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European Union Emissions Trading System

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The European Union Emission Trading Scheme (EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world. Under the scheme, each participating country proposes a National Allocation Plan (NAP) including caps on greenhouse gas emissions for power plants and other large point sources. The NAP must subsequently be approved by the European Commission.

Launch

The scheme, in which all 25 member states of the European Union participate, commenced operation on 1 January 2005. In its first year, 362 million tonnes of CO2 were traded on the market for a sum of €7.2 billion. [1] The price of allowances increased more or less steadily to its peak level in April 2006 of ca. €30 per tonne CO2 [2], but came crashing down in May 2006 to under €10/ton when it became clear that many countries had given their industries such generous emission caps that there was no need for them to reduce emissions. Consequently, NGO's have accused national governments of abusing the system under industry pressure, and have urged for far stricter caps in the second phase (2008-2012). [3]

Phase I

In the first phase (2005-2007), the EU ETS includes some 12,000 installations, representing approximately 45% of EU CO2 emissions, covering energy activities (combustion installations with a rated thermal input exceeding 20 MW, mineral oil refineries, coke ovens), production and processing of ferrous metals, mineral industry (cement clinker, glass and ceramic bricks) and pulp, paper and board activities.

Phase II

The second phase (2008-12) is to cover not only CO2, but all greenhouse gases. Moreover, CDM and JI credits are expected to be introduced in second phase through the 'Linking Directive'.[4] The Commission also considers including aviation in the EU ETS [5], a move considered important due to the large and rapidly growing emissions of the sector. The inclusion of aviation is estimated to lead to an increase in demand of allowances of about 10-12 million tonnes of CO2 per year in phase two. This in turn is expected to lead to an increased use of JI credits from projects in Russia and Ukraine which would offset the increase in prices and eventually resulting in no discernable impact on average annual CO2 prices.[6].

Ultimately, the Commission wishes the post-2012 ETS to include all greenhouse gases and all sectors, including aviation, maritime transport and forestry [7]. For the transport sector, the large number of individual users adds complexities, but could be implemented either as a cap-and-trade system for fuel suppliers or a baseline-and-credit system for car manufacturers[8].

National Allocation Plans for the second phase are currently being drafted and are expected to be ready by June 2006. The European Commission suggests that if the ETS is to contribute proportionately to emission cuts, the total number of allowances should be around 6 % lower in phase two than in the first phase.[9]

Environmental consequences

Overall emission reductions

In 2004, Ecofys analysed the then available preliminary NAPs of all EU countries[10]. The information suggested that the caps for Phase 1 are rather lenient; in most countries, the power sector would not need to reduce CO2 emissions as much as the country as a whole, in other words the other sectors must make more ambitious emission reductions than the power sector under the scheme. More strikingly, a few countries (such as the Netherlands) gave more allowances than Ecofys estimated to be needed under a business-as-usual scenario, implying that no 'real' efforts to reduce emissions would be required. In their analysis of the Phase 1 NAPs, the NGO Climate Action Network called the caps a 'major disappointment'[11], arguing that only two (UK and Germany) of the 25 EU states asked the participating industry sectors to reduce emissions compared to historic levels and found that in the 15 old EU member states as a whole, allocations were 4.3% higher than the base year. In May 2006, when several countries revealed registries indicating that their industries had been allocated more allowances than they could use, trading prices crashed from about €30/ton to €10/ton. Widespread overallocation would imply that no overall emission reductions would have been achieved.

Allocation

Most allowances in all countries were given freely (known as grandfathering). This approach has been criticized as being less efficient than auctioning and providing too little incentive for installing clean, renewable energy[12],[13].

The inclusion of sinks

Currently, the EU does not allow CO2 credits under ETS to be obtained from sinks (e.g. reducing CO2 by planting trees). However, some governments and industry representatives lobby for their inclusion. The inclusion is currently opposed by NGO's as well as the EU commission itself, arguing that sinks are surrounded by too many scientific uncertainties over their permanence and that they have inferior long-term contribution to climate change compared to reducing emissions from industrial sources[14].

See also

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