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Climate Change Leadership Forum reports

Update on EU ETS Developments: Proposals for Phase 3 and Beyond

Climate Change Leadership Forum report number: 4

Briefing for the Climate Change Leadership Forum
Prepared by the emissions trading group
Date: 1 April 2008

  1. The European Commission (EC) has recently released its proposals for the European Union Emissions Trading Scheme (EU ETS) during the period 2013 -2020, Phase 3 of the EU ETS, and beyond. It should be noted that this is a proposal only and is yet to be approved by Member States or the European Parliament.  The EC's proposal is that:
    • The EU ETS contributes significantly to achieving the EU’s target (announced in March 2007) of reducing GHG emissions by 2020 by 20% below 1990 levels.
    • In line with the above, the size of the cap in the EU ETS (the total number of allowances either gifted or sold) will be reduced in a linear manner from 2013 through to 2020. This would equate to a 21% reduction in emissions compared to 2005 by 2020, within the cap
    • Full auctioning (ie, zero free allocation) should be the rule for the power sector from 2013 onwards (consistent with the NZ proposal).
    • In other sectors not deemed to be at significant risk of carbon leakage, free allocation will be phased out from 2013 to 2020 (largely consistent with the New Zealand proposal).
    • Sectors or sub sectors deemed to be at 'significant risk of carbon leakage' will receive up to 100% of their “share” of the cap for free  (see clarification below), the list of sectors / sub-sectors eligible for such free allocation will be reviewed in three-year intervals.
  2. A recent press release (February 21 2008) cites European Commission President Jose Manuel Barroso as saying:

    "Ultimately, the best solution is an international [emissions trading] agreement…but in the absence of an international agreement, we should be ready to look at interim solutions for energy intensive industries. For example, receiving their [emission trading] allowances free of charge, or requiring importers to obtain allowances alongside European competitors….This is the most we can do for our energy-intensive industries."

  3. This press release has been interpreted by some as a back-down by the EC. In fact, it remains very much in line with the proposal of 23 January 2008 as noted above, in particular, point ‘e’.
  4. Reports in New Zealand have also picked up on the generosity of the EU proposal. However the EC’s proposal is not as generous as is being portrayed.
  5. Our interpretation of the EC proposal is that trade exposed sectors in the EU ETS could receive a free allocation of up to 100% of a predetermined “share” of the cap. The absolute number of units gifted will decline in a linear manner by 1.74% per annum, at the same rate as the reduction in the overall cap during the period 2013-2020.  We also understand that this 1.74% linear reduction for allocations will commence from 2010, and that the amount of allowances allocated is also lowered by another 5% per year by a contribution to the new entrants’ reserve.   The size of the cap in 2013 is therefore estimated to be over 5% below the phase 2 cap of 94% of 2005 emissions (i.e. less than 90% of 2005 emissions). 1
  6. It should also be noted that the NZ ETS recognises cost increases for electricity – while the EU ETS does not, and that participants in the NZ ETS are likely to have access to cheaper units for compliance purposes, as use of Kyoto units to meet obligations is restricted under the EU ETS.2
  7. The net result of this is that the proposed treatment of firms deemed ‘at risk’ is likely to be more generous in the NZ ETS than in the EU ETS in 2013.  By 2020, it appears that this would be reversed (if the currently proposed phase-out approach is agreed), however if the allocation being discussed by Cluster B was adopted, the NZ system would be substantially more generous through to 2020. 
  8. It should be stressed that the EC proposal is subject to approval by both the Council of the EU (the Member States) and the European Parliament, and may undergo modifications before a final decision is taken (expected in late 2008).

1 Hence, if you assume the trade exposed sectors had an average allocation in 2008 to 2012 of 100 allowances, the maximum amount they can be given for free in 2013 is less than 90 allowances (reduced by 3 x 1.74% allowances due to the declining cap and close to 5 allowances to fund the new entrants’ reserve). This figure declines from year to year by 1.74 % (of the base figure, rather than last year’s figure).

2 As noted in the report to the leadership forum “Further Analysis of AAUs in the NZ ETS”, of 27 November 2007, at around 23 Euro at that time, EU market prices are far higher than the lower market prices for trades in Kyoto markets outside the EU, which were often around 11Euro for primary and 16 Euro for secondary markets at that time.