Lessons learned from EU Emissions Trading Scheme (ETS)

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Lessons learned from EU Emissions Trading Scheme
(ETS)
Dina Kruger Director, Climate Change
Division Office of Atmospheric Programs U.S.
Environmental Protection Agency NARUC WINTER
MEETING Joint ERE-Electricity Committee
Session February 19, 2008
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Overview

• Background on EU Climate Policy
• EU Emission Trading Scheme (ETS)
• Lessons learned from Trial period of ETS
• Looking forward

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European Union (EU)

• Within EU
• 27 Member states
• 23 countries have Kyoto targets as Annex B
  parties, Malta and Cyprus do not have targets
• Original 15 EU Member States have
• Collective Kyoto target of (8 below 1990
  levels), but
• Differentiated responsibilities under the EU
  Burden Sharing Agreement

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Emissions and GDP in 2005
EU emissions are 40 below US emissions while GDP
is about 10 higher than US GDP
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EU Burden Sharing Agreement
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EU Climate Change Policy
Overall EU Goal Reducing its overall emissions
to at least 20 below 1990 levels by 2020

• EU is using a portfolio of policies to meet goal
  across all sectors through the EU Climate Change
  Program (ECCP)
• Cross-cutting cap and trade
• Regulation
• Incentives
• Voluntary approaches
• Updated goals and binding measures for ECCP
  portfolio announced January 23, 2008
• Energy supply measures increase share of
  renewable energy to 20 by 2020
• Energy demand measures 20 reduction in energy
  consumption through energy efficiency
• Transportation, buildings, agriculture reduce
  emissions 10 below 2005 levels
• Commitments by car makers to reduce CO2 emissions
  rate from new passenger cars by 25 below 1995
  levels by 2008/2009
• Increase share of sustainable biofuels to 10 of
  overall petrol and diesel consumption
• Improved EU ETS

Source Point Carbon, European Climate Change
Program, http//ec.europa.eu/environment/climat/e
ccp.htm
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EU Emissions Trading Scheme (ETS)

• EU ETS currently addresses nearly 50 of all CO2
  emissions (40 of total annual GHG emissions)
• EU Directive currently outlines provisions for
  initial trading periods
• Trial period (2005-2007)
• First commitment period (2008-2012)
• Proposed amendment for third period (2013-2020)
  with commitment for subsequent phases

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EU Emissions Trading Scheme (ETS)

• 2005-2007 Trial Period
• Cap set by member states, 2.2 billion allowances
  issued annually
• Covers only CO2 emissions
• Coverage combustion and process emissions from
  electricity generation and selected industries
• Energy activities, mineral oil refineries, coke
  ovens (installations with rated thermal input
  20 MW)
• Production and processing of ferrous metals
• Minerals industry (includes cement, glass,
  ceramics, lime)
• Pulp and paper production
• Point of regulation
• Downstream
• Allocation Approaches
• 95 of allowances must be allocated freely, 5
  can be auctioned
• Compliance and penalties
• Penalties 1st period 40/excess ton CO2
• 2008-2012 Kyoto Commitment Period
• Cap set by member states, 2.083 billion
  allowances annually

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Prices and Volumes

• General factors contributing to price volatility
• Fuel prices
• Weather
• Policy developments

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Evaluating Emissions Trading

• Does it meet the environmental goal?
• Are caps achieved?
• Is monitoring accurate?
• Does the market work efficiently?
• Sufficient sources for a liquid market?
• Long-term certainty for investment planning?
• Is it a workable program administratively?

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Trial Period Design and Implementation Lessons

• Lesson 1 Need high quality emissions data to set
  environmental goals
• Phase 1 caps based on limited data
• Phase 2 caps take advantage of better data
• Complementary policies needed for non-capped
  sectors
• Lesson 2 Consistency and predictability are
  important
• Large variability in allocation method among
  member states
• Failure to credit plant shutdowns creates
  perverse incentives
• Lesson 3 Keep scope manageable and consider
  contribution to emissions
• Inclusive of largest emitters and sufficient
  sources for trading, but
• Large number of small installations included
• 36 of total installations, responsible for
  0.7 of emissions
• 7.5 of total installations, responsible for 60
  of emissions
• Third phase of ETS will allow small installations
  lt 25MW and emitting lt10,000 tons to opt out

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Trial Period Design and Implementation Lessons

• Lesson 4 Need to have flexibility and provide
  long term-certainty
• Sources did not have temporal flexibility due to
  lack of banking between phases
• Phase 3 Trading extended to (2013-2020) for
  long-term investment certainty
• Banking will be allowed between Phase 2 and 3
• Lesson 5 Program implementation should be
  efficient
• Infrastructure for transfer of CDM credits not in
  place
• Monitoring protocols clear, but not all reporting
  is electronic
• Initial release of monitoring data not
  coordinated
• Role of third-party verifiers affects timing of
  data submissions
• Lesson 6 Transparency is important for
  credibility
• Functioning registry system to track allowances
  and ownership, but allowance transfers are not
  public data
• Annual reporting (quarterly reporting in U.S.)

EU ETS is looking to harmonize program design
across all participating countries
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EU Climate Policy Looking Forward

• Further improvements to EU ETS
• Single EU-wide cap instead of 27 national caps
• Average 1.846 billion metric tons CO2/year
• Increasing share of auctioning (full auctioning
  of power sector allowances in 2013)
• Community-wide new entrant reserve (5 of cap)
• Expanding to include other sectors and gases
• Aviation
• Aluminum (PFCs) and Chemicals (N2O)
• Recognize carbon capture and storage (CCS)
• Domestic Offsets?
• Linking
• Phase 2 Norway, Iceland, and Liechtenstein
• International Carbon Action Partnership (ICAP)
• Discussions with the Northeast Regional
  Greenhouse Gas Initiative (RGGI), California,
  Australia, New Zealand and Canadian Provinces
• With global agreement, EU will commit to 30
  below 1990 levels by 2020

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For more information

• Point Carbon www.pointcarbon.com
• Caisse desDepots http//www.caissedesdepots.fr/
• EU ETS http//ec.europa.eu/environment/climat/emi
  ssion.htm
• Thank you!
• Dina Kruger
• Director, Climate Change Division
• Office of Atmospheric Programs
• kruger.dina_at_epa.gov
• www.epa.gov/climatechange