Memorandum by the European Federation
of Energy Traders (EFET)
EFET highly appreciates your invitation to submit
to your call for evidence concerning the revision of the EU's
emissions trading system and we are gladly willing to express
our views of the European Commissions amendment proposal.
EFET, with more than 90 member companies operating
in 21 countries, represents the most active traders under the
ETS. EFET is a strong supporter of trading mechanisms as the most
cost-efficient way to curb GHG emissions.
EFET is especially concerned with the proper
functioning of the emissions trading system and market. A number
of key criteria should be fulfilled to ensure this:
— liquidity in terms of traded volume
and active traders;
— level playing field for participants;
— clarity and predictability on regulatory
aspects;
— clarity on factors that drive supply
and demand;
— long-term certainty about the market
framework; and
— trustworthiness and transparency
in reported emissions.
Firstly, we shortly enumerate some key elements
in the proposal that EFET supports (having advocated these to
the European Commission in an earlier stage):
— a longer, eight year trading period,
parallel with the 2020 targets;
— inclusion of more sectors and gases
where appropriate;
— exclusion of small installations;
and
— harmonised allocation throughout
the EU as to the cap, the allocation rules and the new entrant
reserve.
However, we have concerns about several other
important issues.
NEW ENTRANT
RESERVE
As to the size of the New Entrants Reserve (NER),
we recommend a careful reconsideration: in fact, the current limit
seems fairly high, given the fact that the NER is not needed for
electricity production. Reservation of too many allowances may
cause unnecessary uncertainty in the market. We would like to
stress that NER management should be transparent and information
hereon timely. To strengthen transparency and predictability,
the proposal should also include clear rules about what happens
to un-allocated NER.
INTERNATIONAL AGREEMENT
Depending on the question if a satisfactory
international agreement is reached, the EU CO2 target will be
either 20 or 30%. EFET does not take a position on those targets
as such, as this is a mainly political choice. However, EFET has
concerns on the timing. In case an international agreement should
be achieved later than what is now assumed (2009 or 2010), there
might be too little time to adapt to the 30% target. EFET therefore
recommends applying an implementation time of at least three years
for adaptation to the 30% target. In other words: the starting
date of the EU cap decrease will start only three years after
the decision to have a 30% reduction target.
KYOTO CREDITS
While, under the current proposal, Member State
governments are allowed to use carbon credits for their national
targets, the ability to use CERs/ERUs in the EU ETS is heavily
restricted and subject to the conclusion of an international agreement
on climate change. As a consequence, a situation of uncertainty
for private entities involved in emission reduction projects is
created. Moreover, as an international agreement on climate change
is not likely to be concluded before late 2009, uncertainties
are likely to persist for a long period of time.
During the last years, private investors from
developed nations have provided large amounts of funding to greenhouse
gas reduction projects, especially under the Clean Development
Mechanism. If financial returns on those long-term investments
are affected by sustained political uncertainties, the immediate
result is the scaling back of new investment into low carbon technology
in developing countries. Ultimately, the CER/ERU restrictions
for the EU ETS would harm the development of an efficient market
for emission reduction projects and would reduce the overall cost-effectiveness
of the carbon markets, as low-cost abatement potential in developing
countries would not be fully tapped.
EFET endorses the ability to use CERs/ERUs proportionate
to required emission reductions. Sectors with restrictive caps
should be given freer access to the use of CERS for compliance.
The clear framework for CER usage, currently reserved to Governments,
should be extended to operators of power plants and other industrial
installations requiring emission allowances. It is also important
to ensure that a CER created in one EU Member State is recognised
in any other Member State; otherwise the market transparency and
equal treatment of companies from different EU countries are put
at stake.
AUCTIONING
Now that the Commission has chosen auctioning
as the basic allocation tool, it should be clear to the Member
States—who will be the auctioneers—that auctions should
serve as a means to have a fair, transparent and unambiguous way
of distributing emission allowances. Although the Member States
will have the auction revenues, revenue maximisation must
not be the aim of these auctions.
As stated before, EFET strongly supports EU-wide
harmonisation. This also counts for the execution of auctions:
all auctions from the 27 Member States should have the same auctioning
rules and should be fully coordinated regarding eg timing, frequency,
size, pre-qualification and information disclosure. Preferably
auctions will be carried out by one central EU body. But at least
a European central interface should be established for coordination
and communication of the member states auctions. Member states
should be obliged to make available a minimum number of EUA's
per year.
Power companies, who will face the lion's share
of third phase auctions, sell forward a large portion of their
electricity production, or source forward a large portion of their
electricity sales to consumers. If the auctions of EUA's will,
as the proposal suggests, start as late as 2013, then there will
be only the possibility for power companies to buy EUA's in the
secondary forward market, to lock in the costs as they sell electricity
forward. To build up more trust in the market prices, it will
be necessary to establish early an underlying certificate market
by selling certificates via auctioning. Therefore the first auctions
should already start before the third compliance period take off,
as soon as the final cap for the third phase is known, preferably
in the course of 2011.
We hope and trust that our contribution will
be valuable for your recommendations to the UK Government.
19 June 2008
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