EU emissions trading scheme final
EU emissions trading scheme final negotiation outcome
Level of the reduction target (cap)
The EU has committed to increasing its current 20% greenhouse gas reduction target to 30% subject to a comprehensive global post 2012 climate agreement. The 'automaticity' of any increase in the EU's greenhouse gas emissions reduction effort following an international climate agreement was included in the proposal of the European Commission and endorsed by the EP ENVI committee. However, the position at the end of the trialogues is that the shift to a higher emissions reduction target to a new legislative co-decision process. A reference to 30% target as part of the implementation of the internationally agreed target is maintained in the legislative text, without automaticity of the step up. This means, at best, that the fight over sharing of the reduction effort between ETS and other sectors and the differentiation of the effort between Member States will need to be repeated. It also means that the higher target could be put in question.
Auctioning of emissions permits
The public acceptability of the ETS in its first and second phases has been seriously undermined by the over-allocation emissions permits to polluting industries, but also through them being allocated for free. This in practice meant that the power sector made windfall profits by increasing the price of electricity based on market price of carbon, without needing to pay for the allowances in the first place. Billions of euro were distributed to shareholders of big polluting companies, creating a serious backlash against EU climate policy. In order to rectify this, the Commission proposed a transition to the full auctioning of permits for the third phase (from 2013).
(a) Power sector - The Commission proposal, which is supported by the EP and the majority of member states, provided for the complete auctioning of all emissions permits for the power sector from 2013. Poland (generating over 80% of its power from coal-fired plants) called into question auctioning for the power sector and, with the support of other new member states, succeeded in securing exemptions for its power sector (based on a formula taking into account GDP and the level of power generated from fossil fuels) - this would result in auctioning gradually being phased-in, rising from an initial 30% to full auctioning in 2020.
(b) Other industry sectors - For the other sectors covered by the ETS (non-power sector heavy industry), the Commission proposed that initially - in 2013 - only 20% of emissions permits would be auctioned, rising to 100% in 2020. The EP ENVI committee voted for an initial auctioning of 15% of permits rising to 100% in 2020. A number of member states opposed the full auctioning of permits for these sectors, most prominently Germany. The outcome of the summit, as unaltered by the final trialogue is that there would be initial auctioning of 20% in 2013, only rising to full auctioning by 2027. However, industries covering the vast majority of emissions (96% of emissions from the non-power sectors) would be eligible for an exemption and potentially free allocation.
The issue of 'carbon leakage' (i.e. relocation of firms, production or market share to third countries with less strict laws on emissions), has been used as an excuse to exempt the non-power sector industries from auctioning. The Commission proposed that firms deemed at risk of 'carbon leakage' could benefit from free allocation of permits, an approach endorsed by the European Parliament. According to several different analyses, sectors representing around 1-2% of EU GNP might be exposed to this risk of leakage, depending on the outcome of the international agreement. However, under the carbon leakage criteria resulting from the summit, the vast majority of emissions from non-power sector firms covered by the ETS (96% of emissions) would be considered as being at risk of 'carbon leakage' and so be able to benefit from free allocation.
As noted above, the free allocation of permits either leads to windfall profits for polluting industries or the system failing to pass on the true cost of climate-damaging emissions to the market (the 'price signal'). The proposals put forward by the Council mask under the environmentally benign title of carbon leakage is in reality an attempt to create a windfall-profit machine for heavy industry via the emissions trading scheme.
Earmarking of auction revenues for climate purposes
The Commission proposed that the revenue from the auctioning of permits should be earmarked for climate protection. The EP ENVI committee voted to support the allocation of all revenue generated by auctioning (up to €50bn in 2020) for climate protection, with 50% of this being set aside for climate change mitigation and adaptation in the developing world. The outcome of the summit would mean there is no binding 'earmarking', although there is a call for member states to make a voluntary commitment to make 50% of the revenue available for climate purposes.
Outsourcing reductions through external offsetting
The Commission proposal envisaged the use of external offsetting (such as the Kyoto protocol CDM/JI) under the ETS (including 'banked' allowances from the second phase of the ETS). Under the final agreement, 50% of the reductions for the period 2008-20 could be delivered through external offsetting (buying 'credits' in emissions-reduction projects in third countries to offset committed emissions reductions).
The 'compromise' on the table would mean only half of the greenhouse gas emissions reductions that should be realised by energy firms and other heavy industry will actually be delivered in the EU. Meanwhile, large exemptions from the auctioning of permits under the ETS would be granted.