Through the reform of the Emission Trading System (ETS) for the 2021-2030 period, the EU hopes to progressively reduce greenhouse gas (GHG) emissions in order to meet the goals both of its climate and energy policy and global goals set out in the Paris Agreement.
The ETS system has set up the first, the biggest and the longest-standing carbon market in the world. (Including other GHGs as well)(1). The ETS is foundation of EUs climate change mitigation policy and a very important tool for reducing GHG emissions in a way that wouldn’t harm the economy. It is implemented in all 28 member states, together with Iceland, Liechtenstein and Norway and it encompasses over 45% of GHG emissions in the EU. Today, the ETS is reducing the emissions of more than 11000 facilities with high energy consumption (power plants and industry facilities) and airline companies.
The system is founded on establishing the emissions ceiling for the entire system annually. This amount of gases is then converted into emission units, each amounting for one tone of C02, which are then distributed to system participants. One of the goals of the System is to provide financial incentive to the biggest polluters to reduce their emissions, since trading with emissions is enabled, the system participants can sell them to other companies if they haven’t used their annual ‘stock’. Some notable results were achieved through this system of putting a price on carbon and trading with it – the emissions coming from the System will have been reduced by 21% in 2020, compared with 2005 as a base year.
Towards achieving the goals
After more than two years of debating, The Council of the EU has formally approved the ETS reform on February 27 2018, preparing it for the fourth phase of its implementation – the 2021/2030 period, which was the final step in that legislative process. The new Directive will step into force 20 days upon it has been published in the EU Official Gazette.
The ETS reform can help the EU achieve its goals, adopted through the EU Climate and Energy Framework 2030(2) and the Paris Agreement(3), setting out the ambition of reducing GHG emissions by 40% until 2030. Instead of the current 1,74%, the emissions ceiling will be progressively reduced on annual basis by 2,2%. This will lead to emission reductions amounting to 556 million tons over the 10-year period, which is equal to the current annual emissions of UK.
At this moment, various external factors led to piling up of the emission units. Whenever there’s a surplus of emission units, the price of coal falls drastically, which reduces the incentive for emissions reductions as well. A long term solution for this issue is establishing the market stability reserve mechanism(4), which will be implemented from 2019. The surplus of units will be withdrawn to the reserve and stabilize the market, in order to reduce drastic price changes. Stabilization of carbon price increases system reliability and sends a signal to the investors that the carbon is being taxed consistently and that investing in the system and low-carbon technology is predictable and profitable. For these reasons, the Directive states that the number of emission units that should be put in market stability reserve will be temporarily doubled by 2023. Furthermore, the new mechanism for control of emissions in the reserve will become operable by 2023.
There’s a reasonable doubt that the companies may move their production to the countries with less strict restrictions on GHG emissions. This is why the new ETS Directive provides many provisions for protecting the industry of the so-called “carbon leakage”(5). The new provisions of the Directive should also protect the industry from the risk of the “inter-sector correction factor”(6), which is related to proportional reducing of the amount of free emission units for all facilities. The reason for this is the fact that the number of emissions is predetermined and strictly limited, which means that the number of emission units is stitly limited as well. There are criteria every facility has to meet in order to get rights to free emission units. When all national emission calculations, for the facilities encompassed by the system are summed up, it may happen that the sum of national emissions surpasses the emissions encompassed by pre-determined number of units. Since the number of units can’t be increased, the EU applies the inter-sector correction factor in order to proportionally decrease the amount of emission units for all facilities and adjust the amounts of free emission units.
Innovations and solutions
Some of the new provisions of the ETS Directive are:
- The revision of free emissions distribution rules will align them with the current production levels of the companies, while criteria for distribution of free units will be adjusted following the technological progress;
- The sector most vulnerable to “carbon leakage” will receive the total possible amount of emission units. For the sectors least vulnerable to carbon leakage, the percent for free units distribution will be 30% tops. This is a notable difference compared with the current 2013-2020 period, since this percent has been reduced from 80% in 2013 to 30% in 2020 for particular industries(7). Gradual abolition of free emission units for least vulnerable sectors, scheduled for 2026, is also a great innovation, although district heating systems will be exempt. Anticipation of this measure led to the market carbon price increase in the past few months and it reached the new record in 2018 compared with a couple previous years(8).
- In addition to allowing the most vulnerable sectors to keep the max amount of free emission units, the member states can also provide support in order to make up for “indirect carbon costs” coming from high-consumption industries. The example of such cost is the rising price of electricity caused by provisions of the ETS. The ETS reform allows the countries to continue providing compensation for indirect carbon costs, which has to be in line with strict rules related to state aid regarding the max amount of aid, as well as the sectors eligible to receive the aid. The provisions regarding transparency and reporting have also been improved.
- The system has established the stock for new participants(9) – 5% of the total amount of emission units is set aside in order to help facilities entering the System or to assist the facilities which have expanded their capacities significantly compared to the moment when they entered the system. The reform allows the reserve for new participants to keep the unused emission amount from the ongoing period (2013-2020) and 200 million tons of emission units from the market stability reserve. Up to 200 million emission units will be returned to the market stability reserve if they are not used over the following period (2021-2030).
The EU hopes to achieve the linear progression in GHG emission reduction throughout the 2021-2030 period, in order to maintain its status as one of the leaders in climate change mitigation and meet the goals of its energy and policy framework, as well as Paris Agreement.
The ETS reform is aimed at encouraging innovations and promoting low-carbon technologies in order to support creating new jobs and growth, in line with industry competition rules in the EU. On the other hand, new stricter measures had to come up with a way to keep the industry within the system in order to preserve carbon market stability, which is why a particular attention has been addressed towards reducing carbon leaking risk and inter-sector correction factor, as well as incentives for new facilities in the System.
Milica Mijatović, Belgrade Open School
The text was published in the 36th issue of the “Let’s speak about Negotiations” Journal.
(1) CH4, N20, HFC, PFC, SF6
(2) http://www.consilium.europa.eu/en/policies/climate-change/2030-climate-and-energy-framework/
(3)https://bigpicture.unfccc.int/#content-the-paris-agreemen
(4)https://ec.europa.eu/clima/policies/ets/reform_en
(5)https://ec.europa.eu/clima/policies/ets/allowances/leakage_en
(6)https://vertis.com/es/post/en-allocation-caps-and-other-mysteri- es-2013-07-29
(7)https://ec.europa.eu/clima/policies/ets/allowances_en
(8)https://www.businessgreen.com/bg/news-analysis/3026710/could-europes--eur10-carbon-price-rise-yet-higher-still
(9)https://www.emissions-euets.com/carbon-market-glossary/959-new--entrant-reserve-ner
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