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EU Emission Trading Scheme: use permit revenues to fund climate change protection, says Environment Committee


13 Oct 2008


Climate & Environment
Sustainable Dev.

Voting Tuesday on the revision of the EU's Emission Trading System, the Environment Committee backed Commission plans to reduce greenhouse gas (GHG) emissions from most industrial sectors by 21% from 2005 levels by 2020 and phase out free emission permits, leading to full auctioning, with an exception for energy-intensive sectors. MEPs want permit auction revenues to be used for climate change protection measures.

The EU Emission Trading System (EU ETS) is a "cap and trade" system: it caps the overall level of emissions allowed but, within that limit, allows participants buy and sell allowances as they require, so as to cut emissions cost-effectively. The EU ETS, launched in January 2005, is therefore a key tool for achieving the EU's aim of reducing its GHG emissions by at least 20 % by 2020 from 1990 levels, or by 30% in event of an international agreement. The ETS currently covers over 10,000 installations in the energy and industrial sectors which are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions. 
Support for a single cap and a yearly reduction in emission allowances

In the report by Avril Doyle (EPP-ED, IE), the Committee backs a Commission plan to introduce a harmonised single EU-wide cap on the number of emission allowances for the ETS third phase ETS (2013 - 2020) instead of the existing 27 national caps. MEPs also agree with the idea that from 2013 onwards, each year until 2020, fewer emission allowances will be put on the market. 
Free allocation of allowances in manufacturing sector to be cut from 85% in 2013 to 0% in 2020
Although the great majority of allowances have been allocated free of charge to installations in the first and second trading periods (2005 -2012), MEPs support the Commission view that from 2013, full auctioning of emission allowances should be the rule. Industries will receive a certain quota of emission allowances free of charge but will have to purchase any further emission permits via auctioning. MEPs, say that 85% of all emission allowances for the manufacturing sector should be allocated free of charge in 2013 (not 80%, as proposed by the Commission).

Also, as proposed by the Commission, after 2013 the free allocation should decrease each year resulting in full auctioning of all allowances in 2020 - with an exception for sectors with a risk of carbon leakage (see below). MEPs say that the distribution of the free allowances shall be based on ex ante benchmarks to be set for each sector at the level of the best greenhouse gas and energy efficient techniques for which MEPs set out detailed criteria.

Amendments seeking to guarantee that the entire manufacturing sector would continue to receive 100 % of emission allowances for free until an international agreement is in force, were not supported by the Environment Committee.

Use auction revenues to adapt to climate change in the EU and reduce emissions in developing countries

MEPs want to channel the ETS auction revenues - which, according to Commission estimates could amount to around EUR €50 billion annually by 2020 - to pay for climate change protection measures. They say that at least 50 % (as opposed to the 20% proposed by the Commission) of these revenues should be paid into a dedicated international fund, which invests in projects in developing countries to help, for example, to reduce greenhouse gas emissions or to reverse deforestation. The remaining auction revenues should also be used to fund climate change projects inside the EU, say MEPs, thus helping Member States to adapt to climate change or to fund research and development.
Include shipping in emissions trading

MEPs support the Commission proposal to extend the scope of the current ETS (which covers for example power stations, oil refineries and factories making cement, glass, lime, bricks, ceramics, and pulp)  to include new industries (e.g. aluminium and ammonia producers and petrochemicals) and two further gases (nitrous oxide and perfluorocarbons).

MEPs also call on the Commission to submit "as soon as possible legislative proposals to incorporate the shipping sector into the Community scheme by 2013" and to specify by 2013 the date for the inclusion of freight transport by road, mining and the waste sector into the EU ETS.
Exclusion of small installations supported but widened

The committee agrees with the Commission that Member States should be allowed to exclude small installations from the scope of the system, provided they are subject to equivalent emission reduction measures, but MEPs want to raise the proposed thresholds: Member States should be able to exclude installations with a rated thermal input below 35 MW (as opposed to 25 MW) and reported emissions of less than 25 000 tonnes of CO2 equivalent (as opposed to 10,000 tonnes) in each of the preceding three years.

Carbon capture and storage: demonstration projects to be financed through allowances

MEPs want to use the ETS to support large scale commercial demonstration projects undertaken in the capture and geological storage of carbon dioxide (CCS). They therefore introduce the possibility of awarding up to 500 million allowances to those projects in the EU or in third countries. Furthermore they ask the Commission to strive to ensure that contracts for the construction of 12 large-scale demonstration facilities are let before the UN meeting in Copenhagen in November 2009 (as promised by the EU Council in March 2007).

Free allowances for energy intensive sectors to avoid carbon leakage

The committee backed the Commission's proposed exception for sectors at serious risk of "carbon leakage" - that is the relocation of production to third countries with a less strict climate policy, leading to increased CO2 emissions by these countries. They agree that these sectors might receive up to 100 % of free allowances until 2020.

MEPs do not list the sectors "exposed to carbon leakage" but ask the Commission to identify them three months earlier than the Commission's proposed date of 31 March 2010, and then to revise them every four years, rather than every three. They also set out detailed criteria for identifying sectors exposed to carbon leakage.

Support for 100 % auctioning for the power sector from 2013 - with certain exceptions

MEPs agree with the Commission that full auctioning should apply from 2013 on for the power sector and that no free allocation should be given for CCS. But they do want electricity generators to be able to receive free allowances for district heating and for heat produced through high efficiency cogeneration in respect of the production of heating and cooling, under certain conditions.
The Environment Committee also voted on Satu Hassi's (Greens/EFA, FI) report on reducing emissions from sectors not covered by the ETS such as road and sea transport, buildings, smaller industrial installations, agriculture and waste. (See separate press release).
The report was adopted with 44 votes in favour, 20 against and one abstention.

In the chair : Miroslav OUZKÝ (EPP-ED, CZ)

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