Transcript Use of auctioning revenues (1)

The New EU ETS and the
Global Carbon Market
Montréal 2010
Dr Nicola Notaro
Deputy Head of the Water Unit
DG Environment, European Commission
Context
Political framework
 Overall EU objective: limit global warming to 2° C
above pre-industrial level to avoid dangerous
climate change
 Stern report (2006): no action = costs of climate change to 5
– 20% of global GDP
 4th IPCC report (2007): man-made climate change
“unequivocal”
 European Council March 2007
 20% reduction of GHG emissions by 2020, independently of
an international agreement
 30% in case of satisfactory international agreement
 20% share of renewable energy by 2020
 20% increase of energy efficiency by 2020
The Climate and
Energy Package
Commission’s Climate and Energy Package
23 January 2008:
Directive to amend the EU ETS to contribute to
GHG emission reductions
Decision to share the efforts to reduce GHG
emissions in non-ETS sector
Directive to reach 20% renewable energy by 2020
Directive on legislative framework for carbon
capture and storage
Dual track approach
GHG reduction target:
-20% compared to 1990
-14% compared to 2005
EU ETS
-21% compared
to 2005
Non-ETS sector
-10% compared to 2005
27 national targets, from -20% to +20%
Guiding principles of the
package
 Cost-effectiveness:
 Market-based instruments: ETS allows the achievement
of the emission reduction target at least cost (costefficient)
 Fairness among Member States:
 national targets in sectors outside EU ETS
 national targets for renewables
 redistribution of auctioning rights (partial)
 Special concern: carbon leakage /
competitiveness
 Especially taken into account in ETS
The EU ETS –
Centrepiece of EU climate policy
 Established in 2005 with first trading period from 2005-07
 Learning period
 Important experience, taken into account in 2nd period (08-12) and
review effective from 2013
 2nd trading period 2008-12:




6.5% reduction of emissions compared to 2005 verified level
Considerable contribution to comply with Kyoto
EU ETS largest carbon market in the world
Nucleus of global carbon market
 Review for 3rd trading period 2013-20 and beyond
 Extensive stakeholders consultation in 2007: need for more
predictability and harmonisation
 Cost-effective contribution to EU GHG reduction targets
Main changes
Key elements in the new EU ETS
EU-wide cap
Scope
Harmonised allocation rules
Carbon leakage
Use of auctioning revenues
Strengthened Monitoring, Reporting
and Verification/Market oversight
Towards a global carbon market: ETS
linking and CDM
EU-wide cap
Single EU-wide cap
Linear annual reduction factor of 1.74% that
reduces the cap also beyond 2020
ETS cap in 2020 would be 1720 million
tonnes based on 2008-2012 scope
Adjustment of the cap to take account of
new sectors and gases (deadline: 30
September 2010)
Scope
 New sectors
 Aluminium
 Basic chemical production
 New gases:
 PFCs from aluminium
 nitrous oxide from certain chemicals
 Combined effect: appr. 6 - 7% increase of scope
compared to current trading period
 Confirmation that all sectors should contribute to
emission reduction commitments
 Aviation as of 2012
 Maritime: proposal foreseen by 2011
Harmonised allocation
rules
 Fully harmonised allocation rules
 Minimum distortion of competition
 No ‘National Allocation Plans’, only ‘National Implementing Measures’, a
list of installations with corresponding allocations based on harmonised
rules
 Auctioning is the default allocation method
 Principle: no free allocation for energy production, phase out of free
allocation for other sectors exposed or not to international competition
 Auctioning Regulation
 to be adopted by 30 June 2010
 Auctioning based on clear and objective principles laid down in
Regulation
 More than 50% of allowances to be auctioned in 2013, increasing
thereafter
 Free allocation on basis of ex-ante benchmark for all sectors
receiving free allocation
Carbon leakage: “exposed sectors”
(1)
Quantitative thresholds laid down in
Directive:
5% cost increase and 10% trade exposure
30% for one of the two
Qualitative analysis for borderline sectors
List determined in December 2009
Allocation for free, 100%
Review every five years
Each year, additions are possible in case of
change that has substantial impact on the sector
Carbon leakage: “exposed and non
exposed sectors” (2)
Individual allocations for free at 100%
(exposed) or 80% (non-exposed) down to 0%
in 2027
% is of the amount determined by
benchmarks
Option of transitional free
allowances in power sector
 Total amount in 2013 capped at 70% of 2005-2007 verified
emissions, gradual decrease to zero in 2020
 10 Member States qualify
 New MS except SI, SK,
 MS to apply by 30 September 2011, COM can reject within 6 months
 For existing installations only
 Conditional upon national plan to modernise energy
infrastructure, clean technologies, diversification of energy mix
 Taking into account the need to limit as far as possible directly linked
prices rises,
 Annual reporting to the Commission
Benchmarks (1)
Free allocation based on benchmarks,
where possible:
Allocations determined ex-ante, no ex-post
adjustment
Starting point: average performance of 10%
most efficient installations in (sub)sector
Important to determine the products for which
to set the benchmarks (for e.g. chemical
industry a few lead products must be selected)
Benchmarks (2)
Benchmarks to be multiplied by historic
production to get the amount of free
allowances per installation
Maximum total free allocation for industry
set at industry’s share in total cap based on
emissions in 2005-07
A correction factor may be applied if necessary (if
benchmarks are too generous) to keep within the
maximum
Solidarity
88% of auction rights distributed according
to MS’ share in verified emissions in 2005 or
average of period from 2005 – 07 (whichever
is the highest)
10% redistributed for ‘solidarity and growth’
(Annex IIa)
2% “Kyoto bonus”: for MS which are at least
20% below Kyoto base year emission levels
(Annex IIb)
Use of auctioning
revenues (1)
 Member States collect and decide on the use of
auctioning revenues
 50% of revenues should be used for climate related
purposes domestically or in third countries that have
ratified the international agreement including:
 Global Energy Efficiency and Renewable Energy Fund,
Adaptation Fund
 Developing renewable energies
 Avoided deforestation
 Carbon Capture and Storage (CCS) including in third
countries that ratify the international agreement
 Low emission and public forms of transport
Use of auctioning
revenues (2)
Fiscal or financial support policies can
be accounted for
MS to inform COM on use of revenues
by means of the reports under the
Kyoto implementation decision
280/2004/EC
Incentivising CCS and
RES projects
300 million allowances available for CCS
and innovative renewable energy
technology demonstration projects
Until 31 December 2015
To be given via Member States
Projects selected on the basis of objective and
transparent criteria
Geographically balanced support
Support for a single project no more than 15% of
total number of allowances
Rules to be determined by comitology
Market oversight
provisions (1)
Commission to monitor carbon market
Regular annual reporting to Council and
Parliament
If evidence of malfunctioning, special
report along with proposals to improve
market functioning
Member States to report on auctions;
to be published on Commission
website
Market oversight
provisions (2)
 Insider dealing and market manipulation:
 By end of 2010, examination whether market is sufficiently
protected from insider dealing and market manipulation
 If appropriate, proposals to eliminate insider dealing and
market manipulation
 Excessive price fluctuations:
 Definition: average price of allowances in a six months
period more than three times of the two preceding years;
 Climate Change Committee to meet and consider possible
measures (alternatively):
• Bring forward auctions;
• Authorise auctioning of up to 25% of remaining NER
Strengthened Monitoring,
Reporting and Verification
 Monitoring and Reporting Regulation
 To replace current guidelines
 To be adopted by 31 December 2011
 Verification and Accreditation Regulation
 Rules for accreditation are new
 To be adopted by 31 December 2011
 Harmonised €100 penalty for non-compliance
 Inflation-linked
 Requirement to surrender allowances remains
 Single Community registry
Quantitative use of
JI/CDM
Maximum allowed use of Kyoto mechanisms
fixed at about 4.5% of the EU 2020 target: this is
unlikely ever to be reached!
Quality of CDM
 Comitology procedure to restrict from 1/1/2013 the use of specific
credits
 Ensure credits represent real, verifiable, additional and
permanent reductions, clear SD benefits and no significant
negative environmental or social impacts
 Can be done at any time (no one-off measure)
 If there is an international agreement
 Only credits from projects from countries that have ratified
agreement from 1/1/2013
Adjustment from
20% to 30%
 Three months after the signature of an
international agreement, COM to submit report to
assess implications to adjust from 20 to 30%
 Report represents basis for proposal to be
submitted
 co-decision
 Proposal based on principles of transparency,
economic efficiency, cost-effectiveness, fairness,
solidarity in the distribution of efforts;
The international carbon
market and linking
emissions trading
systems
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Where we are
The EU ETS has been the core of the
‘global carbon market’
• An absolute emissions cap covering 30
countries for around 11,500 installations
and emissions from aircraft
• EU ETS and EU Member States have
provided the main demand for Clean
Development Mechanism (CDM) credits
• The EU: around 10% of global GHG 29
emissions
Where we need to go
Limit global temperature increase to 2°C
All countries, including emerging economies,
need to take more action to reduce emissions
Pledges under Copenhagen Accord
Emission trading systems are a cost-effective
way to do so
Cap and trade in place or in discussion: US
(Federal, RGGI and WCI), Australia (2013?),
Japan, Switzerland, New Zealand and others.
ETS developments in Mexico, South Korea,
China and India…
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An important source of
climate finance
 Climate actions require roughly € 100 billion per year
by 2020 in developing countries, with total
international public finance needs estimated around
€ 22 to 50 billion per year.
 A strong carbon market can deliver € 38 billion per
year by 2020, requires:
 Ambitious developed country action (-30% developed country
as a group by 2020 rel to 1990)
 A shift from CDM to sectoral crediting mechanism in advanced
developing countries and sectors
 Making the most of the carbon market reduces the
need for public finance
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A robust international
carbon market
Through bottom up linking of cap and trade
systems in developed countries
OECD wide market by 2015- transatlantic
market as first step
Linking increases liquidity, reduces volatility,
increases opportunity for low cost abatement
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A robust international
carbon market
Inclusion of advanced developing
countries and competitive sectors by
2020
Reform of CDM and replacement over
time by a sectoral mechanism for
advanced developing economies and
sectors
Sectoral crediting as a stepping stone
to ETS
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International Carbon
Action Partnership ICAP
 Public authorities committed to cap and trade
 Technical exchange on best practice to improve design and
promote compatible systems
Members:
 EU: European Commission, Denmark , France , Germany,
Greece , Ireland, Italy , Netherlands , Portugal , Spain , United
Kingdom
 North America:
 Regional Greenhouse Gas Initiative Members (RGGI): Maine,
Maryland, Massachusetts, New Jersey, New York
 Western Climate Initiative Members (WCI): Arizona, British
Columbia, California, Manitoba, New Mexico, Ontario, Oregon,
Québec, Washington
 Others: Australia, New Zealand, Norway, Tokyo Metropolitan
Government
 Plus Observers: Japan and Ukraine
www.icapcarbonaction.com
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RGGI & WCI
 RGGI (10 North-east US States)
 10% reduction CO2 emissions from the electricity sector by
2018
 Allowances are auctioned
 Proceeds for clean energy/consumer benefits
 Offsets from projects in RGGI States, 10% ceiling per power
plant
 First auctions in 2009
WCI
 15% reduction Kyoto gases below 2005 by 2020,
multisector, offsets possible but capped, complementary
measures
 Still to start…
US Federal Level
 Waxman Markey (House June 2009)
 Boxer Kerry (Senate October 2009)
 Kerry Lieberman
 Complex legislation, including wide-ranging ETS
 17% below 2005 by 2020; 83% by 2050
 High levels of offsets (2bn T each year v. 1.6bn T for 2008-2020
in the EU); too many domestic agricultural offsets
 Price collar
 Border tax adjustment (softer than in the previous bills)
 Increased free allocation to industry
 Will it ever be approved ???
Linking – EU legislation
provisions for mutual
recognition
EU ETS Directive: Art 25,1 bis and 2:
“ Agreements may be made to provide for the
recognition of allowances between the
Community scheme and compatible mandatory
greenhouse gas emissions trading systems with
absolute emissions caps established in any other
country or in sub-federal or regional entities.”
“ Where an agreement […] has been concluded, the
Commission shall adopt any necessary provisions
relating to the mutual recognition of allowances...”
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Linking through
Aviation
All flights into and out of the EU will
be covered by EU ETS from 2012
Where non-EU ETS countries take
action on aviation emissions, the EU
ETS may recognise it as equivalent
action
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Importance of coordination
of recognition policies
In practice two systems accepting the
same international credits for compliance
will be linked through these international
credits
Need for cooperation in the development
phase
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Info on the Climate Action and Renewable Energy Package at
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http://ec.europa.eu/environment/climat/climate_action.htm