EU ETS
European Union Emission Trading Scheme
2005-2007: Phase 1 of The European Union Emission Trading Scheme (EU ETS)
The European Union (EU), having ratified the Kyoto Protocol (Kyoto), has voluntarily imposed stricter commitments than those under Kyoto, and has committed to reduce its GHG emissions to 92 percent of 1990 levels by 2012. As a result, it has implemented a trading system for GHG emission reductions known as the EU ETS, which came into effect on 1 January 2005 and is the first regulatory enforced commercial market for certified emission reductions (CERs).
Under the EU ETS, as under Kyoto, GHG emissions are quantified according to tonnes of carbon dioxide equivalent (CO2e). One tonne of CO2e is known as a European Union Allowance (EUA). In order to reduce GHG emissions, the EU ETS will impose caps on the amount of EUAs permissible in any EU member state. In turn, each EU member state must draft a National Allocation Plan (NAP), which must be approved by the European Commission, setting out how the maximum annual volume of EUAs in that EU member state is to be divided between the various sectors of GHG emitters, and setting limits on individual emitters. These caps will be deliberately challenging, so as to encourage GHG emission reduction and the development of a trading market in emission reduction credits.
To reduce their emissions in order to comply with the caps, emitters can either invest in technologies that will result in reducing emissions, purchase reductions from emitters who have emitted less GHG than they were allowed and thus have a surplus to sell into the market, or purchase GHG emission reductions to ‘offset’ against their GHG emissions. The technology option for most big emitters has proven to be cost prohibitive. In addition, most emitters affected by the GHG reduction commitments are not expected to be in a surplus situation. The emitter’s most cost effective solution is to purchase GHG emission reductions, hence accomplishing two key goals: 1) allowing the emitter to meet its GHG reduction commitment and, in the case of CERs, 2) contributing to the social and economic benefit of developing countries or countries in transition.
The EU ETS will be implemented in two stages: Phase 1 (2005-2007); and Phase 2 (2008-2012) which corresponds with the first commitment period of Kyoto. During phase 1, any emitter exceeding its GHG emission cap under the NAP in any given year (after taking into account any emission reduction credits they have purchased to offset their emissions) will be subject to a fine of €40 per tonne of GHG emitted in excess of that cap, will have to purchase corresponding EUAs to correct the excess in the following year, and will be publicly named on the European Commission’s web site. During phase 2, the fine will be increased to €100 per tonne in excess of the cap. There is therefore a strong incentive for emitters to purchase emissions reduction credits to offset their emissions and avoid these harsh penalties.
As mentioned above, the NAPs for each EU member state impose annual caps on emissions. Any installation with a surplus number of EUAs for any year may carry that surplus over into the next year. The surplus may be used to offset GHG emissions in that year, or may be sold to other emitters. Such banking of allowances is permitted during phase 1 of the EU ETS only — any surplus at the end of phase 1 will be lost. The only emission reduction credits that may be used to offset emissions or banked throughout phase 1 and phase 2 of the EU ETS are CERs arising from CDM projects.
2008 – 2012: Phase II EU ETS, First Commitment Period Kyoto Protocol
2008 will see further development of the global GHG emission reductions market. The EU ETS will enter phase 2, with tougher fines and no option of banking EUA allowances from phase to phase. Also, the first commitment period of the Kyoto Protocol will commence, with all ratifying industrialised nations being subject to GHG emission reduction targets. As a result, the market for GHG emission reduction credits is expected to grow due to the forecasted increase in demand from capped emitters. ERUs from JI projects will be available for trading in this period as well.
For more information, visit our resources page.