Updated: July 2012

New:

Allocation of allowances from 2013 on:

In July 2012 the Commission proposed to reduce allowances in the coming auctions for 2013. This will now be debated among EU countries.

In March 2011 the Commission launched a roadmap for a low-carbon economy, where is suggested to reduce allowances because of the unexpected low prices on the allowance market. The proposal was welcomed by most EU countries, but because of resistance from Poland, there was a not unanimous agreement to take the proposal forward when discussed in June 2011.

In April 2011, the Commission adopted a decision about how allowances should be allocated from 2013. Auctioning will become the main way of allocation, but still a number of free allowances will be given to industry until 2020, notably to industrial sectors exposed to significant competition outside the EU. The benchmarks are in most cases based on the average emissions performance of the 10% most efficient installations in each sector.
After collect the necessary data from installations (until Septembre 2011), the EC will check the submissions and Member States will calculate the final allocation per installation (information expected during 2012).
The total amount of emission allowances agreed to be auctioned by the Member States for the third phase (2013-2020) will be 120 millions.

On September 2011, the EC established the rules of allocation of free emissions to airlines, stating that the aviation industry will become part of the EU ETS from 2012.

EU Single Registry

Since 2005, the registries keep track of the ownership of allowances issued under the EU ETS, ensuring its accurate accounting. The Directive (2009/29/EC) provided for the centralisation of the EU ETS operations into a single registry operated by the Commission.
The 20th of June 2012, the European Commission activated the single registry, replacing the national registries. It covers all EU Member States plus Norway, Iceland and Liechtenstein and records the national plans with the allowances assigned to each Member State, the accounts of the companies or physical persons who hold these allowances, the transfers of allowances, the annual verified emmisions from installations and the annual reconciliation (settle and fitting) of allowances and verified emissions.
Accounts for aircraft operators are included since January 2012 as well as accounts for stationary installations.
To open an account and participate in the EU ETS the procedure will be the same as before, a request must be sent to the national administrator.
The verification, recording and authorisation of transactions now are held by the European Union Transaction Log (EUTL) replacing the Community Independent Transaction Log (CITL).


Functioning of the Emission Trading Scheme (ETS)

How the Emission Trading Scheme Works ?

The aim of the EU-ETS Directives are to reduce greenhouse gas emissions in a cost-efficient way, with introduction of greenhouse gas emission ceilings of major emitters and allow trading among them.
All greenhouse gas emitters in EU that are covered by the EU-ETS must have enough greenhouse gas "allowances" to be allowed to emit their greenhouse gases. The EU countries' governments allocate greenhouse gas allowances to companies in their respective countries. These allowances can be traded between companies if they choose to do so. Each year, companies must submit a number of allowances that corresponds to their actual emissions. If they do not have enough allowances, they will have to pay a fine. The holding and tracking of allowances are done through national electronic registers. The sectors covered are energy, iron, cement, glass, ceramics, pulp, paper, and board. Only larger installations are covered, e.g. combustion installations above 20 MW input.
The first phase of the scheme was 2005 - 2007, before the Kyoto Protocol's commitment period. In this phase allowances were given for free to participating installations and there was a low level of penalty for non-compliance of 40 EUR/tons of CO2. Due to large allowances given by countries, the market price of the allowances fell to close to zero during the period.
The second period follows the Kyoto Protocol commitment period 2008 - 2012. In this period at least 95% of the allowances are given for free, but the countries can decide to auction up to 5% of the allowances. The penalty for non-compliance is increased to 100 EUR/ton of CO2. Also from 2008, the exchange of allowances between installations in two different Member States will give rise to the adjustment - through the national registries - by a corresponding number of tons of the total quantity of emissions allowed for each Member State. This is according to the burden-sharing agreed with the ratification of the Kyoto Protocol.
A third phase is agreed for 2013-2020 with allowances to be auctioned to most power plants and to the part of the industry least vulnerable to international competition. In this phase unused emissions from the second phase can be carried over, a decision that is likely to lead to over allocation of allowances during most of the third phase.

EU-ETS: Limits of the System

The EU Emission Trading Scheme is regarded as one of the cornerstones of the EU climate policy, but the first periods have shown a number of weaknesses in the system which clearly show the need for better frameworks for the EU-ETS as part ofEU climate policies. Some of the main problems of the EU-ETS were and are:

- Large variations in prices of allowances, reducing the incentives for long-term investments to reduce emissions.
- Unjustified windfall profits for companies with large CO2 emissions that receive free allowances and that can increase their product prices with the quota prices. Also nuclear power plants enjoy these windfall profits
- Reduced incentives to continue with reductions when allowances are sufficient and prices are low. This is because a number of previous policies are abandoned for the companies included in the EU-ETS, such as CO2-taxes.
- The uncertainty regarding future systems have given uncertainty for actors if they should aim at low or high emissions.
- large influx of questionable allowances from the CDM (Clean Development Mechanism) of the Kyoto Protocol.
Some of the problems will be solved in the third period, but with the ETS allowances currently allocated until 2020, there are too many allowances allocated, if the EU countries shall reduce emissions in line with limiting global warming to 2’C. The current reduction rate of 1.74% per year is too slow: It will only result in phase-out of emissions by 2068, if continued.The carry over of allowances from the second period and from CDM projects adds to the problem. The current allocation is part of fulfilling EU's 20% reduction target 1990-2020. If the target is increased to 30% and allowances reduced accordingly, it would set EU on a more sustainable track, depending on the influx of CDM credits. Unfortunately, in its current form the EU-ETS is not the cornerstone of the EU climate policies it was meant to be.

INFORSE-Europe Proposals to Improve the EU-ETS

To improve the EU-ETS and achieve larger greenhouse gas reductions, INFORSE-Europe proposes the following changes:
- There should be a minimum (floor) price for allowances of 30 €/ton of CO2.
- Allowances carried over from the second (2008-2012) period to the third period must be limited, by degrading them by a factor 2-3 or more (two-three or more unused allowances in this period shall give only one allowance in the next period).
- The industry sectors that receive free allowances should be reduced, and instead of free allowances, companies should be offered support, including grants and loans for transition to low carbon technologies
- Much stricter rules than the current ones must be introduced to limit the use of allowances from CDM projects in EU-ETS. Only projects that are clearly contributing directly to poverty reduction and basic needs of those that implement the measures should be eligible. The use of external (CDM) credits should be limited to 10% of reductions (for instance 10% of reductions is 2% of total allowances if reductions are 20%)
- a windfall tax shall be introduced for nuclear power. The tax shall be equal to the extra revenue that the nuclear power plants will gain because of increased electricity prices caused by the EU-ETS.

Read:
- The full INFORSE-Europe proposal ( pdf file) (November 2010)

- INFORSE-Europe's Response on EU Consultation on Auctioning third phase EU Allowances prior to 2013 ('early auctions')
(pdf file 137 kB), (February 2011).
Background of the EU Consultation: Under the revised Emission Trading System (EU ETS) a significant share of the allowances will be auctioned rather than allocated free of charge. This will apply as from the third trading period starting in 2013. The Commission recently adopted an "Auctioning Regulation", which provides inter alia the possibility to auction third phase allowances prior to 2013, so-called "early auctions". Such auctions appear desirable in order to ensure a smooth transition of the market from the second to the third trading period of the EU ETS. However, what is the appropriate volume of EU allowances and timing for early auctions? The Commission invites all interested parties to express their reasoned and substantiated views on the appropriate volume and timing of these early auctions.
See: EU Public Consultation (period 06/12/2010 - 07/02/2011)

Follow also the development at Climate Action Network's site at www.climnet.org/EUenergy/NAPs.htm.

and the Commission's site http://ec.europa.eu/environment/climat/emission.htm

Legislation

Directive (2009/29/EC) of 23/4 2009 to amend the 2003 Directive (2003/87/EC) to improve and extend the greenhouse gas emission allowance trading system (until 2020).

On 23 April 2009, the EU countries and Parliament agreed a directive to amend the 2003 Directive on the Emission Trading Scheme and extend it with a third period 2013-2020. The directive gives the following modifications:
- The total amount of allowances circulating in 2012 will be then cut by 1,74% annually (in line with a 20% EU greenhouse gas reduction target 1990-2020).
- Extending the scope of the ETS: new sectors and gases are covered like chemical industry emitting N2O from production of adipic acid and nitric acid, petrochemicals, ammonia, aluminum and N2O.
- National Action Plans will be replaced by a common auctioning system and common allocation, including some free allocations. Full auctioning will be the rule from 2013 for the power sector, except for Poland and some other Central European countries that got an exception. Energy-intensive industries exposed to international competition can receive their allowances free of charge, but the fraction of free allowances will gradually be decreased.
- the revenues of auctioning will go to the EU country budgets, with a proportionally larger share going to countries that have had large reductions in the past, mainly Central European countries, and a small part going to support carbon capture and storage as well as renewable energy
- CDM will continue to be eligible, but if the Kyoto Protocol is not continued, EU will continue CDM credit systems with developing countries on a bilateral basis.
The Directive will regulate EU-ETS from 1/1 2013.

Read the Directive on the EU Law website.

Read the consolidated text of EU-ETS dir. 2003/87/EC including amendments with dir. 2009/29/EC and other amendments from 2009 and earlier, on the EU Law website.

Agreement to Include Airline Emissions into the EU-ETS

On November 19, 2008, a directive (2008/101/EC) was agreed between the European Parliament and the European Council on airline emissions. This directive includes aviation in the EU-ETS in 2012. Emissions from plane will be reduced by 3% in 2012 (compared to the 2004-2006 level) and by 5% in 2013. 85% of the emission certificates will be allocated for free whereas the 15% remaining will be auctioned.

Read the Directive on the EU Law website.

Link Directive: Directive 2004/101/EC

September 13, 2004: The Directive was formally approved by the EU countries, following a compromise suggested by the Parliament.
The compromise gives some qualitative limitations to the use of external credits in the EU-ETS, in particular:

NGOs have been criticizing the Parliament's compromise, and are urging the countries to agree to a strict and harmonized cap on the use of Kyoto project emission quotas in the EU's internal emissions trading system.

The directive was proposed in July 2003 by the Commission

Read the directive at the EU Law website.

Read also Climate Action Networks overview at www.climnet.org/EUenergy/Linking.htm

World Wildlife Fund Proposals Regarding the Link Directive

From its proposal, it was a general fear from environmental NGOs, such as the WWF, that loopholes such as cheap emission allowances of doubtful origin easily could undermine the effectiveness of the emissions-trading system (the hot air problem), if they are allowed to enter the system via the "link" directive or otherwise. The experience has shown that these are in fact serious problems, threatening to undermine the effectiveness of the EU-ETS, Read for instance http://www.sandbag.org.uk/

Directive 2003/87 on an EU Emissions Trading Scheme

The Directive entered into force on October 23, 2003, as dir. 2003/87/EC after approval by EU countries and Parliament

The Directive was proposed by the EU Commission in October 2001 as COM/2001/581.

Read more about the Directive at: http://ec.europa.eu/clima/policies/ets/index_en.htm

See comments by Climate Action Network at http://www.climnet.org/EUenergy/ET.html.

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