Updated: July 2015

The EU Emission Trading Scheme is by many EU leaders seen as a cornerstone of EU climate policy It covers 42% of EU greenhouse gas emissions. Unfortunately several flaws in the scheme makes it presently an ineffective tool to reduce greenhouse gases because of excess emissions and resulting very low emission costs.

Restriction of Excess Emisisons

In 2010, it was clear for everybody that there were excess emissions in the EU-ETS, leading to unexpected low prices. In March 2011 the EU Commission suggested to reduce allowances. The proposal was welcomed by most EU countries, but because of resistance from Poland, the proposal was delayed.

In July 2012, the Commission proposed to reduce allowances in the coming auctions for 2013 and set them aside for later. This was agreed among the EU countries, but in 2013 the Parliament first objected and then agreed to a less ambitious arrangement.
The agreements is that allowances for 900 million tons of CO2 emissions are set-aside 2013-14 until 2018.
Because of the large number of excess emissions, the set-aside has not raised the price of allowances to a level, where it will be effective to reduce emissions, (such as above 15 Eur/ton), but it has probably avoided the collapse of the EU-ETS market (a collapse is if the allowance price reaches 0)

In July 2015, however, the EU Comission's Summer Package proposes a revison of the ETS system in line with the 2030 climate and energy policy framework agreed by the EU leaders in October 2014. A reduction of the emission allowance quantity by 2.2 % every year from 2021 which would increase the price of CO2 emission. The EU ETS should continue to inspire other international partners, such as China, to use carbon pricing as a cost-effective driver for a gradual but sustainable decarbonisation of their economies for the benefit of future generations.
Read INFORSE-Europe's opinion in the Press Release dated ( pdf file 137 kB).
Follow the development at the Commission's website http://ec.europa.eu/priorities/energy-union/index_en.htm

Functioning of the EU Emission Trading Scheme (EU-ETS)

The aim of the EU-ETS Directives is to reduce greenhouse gas emissions in a cost-efficient way, with introduction of greenhouse gas emission ceilings of major emitters and a mechanism for 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 total number of allowances given or auctioned is each year reduced with 1.74% compared with the previous year.
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 followed the Kyoto Protocol commitment period 2008 - 2012. In this period at least 95% of the allowances are given for free, but the countries could decide to auction up to 5% of the allowances. The penalty for non-compliance was increased to 100 EUR/ton of CO2.
The third phase is covering 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 giving large over allocation of allowances, leading to low costs of emissions.
A fourth period i foreseen for the period 2021-2030, for which the EU Commission has proposed to reduce emissions with 2.2%/year. Other improvements of the EU-ETS are also proposed.

External allowances feed into EU-ETS

With the "link" directive (see below), companies can buy emissions from project that should reduce emissions as CDM-projects as specified by the Kyoto Protocol and following UNFCCC guidelines. This has added to the excess of emissions, in particular because of a large influx on Chinese CDM quotas that are results on questionable projects with very little greenhouse gas reduction effects. The types of CDM projects that can be used for EU-EST allowances were reduced in 2013, but the "link" directive is still a loophole that makes the EU-ETS less likely to become effective.

Airlines included

On September 2011, the EU established the rules of allocation of free emissions to airlines, stating that the aviation industry will become part of the EU ETS from 2012. The effect of the rules are that airlines get about 85% of their emissions for free. The inclusion of airlines caused protests from China, USA and many other countries. EU bowed to the protests and excluded flights outside EU from the EU-ETS until 2020. Also flights to airports near EU external borders are exempted from EU-ETS since the Regulation n°421/2014.

EU Single Registry

In 2012, the EU Commission activated the single registry, replacing the national registries. It covers all EU Member countries 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 emissions from installations and the annual reconciliation (settle and fitting) of allowances and verified emissions.
The verification, recording and authorization of transactions now are held by the European Union Transaction Log (EUTL).

INFORSE-Europe Analysis: Limits of the EU-ETS

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 systems:

- 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 and CO2 costs 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.

The CDM influx is less prominent 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. In conclusion, because of the flaws 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 20€/ton of CO2.
- Allowances carried over from one period to the third period must be limited, by degrading them by a factor 2-3 or more (two-three or more unused allowances from the previous 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.

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

Regulation n°421/2014, amending the Directive (2003/87/EC) on gas emission allowance trading within the Community, on April 16th 2014. This amendment concerns the derogation of the Aviator sector concerning the external borders of EU. It has been done in advance of the implementation, by 2020, of an international agreement applying a single global market-based measure.
Read the Directive.

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).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 to include 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. Read the Directive on the EU Law website.

Link Directive: Directive 2004/101/EC SIn 2004 this Directive was approved. It allows use of CDM credits within some limitations to be used as EU-ETS allowances. Credits from projects generating sinks and from hydropower above 20MW are not allowed in the EU-ETS Read the directive at the EU Law website.

Read about the development and problems of EU-ETS at http://www.sandbag.org.uk/

A Bit of History
The European Climate Change Programme for EU's implementation of the Kyoto Protocol identified in 2000 a cap-and trade system for greenhouse gas emission from large emmitter as a possible cornerstone in EU climate policy. One reason for this conclusion was that since 1992 the EU countries had discussed a common energy/CO2-tax, but were not able to agree on such a tax

In 2001, the EU Commission the proposed a directive for the EU-ETS, covering the period until the end of the Kyoto Protocol, 2012.
In 2003, the directive was adopted.
In 2004, the use of CDM credits in EU-ETS was included with the "link" directive.

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