The start of the 3rd phase of the implementation of the European Emissions Trading Scheme ( EU ETS) is scheduled for 2013. As of that moment, the scope of the scheme is broadened with the inclusion of specific chemical industries.
Purpose of the Scheme...
The EU Emissions Trading System (EU ETS) has been in operation since 2005. It was developed in order to help EU Member States achieve their commitments to limit or reduce greenhouse gas emissions in a cost-effective way. Linking up the EU ETS with other compatible systems around the world should form the backbone of a global carbon market.
The EU ETS works on the "cap and trade" principle. The cap is the total amount of emission allowances to be issued for a given year. An emission cap is defined, for each individual plant, via a National Allocation Plan (NAP) submitted by member states and approved by the Commission. This means there is a cap on the total amount of certain greenhouse gases that can be emitted. Within the cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value. The number of allowances is reduced over time so that total emissions fall. Companies that exceed their quotas are allowed to buy unused credits from those that are better at cutting their emissions.
Carbon Leakage
Carbon leakage occurs when there is an increase in carbon dioxide emissions in one country as a result of an emissions reduction by a second country with a stricter climate policy. Member States may adopt financial measures in favour of sectors or subsectors determined to be exposed to a significant risk of carbon leakage due to costs relating to greenhouse gas emissions in accordance with state aid rules applicable in this area.
Industries at stake...
Since the start, the system covered power stations and other combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, bricks, ceramics, pulp, paper and board. As of 2012, aviation is part of the package. As of 2013 the scope is further extended in order to include to CO2 emissions from petrochemicals, ammonia and aluminium, as well as N2O emissions from the production of nitric, adipic and glyocalic acid production and perfluorocarbons from the aluminium sector.
Rules & Formalities of the Game...
At this moment, each Member State has a national ETS registry. A company or a physical person must open an account in one of the registries, by applying online at the registry website of the relevant Member State. The Community Independent Transaction Log (CITL) records and authorises all transactions that take place between accounts in the EU ETS registries.
The EU ETS Directive provides for the centralisation of the ETS operations into a single European Union registry. This new registry is operated by the Commission and will replace all national EU ETS registries. Initially, the single registry will be partially activated in order to allow airlines to open registry accounts and receive free allowances.
If the great majority of allowances was allocated free of charge during fase I (2005-2007) & II (2008-2012), as of 2013, auctioning of allowances should become the basic principle for allocation. As of that moment, the free allocation shall decrease each year with a view to reaching no free allocation in 2027.
Results so far...
The initial years (2005-2007)
The first trading period established the free trading of emission allowances, put in place the necessary infrastructure and developed a dynamic carbon market. The benefit of the first phase might have been limited due to an over reliance on emission projections before verified data became available. Certain analysts blame that generous C02 allowances granted to industry in the first years led to a fall in carbon prices.
Improvements (2008-2012)
The availability of verified emissions data allowed the Commission to ensure that the cap on national allocations under the second phase was set at a level that results in real emission reductions. As the total quantity of allowances during phase I & II are governed by NAPs, the risk of distortion of fair competition within the internal market is potentially lurking just around the courner.
Further optimisation (2013-2020)
The third trading period, which begins in 2013, will no longer be based on NAPs but there will be a single EU-wide cap and allowances will be allocated on the basis of harmonised rules and a central registration system.
