Lex Mundi Annual and North America Regional Conference. Vancouver. September 30 October 2, Hot Topics in Climate Change and Energy:

Transcription

1 Lex Mundi 2010 Annual and North America Regional Conference Vancouver September 30 October 2, 2010 Hot Topics in Climate Change and Energy: Outline on European Emissions Trading Scheme (EU ETS) by Rechtsanwalt Uwe M. Erling, LL.M. Noerr LLP Brienner Straße Munich/Germany Tel.: +49 (0) Fax: +49 (0) Page 1/5

2 I. European Emissions Trading Scheme (EU ETS) in a Nutshell The EU Emission Trading Scheme (EU ETS) is the largest multi-country, multisector Greenhouse Gas emission trading scheme world-wide. It has been established through binding legislation in 2003 and covers over 11,500 energyintensive installations across the EU, which represent close to half of Europe s emissions of CO Cap and Trade Designed as a cap and trade scheme, the EU ETS sets a limit or cap on the amount of CO 2 that can be emitted during specified trading periods. The total quantity of CO 2 emissions is determined by National Allocation Plans (NAPs) that Member States grant to their companies, which can then be sold or bought by the companies themselves. This means each Member State must ex ante decide how many allowances to allocate in total for a trading period and how many each plant covered by the Emissions Trading Scheme will receive. 2 The idea is that Member States limit CO 2 through the allocation of allowances, thereby creating scarcity, so that a functioning market can develop later and overall emissions are then really reduced. 3 1 European Parliament and Council Directive 2003/87 of 13 October 2003 establishing a system for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61, 2003, O.J. (L 275) 32 [hereinafter European Parliament and Council Directive 2003/87]. 2 NAPs have to be drawn up periodically. Each Member State had to prepare and publish a first NAP for the trading period by 31 March The NAPs for the second trading period had to be prepared and published by 30 June However, under the 2008 review of the EU ETS it is proposed to substitute NAPs by a single EU wide cap, see Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, COM (2008) 16 final. 3 Official EU data published in May 2006 showed that a group of countries, including large polluters such as Germany, were left with 44.1 million tonnes extra CO 2 allowances for the year The supply surplus sent carbon prices crashing, calling into question the credibility of the EU scheme. In an bid to avoid a repeat of this situation during the second trading period, set to begin in mid 2008, the Commission announced in October 2007 a 10 % reduction in the emissions that member states are Page 2/5

3 In the first trading period, from 2005 to 2007, the system covered only CO 2 emissions from large emitters in the power and heat generation industry and in selected energy-intensive industrial sectors. 4 In the second trading period, from 2008 to 2012, emissions of nitrous oxide (N 2 O) are also included Greenhouse gas emissions permit Under the Scheme, plant operators are not allowed to emit CO 2 unless they hold a greenhouse gas emissions permit. 6 Such permits are not tradable and are issued by the competent authority of EU Member States provided that the operator is capable of monitoring and reporting emissions. 7 The permit requires operators to monitor their emissions and to produce at the end of each year a report on annual emissions, which will be verified by a third party (similar to an auditor verifying the financial accounts of a company) EU Allowances Furthermore, plant operators have to make sure that they are in possession of a sufficient number of tradable allowances 9 because operators are required by April 30 of each year to surrender EU Allowances in a number allowed to emit (to a total of 2.08 billion tonnes for the period), forcing some countries to slash their suggested targets by as much as 50 %. 4 European Parliament and Council Directive 2003/87, art. 4, annex 1: combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, bricks, ceramics, pulp and paper is also identical with the first commitment period under the Kyoto Protocol. 6 European Parliament and Council Directive 2003/87, art. 3 (d), art. 4, art Id. art. 6 par. 1, art 14; Commission Decision 2007/589 of 18 July 2007 establishing guidelines for the monitoring and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council, O.J. (L 229) 1 (setting binding monitoring and reporting standards). 8 European Parliament and Council Directive 2003/87, art Id., art 3 (a): an EUA represents the right to emit one tonne of carbon dioxide equivalent during a specified period, which shall be valid only for the purposes of meeting the requirements of this Directive and shall be transferable. Page 3/5

4 equivalent to the CO 2 verified emissions of their respective installations in the previous year. 10 If an operator does not comply with this requirement, it will be required to pay a penalty of 100 Euro for each ton of CO 2 emitted by that installation between 2008 and 2012 for which it has not surrendered sufficient EU Allowances. 11 However, this penalty will not free the operator from its obligations, as it still remains obliged to surrender the relevant amount of EU Allowances for these emissions in the subsequent year. 12 In addition, the operator will be named and shamed by having its name published Linking with the Kyoto Project Mechanism Under the Linking Directive 14, operators of an installation subject to emissions trading can, in principle, also fulfil their obligation to surrender allowances by means of the surrender of Emission Reduction Units (ERU) or Certified Emission Reductions (CER) from Joint Implementation (JI) and Clean Development Mechanism (CDM) projects. Basically, all credits are eligible for compliance purposes. 15 Only project-based carbon credits generated from nuclear installations or from areas of land use, land use changes or forestry (LULUCF) are exempt from this regulation. 16 Special regulations also apply to large hydro projects. Apart from these qualitative restrictions, quantitative restrictions also apply. Plant operators may use 10 Id. art 3 (a), art. 12 (3); an obligation to surrender allowances equal to the total emissions of the installation in each calendar year, as verified, is also set forth in the emission permit, see art. 6 par. 2 (e). 11 Id. art. 16, par.3, sentence 2: the penalty is called Excess Emission Penalty (EEP). 12 Id. art. 16, par.3, sentence Id. art. 16, par European Parliament and of the Council Directive 2004/101 of 27 October 2004 of amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol s project mechanisms, O.J. (L 338), 18 [hereinafter Linking Directive 2004/101]. 15 Linking Directive 2004/101, art.11a), par Linking Directive 2004/101, art.11a), par. 3. Page 4/5

5 project-based carbon credits only to a maximum level as set forth in the NAPs and National law of the EU Member States. 17 II. Review of the EU ETS in the Third Period ( ) With regard to the third trading period the EU ETS has been revised by Directive 2009/29/EC. 18 According to the Commission the EU ETS in the third period shall provide a more efficient, more harmonised and fairer system. Increased efficiency shall be achieved by means of a longer trading period (8 years instead of 5 years), a robust and annually declining emissions cap (21% reduction in 2020 compared to 2005) and a substantial increase in the amount of auctioning (from less than 4% in phase 2 to more than half in phase 3). More harmonisation shall be achieved many areas, including with respect to the cap-setting (an EU-wide cap instead of the national caps in phases 1 and 2) and the rules for transitional free allocation. Finally the fairness of the system has been substantially increased by the move towards EU-wide free allocation rules for industrial installations and by the introduction of a redistribution mechanism that entitles new Member States to auction more allowances. Whether the revised EU ETS as the cornerstone of the EU's strategy for fighting climate change will meet these expectations of a more efficient, more harmonised and fairer system in the third trading period remains to be seen. 17 Linking Directive 2004/101, art.11a), par. 1; Such a limit is for example set by section 18 Gesetz über den nationalen Zuteilungsplan für Treibhausgas-Emissionsberechtigungen in der Zuteilungsperiode Zuteilungsgesetz 2012 (German Allocation Act 2012) v (BGBl. I 1788) (plant operators may use project based carbon credits to a maximum level of up to 22 % of the allocated amount of allowances for compliance purposes). 18 Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community. Already in 2008 the EU ETS has been extended to cover aviation activities by Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community. Page 5/5