissions. The Proposal for a new Industrial Emissions Directive (IED) 14 To industries and Member States, the myriad of directives can make it unclear what rules are applicable in a specific situation. An example of this is the application of Best Available Techniques through the BREFs. During the recent review of the IPPC, these issues were indeed brought up by the stakeholders (EC Commission, 2007b). Based on this review, a proposal for a Directive on Industrial Emissions was adopted on 21 December 2007 (EC Commission, 2007a). This proposal intends to: strengthen or add certain provisions to ensure better implementation and enforcement of the legislation by national authorities with the aim of achieving a high level of environmental protection, while simplifying legislation and at the same time reducing unnecessary administrative burdens. Clearer provisions will allow better monitoring and enforcement of the legislation through Community actions. It will be a recast of seven existing directives, among which are the IPPC Directive, the Large Combustion Plants Directive and the Waste Incineration Directive. This proposal is currently in a very advanced stage of the co-decision procedure and is expected to be officially approved in the near future. Flexible instruments are mentioned in accompanying documentation Interestingly, one of the possibilities that the document accompanying the proposal discusses, is the introduction of flexible instruments to meet its targets. The Impact Assessment (EC Commission, 2007b) concludes that it would work best by allowing Member States to choose whether they maintain the individual BAT-based permit conditions for NO x and SO 2 emissions or opt for an emissions trading scheme (subject to EC rules) instead. EC-wide rules would be established to particularly ensure that 24/75 14 As this is written, the Industrial Emissions Directive is undergoing the co-decision procedure to be adapted as legislation. Final approval by the European Parliament is likely to be given in May 2010, quickly followed by adaption of the act. 24

25 the overall BAT-based emission levels are achieved. Such ETS provisions were, however, not included in the final proposal for the new IED. Instead, in a Communication accompanying the IED proposal, the Commission announced that it would proceed with investigating possibilities for the introduction of an emission trading scheme on NO x and SO 2 (EC, 2007). Current and future trends in air pollution policies Command-and-Control instruments have been the main drive behind the lowering of industrial emissions in the EU. Enforcement of Emission Limit Values (ELVs) is increasingly based on Best Available Technology standards as legally defined under the IPPC Directive. This Best Available Techniques (BAT) approach is strengthened in the proposed Industrial Emissions Directive. Indeed, through internet consultation, over 90% of private companies, industry organizations and individuals agreed that the implementation of Best Available Techniques (BAT) should remain the key instrument of the EU policy on industrial emissions (EC Commission, 2007b). The full range of legislation as described above has actually been legally and administratively complex to implement for each Member State. The proposed single Industrial Emissions Directive is intended to simplify policies. The policy trends described in this section illustrate that the introduction of ETS for NO x and SO 2 will inevitably coincide with continued enforcement of the local BATrequirements 15. In addition, a new policy will require the relaxation or simplification of other policies, to maintain a low level of complexity for the overall package of air pollution policies. 3.3 Theoretic considerations concerning Emission Trading Systems There is considerable theoretic knowledge regarding the use of ETSs and its achieving environmental objectives. This section will outline the theoretical advantages and disadvantages of using ETS as discussed by academics and EC communications. This will be analysed in the broader context of Market Based Instruments (MBIs) What is an ETS? In the case of an ETS, the right to emit a certain unit is certified and the total amount of emissions is set at a maximum level (cap) for a specified group of controlled entities (e.g. countries, companies). If the emission cap is below the business-asusual level, the emission certificates become valuable and emission reductions are incentivized. The possibility to trade certificates helps a cost-effective allocation, as emitters with abatement costs above the market price can refrain from taking measures and buy certificates instead. These certificates are supplied by emitters with lower abatement costs who take additional measures and sell their surplus certificates. Contrary to a tax on emissions, an ETS ensures reaching the 25/75 15 This was further confirmed in our interviews with Johan Vollenbroek (Environmental Consultant at Mobilisation and expert on IPPC enforcement) and Rob Maas (Head of European Air Quality and Sustainability at the Netherlands Environmental Assessment Agency (PBL)) 25

26 environmental target (which is equal to the emission cap), and uses the market to define the price associated with reaching that target. Efficient and flexible MBIs are policy instruments that use financial incentives (e.g. subsidies) or disincentives (e.g. taxes) to encourage wanted behaviour and discourage unwanted behaviour instead of enforcing or forbidding it by more traditional Command-and- Control policies. MBIs reduce unwanted externalities of economic activities by charging them, making the activities by which they are caused more expensive and thereby discouraging them. Those who benefit from the activity pay at least partially for the pollution they cause, in accordance with the polluter pays principle. MBIs are relatively efficient because, unlike regulatory or administrative approaches, they use market signals to address the market failures by creating a market for abatement activities. This gives the emitters the flexibility to make their own decisions on whether to abate or not, and how. The businesses themselves usually have the best insight into what their most cost-efficient abatement options are. This enables them to make a high-quality decision about the optimum use of technology and timing for abatement measures or purchases of allowance to meet the legal requirements. Less regulatory information required The fact that the choice between abatement options is made by the businesses relieves the regulator from this task. For this reason, the regulator has a lesser need for information in an ETS than in a Command-and-Control approach. Contrary to a Command-and-Control situation, knowledge of abatement measures, abatement costs and the best abatement mix for each individual installation is not necessary. This results in comparatively low administrative costs for the regulator during the design phase. There are however other informational needs. With ETS, the free allocation of allowances (based on historic emissions or benchmarks) involves a significant administrative effort. The implementation of an ETS also requires the regulator to set the level of emissions under the scheme, associated with a total cost and price level that will be revealed only in the course of the program (Goulder, Instrument Choice in Environmental Policy, 2008). To set the cap at an appropriate level, the regulator needs at least a vague idea of what these costs will be, to ensure that they will not be prohibitive. This is particularly important in light of the necessary rigidity in target setting associated with a stable ETS; in order to give the system time to settle and reveal the long-term price for emission reductions, caps must be set for long-term periods 16 without opportunities for adjustment. For these reasons, the information needs for an ETS are, in practice, often similar to those for Command-and-Control policies. Conversely, if all the abatement options and their related costs are completely known to the regulator, there is no need for a market system to reveal the cheapest options 26/75 16 In the review of the EU ETS, more than 50% of the private institutions indicated they wanted a trading period with a length of more than 10 years (McKinsey & Company, Ecofys, 2005). 26