1. The EU Emissions Trading Scheme- EU ETS Presentation by Yvon Slingenberg Head of Unit Implementation of the EU Emission Trading System

2. This Presentation The EU ETS: Part 1: an essential part of a wider package of climate and energy policies Part 2: emissions reductions and improvements to the system Part 3: building block of the international carbon market

3. 1. The EU ETS: an essential part of a wider package of climate and energy policies

4. EU ETS basics Mandatory system in place since January 2005 Environmental outcome guaranteed: cap on emissions from ~11,500 energy-intensive installations across EU Covering around 50% of EU CO2 emissions Direct: regulated at source of pollution Simple market system- no price intervention

6. GHG Target by 2020: -20% compared to 1990 -14% compared to 2005 EU ETS -21% compared to 2005 Non ETS sectors -10% compared to 2005 27 Member State targets, stretching from -20% to +20%

7. Scope and timing Three-year learning-by-doing phase from 2005-7, including power, heat and steam generation, oil refineries, iron and steel, pulp and paper, buildings materials (cement etc.) Five-year “Kyoto” phase from 2008-12, with tighter caps and established infrastructure Coverage of aviation from January 2012 (all departing flights, and incoming except where measures by departure country recognised as equivalent) EU ETS revision applicable from 2013 onwards, inclusion of more sectors (Aluminium, basic chemicals) and gases (eg PFC, N20)

8. 2. The EU ETS is working and improving: lessons for better systems

9. EU ETS putting a price on carbon and reducing emissions ETS emissions down 13.7% 2007 - 2009 2 ETS cut emissions by 2 % to 5% in Phase1 1 1 assessment by Ellerman et al, ‘Pricing Carbon 2010 2 verified emissions data, European Commission Source Point Carbon

10. EU ETS emissions reductions 2005-2007 -2% to -5% emissions reductions due to ETS (Ellerman et al) -13.74% 2007-2009 Point Carbon Surveys In 2006 5% of participants took future cost of carbon into account for investment By 2007 this had risen to 65% By 2010, long term carbon price a decisive factor for new investments for 47% (61% for large polluters). 54% say ‘EU ETS has already caused emissions reductions in my company’

11. Revised EU ETS: 2013-2020 phase & beyond EU-wide cap fixed in law up to 2020 and beyond (linear trajectory) Auctioning becoming default over time More than 50% of allowances auctioned Political commitment to use 50% revenues to tackle climate change Level playing field within EU, auctioning rights linked to costs/GDP EU-harmonised ex-ante benchmarks for all free allocation, based on 10% top performers

13. Aviation to be included; will change figures correspondingly, but cap not reduced

15. However transitional solutions exist via domestic policy:Emissions trading is itself a least cost way to meet emissions reduction targets Use of international offsets for cost containment Free allocation of allowances instead of auctioning

16. Allocation and carbon leakage Free allocation given in 2005-7 and largely in 2008-12 periods, rules decided by MS Independent ex post analysis1 for 2005-2007 detects no statistical evidence of delocation due to ETS In revision to EU ETS, move to harmonised EU-wide allocation with revised approach (benchmarks) 1 Ellerman et al ‘Pricing Carbon’

17. EU-wide rules for free allocation In terms of allocation rules, three categories of operators: No free allocation: power sector (except for heat) Partial free allocation: industry 100% free allocation of benchmark: industry exposed to risk of carbon leakage Phasing out free allocation for sectors not exposed to risk of carbon leakage: 80% of benchmark in 2013 30% of benchmark by 2020 With a view to reaching full auctioning in 2027

18. Benchmark: average performance of 10% most efficient installations in a (sub-)sector Benchmark

19. Addressing differences in development From 2013, no free allocation for power production, following windfall profits => large auctioning revenues. Possibly € 30 billion per year (depending on C price) Auctioning allows redistribution based on level of development: 88% of auction rights distributed according to Member States’ emission shares 12% distributed to new member states for purpose of solidarity and growth

20. Option of transitional free allowances in power sector 10 new Member States qualify: maximum 14% of EU power generation Existing installations only Conditional on national plan to modernise energy infrastructure, clean technologies, diversification of energy mix Total amount in 2013: maximum 70% of 2005-2007 verified emissions, decrease to zero in 2020 Individual allocation based on 2005-2007 verified emissions or benchmark Applications by Member States by September 2011, Commission can reject within 6 months

21. Auction Revenue Benefits Several billion dollars for carbon capture and storage and renewables projects (using 300 million allowances set aside from the EU ETS new entrants reserve) 50% of EU ETS auction revenues should be invested to tackle climate change and shift to low-emission technologies

22. 3. The EU ETS: building block of the international carbon market

23. A robust international carbon market In parallel to and supporting the UN process To get as close as possible to an international price for carbon A robust market: provides incentives for more ambitious action in developing countries is an important source of climate finance for developing countries

24. 23 Building a robust international carbon market Through bottom up linking of cap and trade systems in developed countries Inclusion of advanced developing countries and competitive sectors by 2020 Reform of Clean Development Mechanism (CDM), focus CDM on Least Developed Countries (LDCs), replacement over time by a more ambitious sectoral mechanism for advanced developing economies and sectors Sectoral crediting as a stepping stone to ETS Addressing surplus AAUs

25. Need to address surplus AAUs A virtual international market for 2008 to 2012 suffers from a serious imbalance: supply (of AAUs) by far exceeds demand Large scale AAU sales (government to government) can affect European carbon price A solution to surplus AAUs is needed