EU ETS EU ETS
THE EUROPEAN EMISSION Trading Scheme has come of age. Operating since January 1st
, 2005, the EU ETS is the world‘s first
large-scale CO2 emissions trading programme. In 2008, over six billion European Union Allowances (EUAs) worth €89 bn were transacted. The global carbon market amounted to EUR 103 bn in 2009, which
represents a 6% increase compared to 2008. The EU‘s Emission Trading Scheme (EU ETS) was the main driver of the carbon market with over 6 bn EUAs transacted worth €89 bn. The overall number of transactions increased despite the fact that average EUA prices fell by 42% to €14.00 compared to €22.10 in 2008.
Grandfathering was originally the norm for initial allocation of emission allowances. Although initial allocation of emission allowances was predominantly performed by means of grandfathering during the first two phases of the ETS, EU Member States were already permitted to auction small numbers of allowances.
In Phase 3 of the EU ETS, a paradigm shift will take place. As of 2013, national allocation plans will be abolished and auctioning will become the default method of allowance allocation.
Auctioning is economically and environmentally more efficient for allocating emission permits to installations. The reasons are: — The “polluter pays” principle is implemented. — Allocative efficiency is improved. — In contrast to grandfathering, auctions generate public revenue. — Higher costs incurred by installations in the auctioning process represent greater innovation incentives.
The move to full auctioning of EUAs from 2013 represents a sea
change for the Emissions Trading Scheme (ETS). It will involve the sale of approximately 10 billion allowances across the EU for the period 2013 to 2020. The electricity sector, with its 60% share of EU ETS covered emissions, will be the only sector facing full auctioning of ETS allowances as of 2013. Installations currently covered by the ETS are collectively
responsible for close to half of the EU’s emissions of CO2 and 40% of its total greenhouse gas emissions. Since January 2008, the EU ETS not only applies to the 27 EU Member States, but also to the other three members of the European Economic Area (EEA) – Iceland, Liechtenstein and Norway. In July 2008, the EU ETS Directive was amended to bring the aviation sector into the system from 2012 onwards (see Directive 2008/101/EC).
Phase 1 and 2 auctions which most notably becomes apparent in the introduction of a common EU- wide platform. However, the need for political compromise has left its marks on the Regulation draft. Abolishing NAPs in favour of a single auctioning platform to eliminate the issue of inconsistent allocation of allowances between Member States is clearly to be welcomed. This progress, however, will be thwarted by the possibility for Member States to opt- out of the central platform. This high
52 December 2010
degree of flexibility for the Member States does not support the objective to reduce the complexity of the EU ETS. The lack of full harmonisation due to the choice of this coordinated approach further interferes with the long-term objective of a global system of CO2 emissions trading. The fact that the two biggest carbon emitters in
the EU – Germany and the UK – have declared their intention to opt-out is very likely to considerably reduce the liquidity and effectiveness of the central platform. Another point to acknowledge is the preference
of a regulated market as operator of the auctioning platform. This is a good choice as it means existent infrastructure and expertise can be used. Regulated markets are subject to consistent rules and regulations across the EEA with infrastructure and connectivity already familiar to most market participants. Apart from these arguments, that specifically
refer to the auctioning mechanism, some broader issues at large should be pointed out. Issues of long-term uncertainty remain although the Phase 3 runs over a significant timespan: Currently, the EU and its Member States are committed to an independently quantified economy-wide emissions reduction target of 20% compared to 1990 levels by 2020. However, as part of a global and comprehensive agreement for the period beyond 2012, the EU and its Member States have expressed a conditional offer to move to a 30% reduction by 2020 compared to 1990 levels. This would boost demand for project-based credits which, in combination with the fact that the rules governing the use of CERs and ERUs in Phase 3 are still uncertain, once more increasing long-term uncertainty for participants in the EU ETS. A more general issue that may be criticised is
that it currently only covers CO2, and no other GHGs pursuant to the Kyoto Protocol. In the long run, emissions trading should be extended to cover more – if not all – GHGs. A reasonable start is the inclusion of nitrous oxide and perfluorocarbon
in the EU ETS which is foreseen from 2013 onwards. Also, incorporating more sectors in emissions trading over the next few years is an issue. There are some new sectors intended to join the scheme in 2013 (e.g. aluminium). Other possibilities comprise the maritime sector. It would also be worthwhile to take into account whether, and how, larger firms in the agriculture and forestry businesses (that emit methane rather than CO2 or are responsible for large-scale deforestation) could be integrated into emissions trading. •
Michael Chlistalla & Meta Zähres,
Deutsche Bank Research Frankfurt am Main Germany. www.dbresearch
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