Joint Implementation and the EU Emissions Trading

Scheme

Jürgen SalayClimate Strategy and International NegotiationDG EnvironmentEuropean Commission

JISC, 16 October 2007

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Recent EU climate initiatives

• On 10 January 2007 the Commission proposed to

– encourage developed countries to reduce emissions by 30% by 2020

– set a unilateral reduction target for the EU emissions at 20% by 2020

• Commission is tabling a wide range of proposals on reducing

emissions in the energy and transport sectors

– 20% increase by 2020 on energy efficiency

– 20% share by 2020 of renewable energy

– Limit average car emissions to 130 g/km

– Include aviation into EU-ETS

– Increase research efforts in energy

• Review process of EU-ETS Directive is beginning

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Central EU climate policy tool

• The cornerstone of the EU’s market-based strategy to reduce GHG emissions cost-effectively (reduces compliance costs by 1/3)

• An essential structural element for long-term global strategies to avoid dangerous climate change

– EU Heads of State have confirmed need to limit global temperature increase to 2º Celsius above pre-industrial levels (3.6° Fahrenheit)

– This requires industrialised countries to reduce GHG emissions by 30% below 1990 levels by 2020, domestically or through emissions trading mechanisms, increasing to 60-80% reductions by 2050

• Important to get it right!!

EU-ETS

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• 2005-7: Start-up period– Allowances mostly allocated for free (auctioning limited to 5%)– Robust emissions monitoring and verification and well performing

electronic registry system– Growing trade of allowances across Europe– Thanks to experience gathered in 1st trading period, companies and

authorities are much better prepared– However, insufficiently ambitious levels for emission reductions– Windfall profits in some sectors

• 2008-12: First commitment period of Kyoto Protocol– Auctioning possible up to 10%– Commission approval to 24 NAPs so far (PT, BU, RO remaining)– Fair and equal treatment being given to all MSs– On the basis of 24 NAPs, the approved cap is 6.5% below the 2005

verified emissions for the ETS sector (10% below requested amount)

• Subsequent five-year periods: Legislative review underway

Stages of development of EU ETS

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Growing trading volumes in 1st period and emission reduction in 2nd period

2142

,5

1927

,93

1500

2000

2500

MtCO2

NAP II process

1st period cap Cap allowed0

20

40

60

80

100

120

140

160

180

Jan-05

Feb-05

Mar-05

Apr-05

May-05

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Volu

me

trade

d (m

illio

n EU

As)

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EU ETS Price Development

Source: Point Carbon

Phase I allowancesPhase II allowances

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Impact EU ETS on JI

• Generates demand for JI that is large (with tight NAP decisions), quantifiable (with

set JI/CDM usage limits) and long term (with the 20% target for 2020):

– EU countries investing at least €2.7 billion in JI/CDM for national GHG reduction commitments

– EU ETS potential demand of more than 1.2 billion ERU/CER (excl. government purchase)

• The EU double counting guidelines give a clear boundary to the areas where JI projects can be done in the EU

– JI can now focus on areas not covered by EU-ETS covering more than 50% of all emissions

Impact JI on EU ETS

• Increases liquidity of EU ETS market and reduces compliance costs

• Implies recognition of JI/CDM credits as equivalent to EU allowances

Need to safeguard environmental integrity of EU ETS:

– Qualitative criteria: no nuclear or temporary credits from sink projects

– Quantitative criteria: ensure supplementarity to domestic action and avoid double counting

EU ETS & JI

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JI/CDM limits in NAP-2 Assessment

• Harmonised approach resulting in JI/CDM limits for individual Member States at 10-15% of approved trading sector caps in most cases

• Maximum total amount of usable ERUs/CERs for the 24 NAPs assessed so far is close to 1200 Mt

• Uncertain whether total limit will be fully used due to possible internal market barriers and supply constraints in 2008-2012

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Double counting

What’s the problem?

• JI and CDM projects can be carried out in any installation, reducing emissions and giving ERUs/CERs in return

• If the JI/CDM reduction happens in an installation under EU ETS and no account is given for these reductions, the operator can sell the EUAs that were avoided through the JI/CDM project

• As a result, the government hands out 2 credits (1 ERU/CER and 1 EUA) in return for a reduction of 1 ton of CO2

Bad deal for the government and the environment

Could conflict with EU state aid rules

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Double counting

Provisions for avoiding double counting

(1) Baselines for project activities should comply with acquis

communautaire

(2) No ERUs are allowed to be issued for reductions or

limitations of GHG that take place in installations under

EU ETS or impact emissions in these installations

indirectly unless a set-asides is created in the NAP for all

approved or planned JI/CDM projects taking place in ETS

installations

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EU-ETS legislative review

• Nov 2006: Review report “Building a global carbon market”

– Improve functioning of the scheme based on practical implementation experience

• Streamline current design

– More harmonised approach to cap-setting and allocation to installations– More predictability and certainty– More harmonised approach to new entrants and closures– Consider benefits and costs of smallest installations

• Expand coverage

– Further sectors (aviation) and gases (CH4, N2O) and options (CCS)– Consider developing links to other mandatory emissions trading systems

Next steps

• Stakeholder consultation completed

• Proposal amending EU ETS Directive – end of 2007

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EU ETS and JI/CDM post-2012

• Stakeholder concerns: over-supply, additionality problems, lack of harmonised quantitative and qualitative restrictions, sufficient supplementarity and predictability post-2012

• Key issues to consider:– Should we have quantitative provisions? How should they be designed?

– Qualitative criteria?

– Banking issues?

– How to make JI/CDM compatible with long-term EU ETS objectives?

• Possible solutions:– Quantitative limits

– Negative or positive list of qualitative project criteria

– Harmonised criteria for approval and use of JI/CDM

– Firm commitment for post-2012

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More info on EU climate policy: http://europa.eu.int/comm/environment/climat/home_en.htm

Background literature on EU ETS: http://www.claeys-casteels.com