iStockphoto/ FeelPic Climate Action The EU Emissions Trading System EU ETS The EU ETS is the cornerstone of the European Union’ s drive to reduce its emissions of man- made greenhouse gases which are largely responsible f or warming the planet and causing climate change. The system works b y putting a limit on o verall emissions from co vered installations which is reduced each year. Within this limit, companies can buy and sell emission allowances as needed. This ‘cap-and-trade’ approach gives companies the flexibility they need to cut their emissions in the most cost-eff ective way . The EU ETS co vers approximately 11,000 po wer stations and manufacturing plants in the 28 EU Member States plus Iceland, Liechtenstein and Norway , as well as aviation activities in these countries. In total, around 45 of total EU greenhouse gas emissions are regulated by the EU ETS. The EU ETS remains the world’ s biggest emissions trading mark et, accounting f or o ver three- quarters of international carbon trading. It continues to inspire the development of other national or regional systems. Europe is looking to link the EU ETS with compatible schemes in other countries. The European Commission presented in July 2015 a legislative proposal on the revision of the EU ETS f or its next phase 2021-2030, in line with the EU’ s 2030 climate and energy policy framework. The proposal aims to reduce EU ETS emissions b y 43 compared to 2005. iStockEU ETS Development in phases 2005-2007 1st trading period constituted a process of ‘learning b y doing.’ EU ETS was successfully established as the world’s biggest carbon market. However, the number of allo wances, based on estimated needs, turned out to be excessive; consequently the price of first-period allo wances f ell to zero in 2007. 2008-2012 2 ndtrading period. Iceland, Norway and Liechtenstein joined 1.1.2008. The number of allo wances was reduced b y 6.5 f or the period, but the economic downturn depresses emissions, and thus demand, by even more. This led to a surplus of unused allo wances and credits which continues to weigh on the carbon price. Aviation was brought into the system 1.1.2012. 2013-2020 3 rd trading period. Major ref orm took eff ect 1.1.2013. The biggest changes have been the introduction of an EU-wide cap on emissions reduced b y 1.74 each year and a progressive shift to wards auctioning of allo wances in place of cost-free allocation. Croatia joined the ETS 1.1.2013. 2021-2030 4 th trading period. Legislative proposal f or the revision of the EU ETS was presented b y the European Commission in July 2015. EU ETS Key facts Operates in the 28 EU countries plus Iceland, Liechtenstein and Norway Limits greenhouse gas emissions from◦ Approximately 11,000 energy intensive installations in power generation and manufacturing industry sectors◦ Operators of flights to and from EU Member States, Iceland, Liechtenstein and Norway for the time being, only flights within these countries are covered Covers around 45 of the EU’s greenhouse gas emissions How the EU ETS works The EU ETS works on the ‘cap and trade’ principle. The o ve r a l l v o l u m e o f g r e e n h o u s e g a s e s t h a t c a n b e e m i t t e d f o r a m u l t i - ye a r p h a s e by t h e p o w e r p l a n t s , f a c t o r i e s a n d o t h e r c o m p a n i e s c o ve r e d by t h e s y s t e m i s s u b j e c t t o a c a p s e t a t EU level. Within this cap, companies receive or buy emission a l l o w a n c e s w h i c h t h e y c a n t r a d e , i f t h e y w i s h t o d o s o . I n t h e p e r i o d 2 0 1 3 - 2 0 2 0 , t h e c a p o n e m i s s i o n s f r o m p o w e r s t a t i o n s a n d o t h e r fi x e d i n s t a l l a t i o n s i s r e d u c e d by 1 . 7 4 e ve r y ye a r . T h i s m e a n s t h a t i n 2 0 2 0 , g r e e n h o u s e g a s e m i s s i o n s f r o m t h e s e s e c t o r s w i l l b e 2 1 l o w e r t h a n i n 2 0 0 5 . A s e p a r a t e c a p a p p l i e s t o t h e a v i a t i o n s e c t o r f o r t h e w h o l e 2 0 1 3 - 2 0 2 0 p e r i o d , t h i s i s 5 b e l o w t h e a ve r a g e a n n u a l l e ve l o f e m i s s i o n s i n t h e ye a r s 2 0 0 4 - 2 0 0 6 . E m i s s i o n a l l o w a n c e s a r e t h e ‘ c u r r e n c y ’ o f t h e E U E T S , a n d the limit on the total number available gives them a value. Each allowance gives the holder the right to emit one tonne o f CO 2 , the main greenhouse gas, or the equivalent amount o f t w o o t h e r p o w e r f u l g r e e n h o u s e g a s e s , n i t r o u s o x i d e N 2 O a n d p e r fl u o r o c a r b o n s P F C s . Allowances can be used only once. Companies have t o s u r r e n d e r a l l o w a n c e s f o r e ve r y t o n n e o f CO 2or the e q u i v a l e n t a m o u n t o f N 2 O o r P F C s c o ve r e d by t h e E U E T S t h a t t h e y e m i t t e d i n t h e p r e v i o u s ye a r . H e a v y fi n e s a r e i m p o s e d i f t h e y d o n o t h a n d i n e n o u g h a l l o w a n c e s t o m a t c h their emissions. C o m p a n i e s m a y r e c ei ve s o m e a l l o w a n c e s f r o m g o ve r n m e n t s f o r f r e e . T o c o ve r t h e r e s t o f t h ei r e m i s s i o n s , t h e y n e e d t o d o Emissions trading systems are among the most cost-effective tools for cutting greenhouse gas emissions. In contrast to traditional ‘command and control’ regulation, trading harnesses market forces to find the cheapest ways to reduce emissions. The European Union launched the EU Emissions Trading System EU ETS in 2005 as the cornerstone of its strategy for cutting emissions of carbon dioxide CO2 and other greenhouse gases at least cost. The EU ETS is the world’s first major carbon market and remains by far the biggest today. By putting a price on carbon and thereby giving a financial value to each tonne of emissions saved, the EU ETS has placed climate change on the agenda of company boards across Europe. Pricing carbon also promotes investment in clean, low-carbon technologies. By allowing companies to buy credits from emission-saving projects around the world, in particular in least developed countries, the EU ETS acts as a driver of investment in clean technologies and low-carbon solutions globally. This factsheet explains the EU ETS as it stood in September 2016. Cutting greenhouse gas emissions EU targets* 2020 –20 2030 –40 at least *compared to 1990 levels iStockphoto/ vencavolrab ei t h e r , o r a m i x t u r e o f , t h e f o l l o w i n g buy additional allowances d r aw o n a n y s u r p l u s a l l o w a n c e s t h e y h a ve s a ve d f r o m previous years. W i t h i n l i m i t s , t h e y c a n a l s o b u y c r e d i t s f r o m c e r t a i n t y p e s o f a p p r o ve d e m i s s i o n - s a v i n g p r o j e c t s a r o u n d t h e w o r l d . T h e n e e d t o p u r c h a s e o r d r aw o n t h ei r r e s e r ve s o f a l l o w a n c e s a n d c r e d i t s c r e a t e s a p e r m a n e n t i n c e n t i ve f o r c o m p a n i e s t o r e d u c e t h ei r e m i s s i o n s by i n ve s t i n g i n m o r e e ffi c i e n t t e c h n o l o g y o r s h i ft i n g t o l e s s c a r b o n - i n t e n s i ve e n e r g y s o u r c e s . C o m p a n i e s c a n a l s o s e l l a l l o w a n c e s a n d c r e d i t s , f o r i n s t a n c e i f t h e y j u d g e t h e y h a ve m o r e t h a n t h e y a r e g o i n g t o n e e d . T h i s a l l o w s t h e m t o c h o o s e t h e m o s t c o s t - e ff e c t i ve options to address their emissions. What the EU ETS covers While emissions trading has the potential to cover many e c o n o m i c s e c t o r s a n d g r e e n h o u s e g a s e s , t h e E U E T S f o c u s e s o n e m i s s i o n s w h i c h c a n b e m e a s u r e d , r e p o r t e d a n d ve r i fi e d t o a h i g h d e g r e e o f a c c u r a c y . P a r t i c i p a t i o n i n t h e E U E T S – u n d e r s t o o d a s t h e o b l i g a t i o n t o s u r r e n d e r a l l o w a n c e s f o r r e p o r t e d e m i s s i o n s - i s m a n d a t o r y f o r c o m p a n i e s o p e r a t i n g i n t h e s e c t o r s c o ve r e d , b u t i n s o m e s e c t o r s o n l y p l a n t s a b o ve a c e r t a i n s i ze a r e i n c l u d e d . G o ve r n m e n t s c a n e x c l u d e c e r t a i n s m a l l i n s t a l l a t i o n s f r o m th e sy s te m i f fi s ca l o r o th e r m e as u re s a re i n p la c e th a t w i l l cut their emissions by an equivalent amount. T h e E U E T S a l s o c o ve r s e m i s s i o n s f r o m a v i a t i o n . F o l l o w i n g international agreement in the International Civil Aviation O r g a n i z a t i o n I C A O t o t a k e g l o b a l a c t i o n t o a d d r e s s i n t e r n a t i o n a l e m i s s i o n s f r o m a v i a t i o n by 2 0 2 0 , t h e E U E T S a p p l i e s u n t i l 2 0 1 6 o n l y t o fl i g h t s b e t w e e n a i r p o r t s l o c a t e d i n t h e E u r o p e a n E c o n o m i c A r e a E E A . A ft e r t h e 2 0 1 6 I C A O Assembly, the European Commission will assess its outcome a n d c o u l d p r o p o s e n e w l e g i s l a t i o n o n t h e E U E T S f o r a v i a t i o n . How allowances are allocated Auctioning S i n c e 2 0 1 3 , a u c t i o n i n g i s t h e d e f a u l t m e t h o d o f a l l o c a t i n g emission allowances. This means that businesses have to b u y a n i n c r e a s i n g p r o p o r t i o n o f t h ei r a l l o w a n c e s a t a u c t i o n . A u c t i o n i n g i s t h e m o s t t r a n s p a r e n t m e t h o d o f a l l o c a t i n g allowances and puts into practice the principle that the polluter should pay. In sectors other than power generation, a transition to auctioning takes place progressively. Allowances not a l l o c a t e d f o r f r e e a r e t o b e a u c t i o n e d . T h i s s h a r e w i l l i n c r e a s e i n t h e f o l l o w i n g ye a r s , a s t h e v o l u m e o f a l l o w a n c e s a l l o c a t e d f o r f r e e d e c r e a s e s f a s t e r t h a n t h e c a p . I n t o t a l , t h e C o m mi ss io n e s t imat e s t hat 57 o f t h e t ot a l a m o u n t o f a l l o w a n c e s w i l l b e a u c t i o n e d d u r i n g 2 0 1 3 - 2 0 2 0 , w h i l e t h e r e m a i n i n g a l l o w a n c e s a r e a v a i l a b l e f o r f r e e a l l o c a t i o n . T h e C o m m i s s i o n ’ s p r o p o s a l f o r r e v i s i o n o f t h e E U E T S D i r e c t i ve f o r e s e e s t h a t t h e s h a r e o f a l l o w a n c e s t o b e a u c t i o n e d w i l l r e m a i n t h e s a m e a ft e r 2 0 2 0 . Power generators have had to buy all their allowances s i n c e 2 0 1 3 . H o w e ve r , ei g h t o f t h e M e m b e r S t a t e s w h i c h h a ve j o i n e d t h e E U s i n c e 2 0 0 4 – B u l g a r i a , C y p r u s , C ze c h R e p u b l i c , E s t o n i a , H u n g a r y , L i t h u a n i a , P o l a n d a n d R o m a n i a – h a ve m a d e u s e o f a p r o v i s i o n a l l o w i n g t h e m t o c o n t i n u e g r a n t i n g l i m i t e d n u m b e r s o f f r e e a l l o w a n c e s t o e x i s t i n g p o w e r p l a n t s until 2019. In return they will invest at least as much as t h e va l u e o f t h e f r e e a llo wa n ce s in m o d e r ni s in g t h e i r p o w e r sector. A u c t i o n s a r e h e l d o n a p l a t f o r m p r o v i d e d by a n e x c h a n g e appointed by national governments but are open to b u ye r s f r o m a n y c o u n t r y p a r t i c i p a t i n g i n t h e E U E T S . M o s t g o ve r n m e n t s u s e a c o m m o n p l a t f o r m f o r t h ei r a u c t i o n s , b u t G e r m a n y , P o l a n d a n d t h e U K h a ve o p t e d t o u s e t h ei r o w n p l a t f o r m s . E U E T S a l l o w a n c e a u c t i o n s t a k e p l a c e o n a d a i l y b a s i s s i n c e l a t e 2 0 1 2 a n d r e p r e s e n t t h e m o s t s i g n i fi c a n t a u c t i o n m e c h a n i s m e ve r i m p l e m e n t e d f o r a n e n v i r o n m e n t a l a s s e t w o r l d - w i d e . Greenhouse gases and sectors covered Carbon dioxide CO 2 from Power and heat generation Energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals Civil aviation Nitrous oxide N 2 O from production of nitric, adipic and glyoxylic acids and glyoxal Perfluorocarbons PFCs from aluminium production iStockphoto/ Pedro Castellano Preventing ‘carbon leakage’ ‘ C a r b o n l e a k a g e ’ r e f e r s t o t h e s i t u a t i o n t h a t m a y o c c u r i f , f o r r e a s o n s o f c o s t s r e l a t e d t o c l i m a t e p o l i c i e s , b u s i n e s s e s t r a n s f e r p r o d u c t i o n t o o t h e r c o u n t r i e s w h i c h have laxer constraints on greenhouse gas emissions. This could lead to an increase in their total emissions. T h e r i s k o f c a r b o n l e a k a g e m a y b e h i g h e r i n c e r t a i n ene rgy-i nten s iv e i ndu stri es. T h e s e c t o r s a n d s u b - s e c t o r s d e e m e d t o b e e x p o s e d t o a s i g n i fi c a n t r i s k o f c a r b o n l e a k a g e a r e p l a c e d o n a n o ffi c i a l l i s t . T h e c u r r e n t l i s t i n c l u d e s a r o u n d 1 7 0 s e c t o r s a n d s u b s e c t o r s , c o ve r i n g a ve r y h i g h s h a r e o f i n d u s t r i a l emissions. T h e l i s t i s e s t a b l i s h e d f o r fi ve ye a r s , o n t h e b a s i s o f c l e a r l y d e fi n e d c r i t e r i a a n d a ft e r e x t e n s i ve c o n s u l t a t i o n w i t h s t a k e h o l d e r s . T h e c u r r e n t l i s t a p p l i e s f o r t h e ye a r s 2 01 5 - 2 01 9 . Free allocation For manufacturing industries, t h e s h a r e o f f r e e a l l o w a n c e s w i l l d e c r e a s e a n n u a l l y t o r e a c h 3 0 i n 2020. For the aviation sector, t h e s h a r e o f f r e e a l l o w a n c e s a m o u n t s t o 8 2 . T h e a l l o w a n c e s g i ve n t o m a n u f a c t u r i n g i n d u s t r i e s f o r f r e e a r e d i s t r i b u t e d t o c o m p a n i e s o n t h e b a s i s o f h a r m o n i s e d r u l e s . T h i s e n s u r e s t h a t i n s t a l l a t i o n s o f a g i ve n t y p e a r e treated equally across the EU. Underpinning these rules are a m b i t i o u s b e n c h m a r k s f o r e m i s s i o n s p e r f o r m a n c e d r aw n u p i n c o n s u l t a t i o n w i t h i n d u s t r y . B y r e w a r d i n g t h e m o s t e ffi c i e n t i n s t a l l a t i o n s , t h e b e n c h m a r k s s t r e n g t h e n t h e i n c e n t i ve f o r businesses to reduce their emissions. I n s t a l l a t i o n s i n s e c t o r s a n d s u b - s e c t o r s d e e m e d t o b e e x p o s e d t o a s i g n i fi c a n t r i s k o f ‘ c a r b o n l e a k a g e ’ r e c ei ve special treatment to support their competitiveness. Installa