Memorandum by the Cambridge Centre for
Climate Change Mitigation Research
LEVEL OF
EMISSIONS REDUCTIONS
1. The proposed level of emissions reductions
and the automatic change from 20% to 30% should an international
agreement be reached
The concept is a good one and supports the EU's
target of a 20% reduction in greenhouse gas emissions (GHG) below
1990 for 2020 for all sectors. The indication that the EU cap
will continue to decrease by 1.74% per year after 2020 gives a
clear signal to all trading sectors about the continuation of
the EU ETS and increased predictability and transparency of the
whole scheme.
However, there are three reasons why the level
of reductions is too low. The first reason for the target to be
more ambitious is that the scientific evidence presented in the
IPCC's Fourth Assessment report (IPCC AR4)[1]
shows that the level of ambition is insufficient to limit global
temperature rises to 2°C above the preindustrial level, with
more recent scientific research suggesting that even the limit
of 2°C risks serious damages in the very long term.[2]
The second reason is that the electricity sector, which is the
largest broad sector affected by the European emission trading
scheme (ETS), has some of the lowest cost options for reducing
emissions, since coal-fired plant can be replaced by gas-fired
plant in many Member States. This suggests that the ETS should
have a more stringent target than the rest of the economy. The
third reason for more ambitious action is that as a member of
the Annex 1 group of countries, that have taken on additional
responsibilities for action under the Kyoto Protocol, the EU should
be setting more ambitious targets compared to the global reductions
required to limit temperature rise.
The target should be more like a reduction of
30% to 40% by GHG by 2020. Moreover additional GHG mitigation
measures are needed for the non-ETS sectors, preferably at equal
rates with those in the ETS (currently the proposal is only for
a 10% reduction). Such additional measures may prove unnecessary
if oil and gas prices remain above $105/bbl equivalent, but this
is not guaranteed, and some form of "ratchet" on the
EU's additional energy taxes should be considered so that real
carbon prices in the non-energy sectors do not fall substantially
below $105/bbl in real terms by 2020.
The automatic change to a more stringent target
if an international agreement is reached demonstrates the EU community's
good will to continue to be the world's leading region in combating
climate change and should be welcomed.
SCOPE AND
OPERATION
2. The sectors and gases that the Commission
proposes to include and exclude. We would be particularly interested
in views on the inclusion of Land Use, Land Use Change and Forestry
(LULUCF) sectors, including agriculture[3]
EC has proposed to include CO2 emissions from
aviation (likely to be included from 2012) petrochemicals, ammonia,
aluminum production and N2O emissions from the production of nitric,
adipic and glyoxalic acid production and perfluorocarbons emissions
from the aluminum sector from 2013. All listed emissions can be
measured and verified. Therefore these emissions can and should
be included in the scheme to increase the efficiency of the EU
ETS.
The Commission has decided to exclude LULUCF.
Including LULUCF requires well-developed monitoring, reporting
and verification measures that are currently not available. Moreover
there are problems of additionality, so it seems wiser to keep
LULUCF out of the ETS.
The EC has also decided to allow opt-outs for
small entities if equivalent measures are in place. This is necessary
to avoid high administrative costs (both for companies and the
governments).
3. The practical application and enforceability
of the scheme
Phases 1 and 2 have proved that the scheme is
functional and can establish a carbon price. Monitoring, verification
and compliance measures are in place, but more harmonised rules
are needed to avoid distortions between Member States. If the
proposal becomes law then member states do not have to submit
National Allocation Plans. Despite the proposed more centralised
and harmonised emissions trading scheme, the European Commission
should continue working with Member-State governments to ensure
that all relevant installations are covered and comply, and to
avoid over/under allocations of allowances.
Penalties should be revisable and adjustable,
not only to changes in inflation as is proposed currently, but
also to the carbon price, especially if the carbon price exceeds
the penalty (
100 per tonne of CO2 in real terms).
4. The key strengths and weaknesses of the
proposal
Key strengths:
— longer trading period eight years
instead of five—increases predictability;
— diminishing cap—required to
show climate leadership;
— high levels of auctioning—reduces
possible windfall profits;
— harmonised allocation methodology—increases
fairness; and
— increased intertemporal flexibility—installations
can bank allowances and credits to the future.
Key weaknesses:
— not stringent enough cap to stabilise
global warming at 2°C level, to provide a strong enough signal
to encourage action by other countries, or in relation to action
for non-ETS sectors;
— usage of domestic offsets—undermines
transparency and responsibility for sectoral action;
— mot clearly defined usage of auctioning
revenues; and
— unclear access to credits from CDM
mechanisms and JI credits from outside the scope of the EU ETS—increases
uncertainty.
You may wish to consider in particular:
— the extent to which the scheme
as currently designed will encourage technological innovation;
The effect on induced technological change (ITC)
would be enhanced by some of the auction revenues being used to
set up an EU-wide Carbon Trust and/or some mechanism to provide
low-cost loans for investment in low-GHG technologies and funding
for deployment of these new technologies. The proposal foresees
using 20% of auctioning revenues on adaptation and mitigation
of climate change (including expenditures on R&D). How much
of this member states will earmark for R&D is unclear and
will be decided by Member States. In addition to this, the level
of technological innovation is related to the level of carbon
price (and fuel prices)—the higher the price level (spot
prices and future prices) the more are companies interested in
adopting new technologies and willing to invest into R&D
— whether it will result in the
appropriate price signal being sent;
The 20 to 30% target has not had the effect of
increasing the carbon price in the ETS Phase 2 to the levels that
the IPCC AR4 suggests that are necessary to achieve the 2°C
target. This price depends on a tight cap, level of auctioning,
usage of CDM/JI credits and intertemporal flexibility mechanisms
(banking-borrowing). The ways in which auctioning will be undertaken
by Member States also influence the carbon price. The price in
the ETS market prevailing in early 2008 of
20 to 25 per tonne of CO2 (/tCO2) is too low to have
a substantial effect on emissions and reflects the low level of
ambition of the 20% to 30% target. The IPCC AR4 suggest that prices
above
50/tCO2 are necessary to make carbon capture and
storage profitable, and prices rising to around
100/tCO2 by 2020 would be necessary to achieve the
2°C target. Such levels of prices can be easily achieved
by a tighter cap, eg the 30 to 40% suggested above, with a substantial
proportion of the allowances being reserved for management of
the price, rather than being given away or auctioned. The Commission
will adopt rules of auctioning by the end of 2010.
— whether it will be efficient and/or
equitable;
Including new industries and GHGs and harmonising
the inclusion of combustion installations will broaden the scope
of the scheme and will help to enhance its efficiency.
The proposed ETS is efficient in that it covers
the EU-wide electricity system, although there are issues of competition
in the marker, being investigated by the EU Commission. There
are problems with rising electricity prices for low-expenditure
households. Recycling of a certain proportion of auctioning revenues
towards improving quality of housing or using revenues to lower
income tax and/or increasing personal allowances would help.
5. The potential application of the new Article
24a permitting allowances to be issued in respect of projects
outside the scope of the Community scheme that reduce greenhouse
gas emissions
These so-called domestic offsetting projects
in the non-ETS sectors reduce the effectiveness of the weak targets
even further and reduce the responsibility of non-ETS sectors
for their emissions. However there are currently no institutions
or rules in place to assure the quality of this kind of offset
project. Establishing rules and institutions would have high administrative
costs. For these reasons domestic offsetting should be avoided.
ALLOCATION AND
AUCTIONING
6. Whether decisions about the proportion
of permits to be allocated for free rather than auctioned should
be taken at the EU level or at the Member State level, and what
the time-frame for such decisions should be
In principle all permits should be auctioned
and the decision should be taken at EU level, otherwise there
could be a "race to the bottom" between Member States
supporting their own companies. These issues with "state
aid" were observed in phase I.[4]
A harmonised allocation methodology at the EU level will also
help to avoid industry-wide distortions in the EU community. Full
auctioning also provides a fairer treatment for new entrants.
Decisions about allocation methods should be taken for longest
possible period (ie 8-10 years) to assure a predictable investment
environment for companies.
7. Which sectors (if any) should continue
to receive a proportion of their emissions permits allocated free-of-charge
and for how long?
There will be free allocation (for sectors excluding
electricity production) from 80% to 0% during phase 3. In addition
to this, the proposal foresees up to 100% free allocation of allowances
to the sectors identified as open to international competition.
These sectors (likely to include cement, iron and steel) will
be indentified by 2010. This decision has to be based on an in-depth
economic and social analysis. However, for transparency these
sectors should have to buy all allowances though auctioning rather
than getting a proportion for free; but the revenues should be
largely returned in the form of subsidies for re-structuring to
low-GHG alternative products and processes. Avoiding free allocation
will also help to avoid any possible windfall profits in these
sectors. The amount of revenues returned to sensitive industries
and the list of these industries should be revisable in every
3 years (as is proposed in the review).
8. Whether the redistributive element of
the Commission's proposal (whereby poorer Member States are allocated
more auctionable emissions permits, thereby increasing the revenues
accruing to their Treasuries) is appropriate
Allocating more allowances to the poorer Member
States inside the EU bubble does appear to be more equitable and
it recognises the principle of common but differentiated responsibilities.
However the proposal does not foresee revision for extra allocations
listed in Annex IIa of the proposal. Supporting some of the old
Member States (Greece, Italy, Sweden, Spain, Portugal, Malta)
is questionable as these countries are not in transition to market
economy and their emissions are not well below 1990 (as they are
in new Member States).
THE INTERNATIONAL
DIMENSION
9. The extent to which EU operators should
be allowed to meet obligations under the ETS by investing in projects
to reduce emissions outside the EU through the Clean Development
Mechanism (CDM)
In phase 2 it is possible to use credits from
CDM and Joint Implementation (JI) up to about 13.4% (ie about
1.4 billion credits) of allocated emissions. Yearly average allocated
CO2 emissions are 6.5% below 2005 verified emissions. Therefore
if installations are using the full amount of allowed credits
from CDM and JI mechanisms (outside the community) then yearly
emissions will rise by about 7%. This contradicts the linking
directive that stresses the usage of CDM/JI credits to be supplementary
to domestic efforts in GHG reduction. Unused credits from phase
2 are transferable on to phase 3 There will be an automatic change
to allow additional usage of credits by 50% of the additional
reduction effort if an international agreement is reached.. If
there will be no international agreement, then the proposed scheme
is unfair on new entrants (including the industries (including
aviation) entering in the phase 3) which cannot transfer the credits
from phase 2 to phase 3.
It would be better if it were clearly specified
how many credits from flexible mechanisms Member States/entities
will be able to use in phase 3.
10. The likely feasibility of creating links
between the ETS and other similar schemes around the world
From January 2008 three countries (Norway, Lichtenstein,
Iceland) outside the EU but in the European Economic Area have
been linked to the EU ETS. Linking other countries' or areas'
emissions trading schemes in the EU ETS will widen the scope and
increase the efficiency of the scheme. However to avoid any distortions
between economic areas and inside industries these schemes should
be based exactly on the same rules. The fairest GHG emissions
trading scheme would be a harmonized global emissions trading
covering all emitting sources in developed as well as in developing
countries.
If it is possible to sell spare emissions between
economic areas, then this may increase the incentive for each
area to avoid stringent emissions cuts in the first place.
19 June 2008
1 IPCC's Fourth Assessment report (2007) http://www.ipcc.ch/ipccreports/assessments-reports.htm Back
2
Hansen et al (2008) Target Atmospheric CO2: Where Should
Humanity Aim? http://www.columbia.edu/jeh1/2008/TargetCO2_20080407.pdf Back
3
According to the UN Framework Convention on Climate Change, the
six land-use categories for the purposes of LULUCF are: forest
land; cropland; grassland; wetlands; settlements; and other land.
http://unfccc.int/methods_and_science/lulucf/items/1084.php Back
4
Johnston, A-Free allocation of allowances under the EU emissions
trading scheme: legal issues. Climate Policy 6 (2006), pp 115-136. Back
| 
