Review of the EU ETS

From ClimateNetworkWiki

This page reviews the experience of the EU Emissions Trading Scheme. It is part of the Economy section of the Knowledge Base, and is meant to ground thinking of what a "good" market-based initiative should look like in a climate change policy. these are raw notes that will be synthesized in the near future

Basics

The EU ETS established a uniform price of ghgs from specified heavy industries in the 25 EU states. Phase I was launched January 1 2005 and runs until the end of 2007. Phase 2 runs from 2008-2012. Further phases are planned, but currently unspecified. Within the scheme, participation is mandatory for included industries (such as energy generation, metal production, cement, bricks, and pulp and paper). Through National Allocation Plans (NAPs), member states decide on the total allowances for each phase within their country, and how these will be distributed between companies and industries. These Plans are subject to approval by the European Commission, and will be (should be) rejected if they do not demonstrate that allocation levels will not exceed expected emission levels in sectors, and are in line with broader plans to meet Kyoto target. Companies in the scheme must provide annual reports on their emissions, which are audited by a third party.

Phase I

• scheme covers less than 40% of all EU GHG emissions
• the permit market over the 3 year period is worth ~US $115 billion.
• majority of permits currently allocated are free (only 0.2% of all allowances will be auctioned in Phase I)
• for most part, member states have prevented allowances from being "banked" between the two phases

Stern Report

What the Stern Report on the economics of climate change [1] has to say about the EU ETS.

Important issues learned (pp.328-329)

• (1) Potential for emissions trading schemes to generate demand for emissions reductions in developing countries
  • the Linking Directive has enabled EU-based industry to purchase carbon reductions from the cheapest source, including those projects being implemented through the Review of Clean Development Mechanism and its implications for sustainability
• (2) Importance of confidence in long-term future of the scheme
  • EU ETS will continue beyond with another phase beyond 2012, but companies want greater clarity over what the EU ETS will look like in the next phases
  • companies state a preference for long-term certainty in the terms of the scheme, for trading to begin a few years after allocation decisions are made, and for trading periods to extend to periods of 10 years
• (3) Imperfect information has significant effect on prices
  • traders in the EU ETS had limited information on the supply and demand for emission allowances
  • the NAPs were not transparent in the assumptions lying behind the projections of their emissions
  • the calculations done by the NAPs did not create enough scarcity, so when the actual emissions of the scheme’s participants was made public in April 2006, there was a dramatic downward correction in prices; this also created volatility
• (4) Difficulty of ensuring scarcity
  • overall allocation of emission allowances is not set centrally, but by the NAPS of the 25 individual member states, although they are subject to the approval of the Commission
  • therefore, total EU allocation is an outcome of decisions made at different levels
  • thus, it has been difficult to ensure scarcity (total EU wide allocation in Phase I is estimated to be only 1% below projected “business as usual” (BAU) emissions)
  • therefore, need stringent criteria on allocation levels for member states and strict decisions by the European Commission on NAPs to ensure scarcity
• (5) Need for robust administrative systems
  • methods used to determine allocations placed considerable demands on companies to collect, verify and submit historical data on emissions
  • Costs were high for small firms with low emissions to comply with the EU monitoring, reporting and verification systems