Sustainability Policies: The EU ETS Case

Climate change is an urgent and serious matter affecting developing and developed countries.
Many organizations, like the World Bank, UN, WWF, are discussing about the related issues and about their possible solutions. But what are the European Policies in place?
The EU Emissions Trading System (EU ETS) is the European Union’s flagship policy launched in 2005 and aimed to address the climate change problem.

EU ETS has the objective to reduce CO2 and other industrial greenhouse gas emissions (GHG) in a cost-effective way and at the lowest cost. This international trading system covers more than 11000 power stations, airlines and “heavy energy-using” manufacturing industries in the 31 countries. ETS is today the biggest emission trading market of the world, covering almost 45% of the total EU emissions.

The emission-saving activities (CDM & JI projects) generate credits (offsets) that can be invested in low carbon technologies, sustainable development and environmental friendly projects in the developing countries.

How does it work?

The EU ETS is based on the “cap and trade” system.  There is a limit (cap) of emissions that companies and power plants need to respect every year in order to avoid high fines. In addition EU ETS has put a price on carbon and a financial value to the CO2 tons of emissions saved. Companies can also buy or get credits from the CDM projects around the world and decide if trade them. The credits or allowances represent the currency of this “emission trading market” and each allowance gives the right to the company to emit one CO2 Ton or equivalent (nitrous oxide N2O and perfluorocarbons PFCs).

Companies need to match their emissions with the allowances and for this reason are encouraged to reduce their emissions investing in more efficient and low carbon technologies or buying extra credits on the market.

The cap decreases over time so the total emissions are reduced. In 2020, the emissions of those sectors under the ETS framework will be 21% lower than in 2005.

Work in progress: THE PHASES

The first phase started in 2005, when the framework was launched. The number of credits in this first phase was too high in comparison of the demand and the price of the allowances went down to zero in 2007, last year of this first period.

During the second phase (2008-2012) the number of credits was reduced by 6.5% but because of the global financial crisis emissions were reduced even more and the decrease of the general demand generated a surplus of allowances, which –contrary to what happened with phase I—could be banked for future phases.

The third phase (2013-2020) just started and includes several changes and reforms. First of all the introduction of an auctioning system (40% of allowances) as a method to allocate allowances, instead of being allocated for free or grandfathered by governments.  Second a single EU-wide cap on emissions instead of the former 27 national caps. And finally the inclusion of more types of gases and of more sectors and industries.

What the IMPACT?

The EU ETS framework is directed to those companies, power plants and industries that have a central role in the climate change context, due to the high GHG emissions. Because of the cap system, companies are encouraged to invest in low carbon technologies or to reduce their total annual emissions. Another positive impact of this system is represented by the investment of a part of the revenue originated by the sales of the allowances of the current period (5%) in renewable energy projects and in carbon capture and storage plans (NER300 program).

Companies can also realize emission-saving projects in developing countries in order to get extra credits. Kyoto Protocol’s Clean Development Mechanism and the Joint Implementation Mechanism represent another possibility of reduce emissions while investing in a responsible and “clean” way in the developing countries.

The mandatory participation of the companies operating in certain sectors, the cap system, the alternative mechanism of generating credits represent a way of addressing the climate change issue and reducing the GHG emissions, one of the main responsible of the climate change effects.

Cutting emissions while investing in low carbon and renewable energy technologies and in responsible projects in the developing countries represent an effective way of getting closer to a sustainable development and step by step the EU ETS is giving its contribution through this successful system.

What NEXT?

The current financial crisis is affecting this recent emission trading market. The surplus and mismatch between available credits and the demand is pushing down the allowances price. For this reason the EU ETS system could be undermined by the surplus of allowances and the long-term emission reduction targets could not be achieved in a cost-effective way.

A structural reform therefore is needed and the European Commission has started a debate on structural measures, necessary in order to address the surplus issue and has decided to postpone the auctioning of some allowances (this is still lost in the legislative process and the European Parliament plenary will vote on this issue mid April).

Time and the response to the current economic crisis will tell.

References

EU ETS Directive for phase 3: http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0063:0087:EN:PDF

Increasing Demand by Raising Long Term Expectations: the Importance of a 2030 Target for the European Union’s Climate Policy, Executive Summary, February 2012, by Pedro Piris-Cabezas and Ruben Lubowski

The state of the European carbon market in 2012. Report from the commission to the european parliament and the council. Brussels, 14.11.2012 COM(2012) 652 final. Available at: http://ec.europa.eu/clima/policies/ets/reform/docs/com_2012_652_en.pdf

http://ec.europa.eu/clima/policies/ets/cap/auctioning/docs/20121112_swd_en.pdf

The EU ETS system: http://ec.europa.eu/clima/publications/docs/factsheet_ets_2013_en.pdf

http://ec.europa.eu/clima/policies/ets/index_en.htm

Comments Off on Sustainability Policies: The EU ETS Case / 04 Apr 2013 por Veronica Recanati
IMSD /

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