comments on com 2006 676 building a global market pot

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Comments on COM (2006) 676 Building a global market

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Comments on

COM (2006) 676

Building a global market

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Content

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Preface

In January 2007 ECON was commissioned hy the Climate Change Work ing Group of the Nordic Council of Ministers to conduct an overview 301/5 0 the sss raise i the Annex tothe EU Covmmission com nication report "Building a global cathow market ~ Report pursuant 1o Aisle 30 of Directive 2008787/EC* (CON{2006)676 final) ‘The Climate Change Policy Working Group docs not necessarily share the views and conelasons of the reper

Oso, June 2007

Jon Dak Engebrenen

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Summary

Ditcetive 2009U87HEC established a scheme for greenhouse gas emission allowance wading the EU ETS (European Uaion Emission Trading Scheme), In connection with he review of the Dinetve, called tor in Aicle 30, the European Commission hss published ä eommunicaion report raising some isses that should be inciled in the review, This remo contains an averview analysis of these issues The main focus of this memo is on issues related Wo the participation of sina installations, but several othr ists ve also discussed

Small installations

Ki coi that the operating costs of the EL ETS are justified by the achieved environmental Benefits, In onder 1 comply with the BTS, all Participating installations incur considerable Fixed ahd variable costs, Given the marginal emissions of small installations, si questionable if te principle of costetftiveness juslfes the inclusion of sal install

Hons under the eurrem ETS rales “There are to major types of cons associated wih participation in the ETS

+ One-off costs account reporting of historical enssog, the installation of 4 ~ Costs arising fom the opening of «tang ‘monitoring system and aministrative changes i the mamigement and organization

4 Recuring costs reporting al verifiation oF emissions, tanstion costs of ~ Costs arising from the anual monitoring {cing and the development of a compliance stratezy

Monitoring, sporting and verification roirements seem 1a cause sie nificant financial and administative burdens on sal installations, These ‘often scem disproportionate w the low volume oỆ cmfsions fom stall installations Although the rules for sta istallationsaze lead seh fied there seems to be mom for improved eost-tfetiveness by farther Simplifications 6 soush list of posible ares For father simplifications

includes

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= Resignation of uncertnty analysis + Verification process Simplified verification methodology

Simplified risk analysis = Simpliid verification report

Iris also possible to exelde sm installations from padieipdion by Setting a theshold, The threshold ay be set aeeording to annual emis sions othe eapacty ofthe instalation, (Oo the European level installations with emissions lowe than 25 000 tonaes CO: per year sceounts for 158 ME of the tol 6339 MU allocated [Excluding installations wits emissions lower than 25,000 tonnes COs por

{year would rece the number of participants by $495 and the emission ‘overage hy 2.5% capacity teshold of 20 MW fs cutetly applic ‘combustion illlations, Increasing the threshold © $0) MW would ey ‘hide 4 large number of installations from the ETS For Sweden and Denmark S88 and 154 installations, respectively would he exelued, a counting for an estimated 3.1 Mua ia Sweden and Ll Main Denmark Tes thus possi to reduce the mummher of participants in the EUV ETS without affecting the volume of emissions covered hy the scheme very tách, these installations ae exclude from the EU ETS one needs to consider the adequateness of slterative poiey measures to limit emis sions and realize the potential for emission ceductons from these sources, Most such altenatives would ako involve costs, eg by reqiting meas tement of emissions

“Tag mone explicit ptr of th costs and ene of sal inst Iuvons participation in the ETS we suggest thatthe following issues be investigated in more det

+ An evalnation of the solute emission redaction poental mm

lations per sector

+ Quantitative analysis of costs fated wo paticipation othe IETS an alternative poly instruments Inclusion of adaiional sectors and gases

Generally the inclusion of additional sectors and gases in the BU ETS, would improve the costeffectivencss of the scheme, since additions be exploited, {ve monitoring and shat inclusion achieves real ginison reductions, i, beyond basiness-as-asta, ne sion of eer gases and sectors requis the establishment of a haslie Fr

otentals for emission vedostion ‘One precondition i however ff

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Carbon Capnure ond Storage

CC hon cnplie an storages (CS) is potently sm important source for ‘esuction of CO; emissions The current allocation rules discriminate hotween technologies because CO: emitting technologies receive allow ances fr free, whereas CO; fee technologies do aot Hence there is an

inherent incemive to build capacity without CCS, recive the free alloca tion, an then invest in CCS if profitable Technology spss lla cation of allowances ~ where more is allocate the more is cmited — cans thatthe ETS at best only weakly ineentvises investments ia CO:

free tchnolgics The problem woul not exist if al allowances we

auctioned, The incentives are, oever, also alfected by a poss

support scheme (subsidy) for investment in CCS Gn existing 38 ell as new Ben zation capacity) The question is Whether it should be posible to get hth free quot and investment subsidies for sue projects, Depending fn the stictness of the ETS auctioning may not be sufficient to make

investments CCS profits Investment in CCS may be supported by several diferent measures and the combining effects ofthese measures nes to be assessed,

Projects within te commit

As an alternative way of inelaing emission redactions in other sectors Mi gases (plus projects) the desirability and feasibility of introducing 8 ‘Commranty-level approval proces fr eansson reduction prjects within The Community may be eonsidered Such projets mast foeus on emis sions from activities that are not suitable foe a system with emission caps, tn that have a substantial potential to rece GHG ensssions Sock pr jects woul be carried out by ETS pariipants, but in sectors outside the ETS But emissions in these stars should be addressed hy ater policy

reasute, and it the addon emission reduction effect of such projec mà If this opportunity is nnoduecd, the ae ules us those applying to I -rojets could he applied "These rules are complicated and cost, and problems concerning double-countng would have wo be addtessed Out

is this should not he priontived a this stage Predicebitny

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ey, the ambition aad overall strictness ofthe EU ETS, the development ‘of abatement cost and the detailed design ofthe EU ETS, From the poliey perspective uncestaingy ean be feduced though a

bie policy envionment Although a exible approach is needed wo incor orate new knowlege, the overall direction ofthe poliey should be pre Jiciable, From this perspective, policies, including allocation ues,

shoul

tenis, aso th the incentives are not distorted by shorter intrest, uso be designed 80 that they ersate comeel incentives for vest rou pressure ‘Long-term EU goals can increase the preditahility athe highest level, and diferent designs of the system have differen implications for pe: icity Auctioning is likely to duce the plitieal sk while atthe sae time increase the financial sk of emiters, Benchmarking fs many

anuactive futures compared to grandathering but it does probably not

reduce the politica risk of the Stem The light time schedules seen 9 favs alo a factor eaucing prsictabiliy Compliance periods of roughly the current length, combined with long em planing goals, are probably the preferred feasible option Tao short «compliance periods may create price diflerences overtime and induce too mạch price volajlity, An inressel seope for banking wal mitigate this moh the credibly ofthe system, Toa long compliance periods may ave the sas effet ci, bul horroing could dice the envionment eestivencss and

CCurzenly there are reserves set side for new entrants (NER) This is {sii since less favourable allocations to new entrants teat bigs in favour of Keeping old installations and delaying new investments, With tioning of allowances there would hen ned foe in NER FFuthernoe its important that de allocation 10 Hew astallaions i “lear which may’ mean that the NER should be expanded if depleted A ‘common NER forthe EU with uniform sles for allocation could enue

mors effcint investinens and reduce the regulatory uncertainty Cen

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1 Introduction and background

“The task at hand is 1 conduct an overview analysis ofthe issues raise ia the Annex 9 the EU Commission communication report "Building a ‘lobal carbon market — Report pursuant to Article 30 of Directive 2USVATHEC™ (COMI20H60676 ial, heraher refened lo a the COM reper “The COM report reviews issues in Article 30 of Dircetive 2003/87/EC

Which estalished scheme for greenhouse gas (GHG) emission allow aces rading witia the EU, hereafter refered 9 asthe Dieetive aad the EU EIS respectively Amicle 80 of the Diretise provides forthe Com: Inission to draw up a eport om the application ofthe Ditetive, aosompe ied by prose 8s appropriate ‘The Ames to the COM report outlines the tems of reference of & Working group which isto review the Directive under the European male Change Programme Hl The pxpose ofthe Working group is wo s: vss the Commission services onthe review ofthe EU ETS that wil ead

ket tô the Dreeive being proposed in 2007

In this memo, special focus should is len to the issues cegarding the panicipation of stall installations in the Emission Trading Scheme (ETS) The consequences of simplifying the patcipaion of smal insta

laons or completely exempting them fom the ETS are discussed bused ‘on the COM report The analysis pives an overview, but even contains some quantification ofthe etfets on the ETS sectors in the Noni eoan

In acon, te following issues ae discussed

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2 Small installations

2.1 Issues

Ics essential hat the operating costs of the EU ETS are justified hy the aehievel envionmnenial benefis, Given the marginal emissions of smal installaions, it is questionable ifthe principle of eustetfeetiveness Joss tko account for small installations under the eutent ETS rules In onder to comply with the ETS, all parieipating installations incur considerable fixed and viable cons Generally, if these coats are ton igh in elation to the emission reduction potential, the overall purpose of the ETS t0 éovide operatons with an incentive to reduce emissions ay be lst ‘Por small esata, it could be th ease that te evssion reduction potentials actually 100 lw 0 justify the cost of pateiatin in the ETS, liso there i a aed to improve the custetectivencss ofthe pation ‘of stall installations, Furthermore, a workable threshold of pariipation hast be define, taking into account the cost of participating tn defining such a tveshold, the ests oF patisipating i relation to the emission reduction poteial should he analyzed Moreover in ease thot issu sient justification for emsing certain smal installations fom the seope ‘of the EU ETS, the cos of addessing emission from these installations through other policies and measures should he taken do accoumt ‘There are two major types of costs associated with participation in the ETS

+ One-off costs account, porting of histecal emission, the installation of — Coss arising from the opening ofa tang ‘monitoring system and aninistative changes in the managenien

sand organization

4 Recurting costs repting an verification of emissions, transleien costs oF ~ Costs arising from the annual monitoring ‘uading and the development of a compliance suatezy

First a al, monitoring,

‘cause significant financial and adinisuative burdens tờ em tions These may often be considered as disproportionate to the low level ‘of eta emissions eaused by small installations To take account of his the Monitoring and Reporting Gidsines' (MRG) from the EU Com sion are alkeay simples But there i «remaining potential ta simpy toding aml verification sequirements seem 40 installa

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specially the diffrent methodolgiss withia the monitoring and verific tion process which can be app ‘Simplified sues could be developed comparable 40 the Small Seale CDM project methodologies Generally the monitoring and reporting Privciples should be steamfined, Also the MRG should provide mone Msibity for adoping appropriate mcthadologies for individual circum

The following list gives rough indication of where futher simpli cations in the monitoring and verification guidelines soneeming salL installations would he useful:

+ Monitoring pan

implied calculation hasel methodologies to determine emisions (i some case more simplified than approuch ter 1) Resignation of uncertainty analysis + Verification process simplified verification methodology

= Simplitia isk analysis implied verification report,

Small istallatons ferthermove face costs rete 10 Finding am appro ‘Me compliance stratay Generally there is anced in assessing the own reduction potential and ils marginal abatement ess, to develop a com pliance stray, to understand the market an to ust price ad market

information, In many cases smal istlations fase a ack of manage time for these activities These types of costs will decease over time, However, there will always he a risk of non-compliance which reguies

some tis 0 be spent onthe developinent ofa compliance strategy For smal inwalations relatively high tansaction cons regarding the tual tade of allowances build arzcre participate inthe market and actually trade, Automatically the aclual iacenive to reduce emissions creases 48 well, Futhennore, geneous allocation of fee allowances reduces the incentive ta tae and also the incentive to rece emissions I envssions ane not messured and verified, then the incentive eo redvee missions would alo be weuced Emission reduction efforts result in Surplus allowances, but de value oF these wil he the ineonne om sles minus the cost of trade, Hence to assess whether it fs eoseffetive to

include small installations in the ETS, the costs have whe seen in rok ston othe potential emission eduction

‘The inmdction of ade minimis role excluding lowest emitters fe ‘below 25.000 woes CO: pot yeas) fom the scope ofthe ETS hasan in ‘et on aera emissions wile emoing significant administrative bur

Aes fron smal inst

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2.2, Small installations in the ETS

Figure 1 shows the disuibution of installations in the fst ETS trading period according to size, and the share of total allocation For cach size ‘category ostallations with emissions lowe than 25 000 tonnes COs pet ‘year ascounts for 158 Mt ofthe total 6335 Me allocated, Exchaing instal: Tavions with emissions lower than 25,000 tonnes CO: per year Would re ‘duce the umber of participants by 54.9%, and the emission coverage by 25%

Figure EU BS nuedlim snonlg n ildiMim te ft tag period 205

Looking at th Sweden, Denmark, Norway and

Finkind, an exemption ofall installations smaller than 25 084 COs por _yetr would spply to 1168 installations, or about 75% ofthe total number

Nordic counties «8

$f installations These installations represent an allocation volume of 1.16 Mi, which account for 4.5% of the total allocated volume for the four countries in 2008.2007 The following graphs give a more detailed ‘overview ofthe distribution of installations in the Nowdiesacconding to their allocation within the Fist EFS trang period igure 2 shows the dstibution of installations ia Denmark, Inthe Fist,

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i ey je Pye 3 Swede’ allocation by talon se, alin period

Figure 3 show that Sweden's ETS sector includes approximately 700 installations within the fist wading period 2008-2007 These tions have total annua allocation of 22.9 Muyear In its National Allo- 700 installa cation Plan, Sweden usc the so-called “opt-in rule", which gives the ‘portunity t unary i

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"`" aN BD

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? Ỹ

In figuce 5 Norway's emission wading sector i illustated The whole sector gets atta allocation of 20.3 Mit inthe whole period 2005-2007, ‘This is shared by 48 installations Inthe Norwegian wading scheme, the 12 small installations with annual emissions below 25,000 va, consiate

25% of the total mumbo oF installations and acount for 0.7% ofthe total allocation

2.3 Setting a threshold

‘There are basically two different measures which ean be applied (0 ex hue smal installations:

+ an nieion threshold or ‘+ capacity threshold

Applying am emission threshold coukd exclude installaions with emi sions lower than a certain figure of tonnes CO per yea In the first ad ing period, excluding installations under 25,000 a would reduce the total numberof participants strongly (by 549%), while reducing the included emissions by ony 2.5%, Seting the threshold at $0 000 Ua would reduce the number of participants by 7O%, but sil only reduce included emis- sions by 5%

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Gen ally, an emission threshold igeeases uncertainty an sil re ‘gives monitoring and reporting of emnssons although the instalation nay be excluded from te ETS Hence monitoring and repoting costs ‘wll not disappear very installation sill hs to measure its annual emis son levels to prove emissions ex-post, wheter de instalation is part of ‘the trading scheme or no, In some cass, the uncertainty as to whether an installaion will wach the threshol emission level oe not may be bigh

Depending on the alternative scheme which applies to the installation smaller han the dhreshod, disaantages or advantages may result foe the

lusallation belonging othe one or he other sehet A eupacity threshold exeludes installations according « thốt siae af installed capacity.” Contary tothe emission threshold approach, the í- fect of shiling the capacity thresholl onthe numberof incl plans very much depends on the Secor I could be that capacities of installa theless,

rot and would not require the same amount of menioring and reporting os an enssion dco In its Emission Trading Directive (200/8¥EC), the EU Commission sready applied the aproaeh of a eapacity d

industry Sectors exeved the thread level anyway Never ‘capacity dveshold would cree more certainty 1 wh is ia oF

estold, In Anes 1 ofthe

Directive ll eaegores of wetvity as wells capacity thresholds of instal lavons eovered by the BTS are defined For example, combustion instal: lutions are only covered if the at! thermab input excsous 20 MW The pacity thresholds for induseal installations refer to prodetion out levels The installations of fenous metal production, for example ate

incladed in the ETS ithe prohitioneapacity seve 25 tons per ou, ‘A change inthe defined capacity hveshold could have a major iaflu- ‘ence wn the number of installations included inthe scheme, Assuming thatthe capacity theshold for combustion installations i the energy =e tor is increased! from 20 MW to SD MW, a ft of insalaions could be ‘eluded from the ETS.°

Tn Sweden, a potential increase of the capacity threshold fur combus tien installations in from 20 MIW tn 50 MW would moan, for the existing trading peri, that about SAK installations which represen a toa allo cated volume of 3.1 Mua would he exeladed.” In Denmark the sane chang: of capacity threshold foe combustion in tllations inthe energy sector would resll i a redaction ofthe inelued installaion numberof 154 representing an allocated volume of 1 MU “The above data ave summarized in Figure 6

rsh as vn ga ye EU Cori TS Dice BT

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§ soma ome

Pie tpt: f changing Capac shes ashe ETS rig prod smal installations are exempt fom the ETS, ether measures or pices ‘must be implemented, We consider two options

+ A tax on missions

+ Voluntary agreements or standards

Both taxes and voluntary agreements require measuring, reporting and verification of emissions Standards may not require measuring, but may

not he easly implemented in most sectors ‘An opimal tax should he in Fine withthe BTS price, and could in ‘rinciple he aljsted according to the price moverments in the ETS mar- markt

ket, Sach an approach would expose the small nations 10th

risk in the asessment of abatement efforts This woukl however, proba iy note done i an efficent way I the fx ifr from the ETS peice, it implics hat abatements ate not conducted in an efficient manne Ifthe tax is higher than the ETS price, ahatements ae potentially caried cut in small installations that are more expensive than abatements in installa tions within the ETS If the taxis lower than the ETS price, abatements are potentially not ceried out in small installations although they are

cheaper than abatements in installations within the ES, A tax may ae: cetheless represea an efficiency gain compared to participation in the erst

4 There sa small potential for abatements i small installations and the aninistratve and transetion costs of a ts is male than the ministrative and transaction costs of ES trang (foe the relevant

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1+ Theeficicncy love is smaller than the efficiency lows induce by ‘eansttion costs ad barriers to trade te smal installa in the

KTS

One option could be 40 wake i voluntary for sill installations to pa ticipate would then he the prictability of priees~ nos having 1 Face the wacer: i the ETS ort he subject toa tan, The Bonclit of choosing a ‘aintics contained in the ETS market The dowvasie would however Be forego the value of fre allowances, iF ax applies to all emissions, A

‘ematvely the (x could only apply to emissions exezeding a cern level This wuld then redace the incentives to reduce emissions beyond ‘he defined level (of “Hes” emissions), hut if dhe abatement pote in smal instal nomic cost (By letting sinall installations choose betes

IETS, one wold think that installations sith a high abtememt potential would choose the ETS since this would give she opportunity 4 sll ex

ions is small this show! not representa high welfare ec ts and the

«os allosances,) Perhaps the ost of sich trom of eve is too high? ‘Alternatively sll installations may ener ino voluntary avcements to reduce emissions to aeotai Teel instal of being expend to a1, ‘This will wot he ateactive for small nsallaions with a large astemeat potential since they will not rap the benefit of Being able tose excess allowances, In both altenatve options 1 the ETS smal installations would face costs which are eeated to developing and managing a compliance ofr duetionstiategy Reduction potentials have w be assessed Wain a wade ng seheme a a an system the marginal abatement costs of th reduction measures must be known Funermore, the abatement costs woul! be compared tothe marks! price or thet, (0 decile on implementing & technical reduction measure, In tax system, since the tax level is proba ‘bly mone eran, the risk assesment would be less complex, hee less ‘expensive Inthe ETS, due to the high price volatiy, the issue of risk is

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Beside the costs for monitoring and reporting, the main cost foe stall installations seem 40 be transaction costs aid cos associated with the induction of increased uncertanry Both wansaction costs sid nes

tainy may be reduced for saat installations by esng a differnt polite insiument than the ETS 1s however dificult 9 see how 1 rainia incemives without measuring and epurting of emissions ‘Ta get « more explicit pituee ofthe easy and henelts of snl ns

lavons parcipation in the ETS we suggest thatthe following isuss he investigated in more det

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3 Other issues

Given the Tinted seope of dhe projet, some of the ser issues men tioned in the COM Report willbe billy ~ and not exhaustively ~ con ‘mented on in the following section

3.1 Other sectors and gases including unilateral inclusion

In general the wang system should he a move efficient GHG emission ahatement instrament the more soctors and Ete are included, Een Tawra inclusion af gases and scotws (individual counnies defining ad tional ssctrs and gases as part othe ETS), sould enhance the elfciney ‘ofthe ETS as an emission reducing instrument ‘Oae precondition is however effective monitoring and that inclusion sehives eal redetions, for example eyo business- aust, Inlasion fof ter gases and sectors requires the elhlihment of a basstine for these sectors aul gases For the benefit of howe eosteffetiveness and ‘competition issues its important tha the inclusion is done according harmonized rules aeross member sates (MS),

Including addtional gases increases the variety of reduction options, ‘offers akltional innovation potemials if innovaion eal times are re: speed, and inccases liquidity and wlimatey the efficiency ofthe i ket, As the different GHGs exhibit ileremt monitoring eos, some eases nay however he more ensily chad than others Te shoul also be observed that wniateral inclusion eld imply that abatements and reduction inthe peeuction level within a sector across Europ is no eared out ina cost-efficient manner Such inclusion would affect the relative competitiveness of te installations inthe sector inthe ‘ountrics where tis inchided in the ETS, iastallatons in counties ‘where i58 noticed On the other hand, nelson could he compet live advanuige ifthe cost of partcpaton ia the ETS is lower tan the ‘ost of teminclusin, depending on what policies and measures inclusion in he ETS re ‘As we understand the COM Report, the Commission recommend that ow sectors and gases are intoduced in 2013 This seems seasonable: the possibilty oF inclusion of addtional gases and sectors during a wading Peiod inroduces adliional market uncertainties, and inreases transac thom costs for ETS patieipants le also inereases the isk of posiponing the ‘maturing ofthe market, For example, there is prabably a huge nee for Imackst analysis and risk mangement tools, Developing si tools sod

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ing the market alanee, would he made unnecessary complicated and may he excessively costly under the “teat” of ne gases and sectors possibly ‘ing inuodvced within a wading period This uadsines the importance of urmonized rules regarding bascline, monitoring, and allocations being ‘defined before unilateral intusion slowed,

3.2 Carbon capture and storage

“The Working Group is to assess to what extent carbon dioxide capture sand geological storage (CS) ae wo be recognized in the ETS, in view of ‘comparable tcatment flow or aon-CO- emitting ativies Ws recomn- menlel tha the Commission oatlines the major EU policy shoices for CCS and proposes an EU regulatory famework dusing 2007 ‘The erent allocation rules diseriminate between technologies be cause CO: emiting technologies recite allowances for free, whereas C0: free temas do aot, For example, exis in CCS willbe pat ofthe ETS and have hesn allocated fe

which may’ be soldi the markt Suc installations however run the ris ‘of eceiving no oF much fewer fee allowances for the next tang period since th

‘have no (oF very low) emissions, Similars, new plan built With CCS wil not be allocsted fee quotas in Hine with wind power sad other carbon-free electricity and heat prextucing capacity Hence there is sa inherent incentive to build eapscity without CCS and thew investi (CCS if priule, Teehnology-spevitie allocation of allowances ~ where ‘more is allocated the more is emitted ~ means thatthe ETS at best only weakly incentviss investieas in CO; fre technologies The problem ‘would no exis ial allowaness were auctioned

The incentives ar, however, also alfeted by possible support sehen (subsidy) foe investment in CCS (in existing as well as new gen ration capacity), The question is whether it should be posible to get hth free quotas and investment subsidies for see projects, Depending fo the sucess of the ETS, avetioning may aot he suieient to make investments in CCS profitable although Ione country wants to cant ute the development of CCS technology and subsidise investients, i is clear that the required subsidy would be lover if suet installations would alsa wesive fre allowances The redaction inthe aeed fr ex sulbsics comes frm both the Value ofthe allowances, which wood he Sold in the ETS market, but also from the effect of higher cleetiefÿ

prices,”

Investment in CCS may be supported by

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Allocation of fse allowances fom the nation

NER Allocation offre allwances fom acomnmon LU NER National R&D support

‘Cominon EU RAD support

In situation where fre allowances mest be taken from the nations al Josatce pool and where eommon EU R&D supper fon the EU is ge erous it may hein the Snvesting county's interest to lobhy 1 Keep CCS, ‘outside ofthe ETS Taking the cos of support he nún-etiftg teh nologies (wind, biomass), and the overall investment incemtives of the ETS, it is elerly preferable w apply uniform allocation mets across ‘echgolopies From a more long-crm infant indusey perspective, rovi- sons should be made for additional supporto technology development such as within CCS,

3.3 Projects within the Community

‘As an alternative way’ of including emission reduotons in other sectors and gases (pls projects, ie a alleenative 1 extend the scape ofthe ETS, the desirability and fessbility of introducing = Commiy-tevel

approval process for emission eeduetion projects within the Commusity tay be eonsideved Such priests mus focus on emissions fram setivites| that are not suitable for «system with emision cap, and that have a sub tani potential to reduce GHG emissions

‘Such prjzets would he carrie ux by ETS partiipans, bat in sectors ‘outside the ETS But emissions in these sectors should he adressed by ther policy measures, ad should be cared out anyway Ha seasonal Policy mix i applic, Ie seems such peojects would frst and foremost be aractive if ther is substantial dserepaney between the ost 0F can

ing out abatements inthe ETS, impacting international ees and domes tie ation in non-T sectors, Including such projeets within the Community as eligible foe ETS would be the sume as intncing a kindof interna 1 system, Heace, the same rules a those applying to I projets eould be use, These rules are substantial and cosy and problems conccening double-cosoting would ave o he ares, Our intial assessment i that making pevisons foe Projects within the Comunity could be a costly provess which would tive very litle in tems of alliional abatements or redoced overall cost ‘of abatements, and heace should not be prioritized at this tage,

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3.4 Predictability

Amoug market participants and investors predictbiliy is genevaly ¥ tzurded as one of the more Smpotant issues As part of the European ‘Commision'sveview of the EU ETS a stakeholder survey was condita tuder the guidance of McKinsey & Company (2008) The survey showed

that emission tating was alrey alfeting behaviour and slaksholdsrs sce long-term issues a the most important ones, portant is

jj reason why Tong-erm issues are Seem a 50 limpostanes of predctabiiy Considering thatthe provision of incentives oko to the vestments s one of the mast important elements of for low emission

ciissions trading and that investtents within the ETS sextors ae 5

ally hing lived with along payback time this focts on longterm ies ‘with predictable and stale framework conditions is not surpising In

spite ofthe relatively broad eonsensun om this ise, no clear recommen dations can be derived from the stakeholder vesponses The views on what changes should be made simply differ between different stake

odes Te predictability sue can be disused on several diferent eves ofthe emission tang scheme is This a Feet he participants in the ETS in several ways Fis of al the xietress and fong-ero commitments ofthe international climate regime is hkely

to aflect the overall stetness ofthe BU climate commitments nd most probably also the strictness and the planing hovizon of the ETS OF ‘sours in principle the EU eam ehoose a sriet ETS regime, se an ETS, with a fow cap, even without an international agrociment, bul thsi Less likely." Secondly an international agrectnent aces the possibilities of the ETS participants wlze the iterutional market A bead and strict ‘On the highest level preietbi fected by the development of the in

‘agreement is likely 1a inerease the demand for international eres, But also increases the possbiis to link the Enrapean syste tô he? sa tems, Thinly, the compstitivencss ofthe Eurpean inary i fete by tn iacenaional agreement since that will impose similar eoss on the Industries in other cegions Long-term European goals can reduce this ‘bu ination 0 this very litle can he done

aniltenlly ‘The second level relates w the develapment

pends on many different factors, but technological development is

W atement costs, This

probably the most impertaat long tem factor The extent and timing of ‘chological development is inherently uneetan Predictability in supe port schemes for technological development may’ be beweicial i increase the predictably of the cost developments

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The thd level is asoeiated withthe seta design of the ETS tmpor= tan issues here ae allacation methods and mules, So far grandathering thus hoon use toa large extent, The rules for new installations and plant cs The above mentioned stake-

closures have ditfred among counts

holder review did not provide sufisint basis wo conclu that alterna tive approaches, e., benchmarking or actioning, wold be less contr — "Although itis poobably comest tht alternative appmaches would he ‘less comtionersil they may neventeles netegeethe radisgbilfy 0F (he system This i paniculaly te for auctioning since this allocation ret wil uke most ofthe speci prosisions and rules redundant, The politcal risk will hus deine On tbe other band actining could in- ‘create the Finacial risk of emilers since they become Financially more exposed to the development ia the EUA price For henchmarking to inerease the predictability i is necesary to reach

‘8 tong-tcam European agreement on the type of enchmarking However ‘one result tr the stakeholder seview was hat practical aecepiance of ‘benchmarking wil depend on the adopted implementation In addition 1 having a European benchmarking scale it as for instance mentioned ‘hat a suficient number of correction foeirs was necessary for aeeep tance, Although benchmarking bas many eter bene eelative to gran Fathering t seems highly ikely that henchmarking system sil Become very complex and aoe contribute significantly 1 reduve the wegulatry risk [Espcelaly forthe st wading period the ight ine schedule reduced the proictbiliy of the system The allocations forthe second trading period are also delayed An in ment for & post Kyoto faeement isnt likely 40 be ached unit 2010 atthe ealest, which tesduces the predictability egatding the pos-Kyoto regime Ít scems dite Felt o rede the uncertainty pertaining the intentional nepotiatons Fpeyond the eusent strong sigeals of continuation of the ETS fom the Commission (Currently the EU ETS i set yp with complionce periods, as well a the commnitinents under the Kyoto Protocol To achieve cost effective

abatement over tne the pice of emissions shell be as sable as possi: ble." The compliance periods may create pice differences over me, but ‘nation wo this to short compliance periods ma’ als induce tow mich price voltliy This depends on the possiblities of hanking (bocwwing and sasing betwen periods) With a large scope for hanking the price Volatility as well ay the price diferences between petiods should be dampened Saving emission allowances is prohably fey unproblematic, Borrowing fom future periods may he much more problematic, paren lary ifthe stability of the fare climate regime # being questioned Similar problems aise with too long compliance petiods, i t00 long

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compliance periods may jeopardize compliance since actions may he Aelayed, especially ifthe long tem erably is put into questioning ‘Compliance period of roughly the cunent length, combined with long tse planning goals is probably the preter feasible option

“To sum up: Uneereainy is an inherent part of business and every-day lite, For long-term investments, research & development and similar i

sues witha tong pay back time climate change vil) ad to these risks, This is unavovdable From the poliey perspective the uncertainty ean be reduced though a siable poley environment Athoweh 2 fesible ap pouch is needed 1 incorporate new knowledge, the vera direction af the policy should be preditable From this perspective, palsies, inl: ing allocation rules, should also be design so that they ereate correct incentives for investments, and that these incentives are not distr by

"— 1 3.5 New entrants

In the first tring pest, all MS have chosen to set side a reserve of slowanees uo be allocate o new entrants, the sedled New Entrant Reserve (NER), The size of the reserve and the allocation res vary Widely atnong MS In is eevision of the Diwetive, the Working group will explore harmonised approaches to new entrants with a view t0 strengthen incentives for investments a low emitting technologies and ‘ensure comparable conditions for competition across EU Isues to be —

+ li sfble lỡ nọtcrode an NE ordlloysems eetort? Eo he taken ino account: temporary satus of NE, depree of competition From ouside EU and climate policies of competitors)

4+ Harmonized allocation to all, either by common rules or by erating & common reserve (Longer allocation periods? Need fr simplicity? ‘Adiwinistrvive burden? Incentive effets? Neutrality betsea Uitfernt technologies and energy sourees?)

+ Appropriateness oF the definition of NE in the iyeefive

{Harmonization of provisions for installations that close during & wading period

"The most important purpose of emission wading isto ensre that invest ments are made in low-carbon or carbone technologies i the system should promote longterm eflsien investments This inclaes bo the timing of investment and the choice of technology

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1+ Tovnot crete unnecessary bare 9 entry

1 To not discriminate between new e ns (within the same sector) In fong trim investment decisions the fal cost of emissions shold he taken into account, Allocation of fe lowanoes reduces the ttl ost of cmissons foram investor If existing installations get more allowances

allocated for free ns, Ht makes # more atrative to keep ‘ld installations in production longer and postpone decommissioning ‘This constitutes harier o entry The et eiieney oss she difference betwecn dhe emissions of the old installation andthe emissions of «new installation." Different rales for new entrants indifferent counties implies a com

petitive antag for now entry in the counties with the most aractive ‘cation rules for new entrants is share of allowances allocated for Tree and the fength of the allocation perio, Using diferent allocation rules for installations in different sectors shoul however a iniply wl tional problems TF the prefered techoology for new investments is moee OHS i fora, the existence of multiple technologies presents aparielar problem hen MMes tỏ ta enty, The eletrcty sector isthe most prominent example of this, There is # wide variety of techoogies and fuels aval thle for investments in nese eectriity generation capacity, including <athon emitting fuels such as coal and gas and aon-carbon esting teeh- logis sue as hyo, wind and nuclear Since aly installations whieh ‘emit CO; get allowances allocated for fee de system favours coal and ‘2s instalations, The allocation of tee allowances in effet canstittes subsidy co fstllatons which emit CO., (Compare the choice between ‘vind mil park and coal powerplant with and without eee allowances.) Maeovet, if alloestions ae made aecording need", Le expected emissions or a tehnology-specfic benchmark, and ther is form

state of free allowances, then eoal power wceives larger subsidy tl L8 power This ley incenivses the wrong investments n powcr gem ‘The consequence oF that

+ ifnew installations ar o get allowances allocated for free, all installations should get the same amount (nat share) oF fre allowances

1 even CO; fice technologies should get fee allowances

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In aldiion, the allocation of five allowances t ew installa eaters, fora lower long-term price kvl for electricity, which means @ higher ‘consumption level And tothe extent that CO; fee lechwalogies ate de sired and ned investment or pret subsides to be profitable, these sulsiies nee tobe higher Ife NER proves to be inadequate, i depleted t means diesen tion between early meweonners and old newcomers, This may not be 3 ‘huge problem from an eficieney point of view, because it vould mean that late eweomers would have to bus all their azeded allowances in the Imarkst and hence take all costs into account Such a provision docs

however accentuate the incentives « Keep ol installations, which are ligile © fice alloations, for wo Tong instead of investing in new less

cathor-imensive installations, Such a provision also inves an a tional uncertain for investors: Will my installation be registered in time to he sige for fre allowances or nol? Even i avilable allowances are

shared between applicants within 4 cotan time period, eg a year, the uneerainy remains TF now cans are

peated accouting tothe same rules as existing installation the length of he allocation peri’ doesnot matter (OF course this rales out grandfahering or updating as an allocation method, but the ‘Commission has stated that allocations should abt he based om histor essons for any ofthe installations in he fot.) Tes probably very important for new entrants thatthe allocation of

evanses is predictable, This may imply longer allocation periods, really investment decisions must be made on the basis of information bout allocations forthe second trading period of the ETS, i, 2008 2012 Investors have very litle information about allocation rules andthe

total market balance aller 2012, Yet the ivestments me today ill likely produce fora period of 30-80 years ahead The uncetint of in ture climate policies and allocations, cleanly ineuces ational risks for invests Addisional risks constitute additonal cost and tend 10 postpone investment decisions Suing up

+ With auctioning of allowances there would be no need for & NER 4 fnew entra get ss favourable allocations than existing

insillqtons, 2 bias in favo korping old installations and delaying sew investments is creted

+ Teisimportant “may neantha (he NER should be expanded if depleted (e.g by the dat the allocation tờ ney isflitfonsït le, vhich ‘government buying EUAS or imterationslereils)

+A common NER forthe EU with uniforin les for alloca

com

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Sammendrag

EU dckixet 20097/EC er ramamen for handel med divhuseas emis: ‘ver indenfor EU og EOS - Eusopean Union Emission Trading Seheme (EU ETS) I orbindelse med en forestienle revision af divektivet hae

Kommissionen i november 2006 publiceret en medelese 8 Det Euro- tpeiske Rad, Earopaparlamentet mf, der behandler nage ome, det skal indi vevisionen af direkliel

Sind ante

et er vigtgt ombostninger ved ETS apsejes af de oped miljomiess: 1 gevinsies I forhold til de murginale omkostringer ved at drive sina aueg ee det et spospsmal om prineippet om omostningseektvitet et

ferdiggorinddragelen af sma ankeg under de nuvarende ETS reglr

Der ert vesenlige ombostningcrforundet mel detagelse i BTS + Startombostninger - Omosinnger ‘apportering a historiske envssioner nsllsingen ved aprttese af en hatelsbonto af et

‘monterngssystem og aminisetive weadrnger

+ herd omkostinges "apportering og veritiering af emissionr,handelsomkosninger g ~ Omkostninger fra den lige monitring, toêwÙng afthandelosrdegi

Monitving, rapporteing 0g velisring hen de vieseniaenansiells og ministrative byrder for smi anes som ofte ikke str i forbold il de lave emissionor fa de smd ang, Selvown reglsne for sin ang allere {er Foret, er der mulighed for forget omkostningseffektivite ved werigeforenklinger, Mutigefoenklinger omfater:

4+ Monitringspan Forenklee heregningsmtder il at pgoreemissionse med ~_Atstelse fra usikkerhedsaalyse

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Det er ops nghiệt úelatke sả anbeg ía dehsgele ï ETS tử ta ca sganse der kan sates pi grundlag a den đạc emission cle kapacje tem af anger Pa curopeiske plan stir anleg med emisioner under 25.000 ton COs

pera for 158 M to af doi alt 6.335 M ton tikelinger af COrKvoter Ldelukielse af anleg me emissoncr under 25.000 fon CO, per vi

rescore antallet af deliagere mei 54/9 % mes ekningen a emissions alder med 2.5 For ffbrEodingounleg apvendes i sjcblikket en kop etsgriense p20 MW, Forogelsew af grensen ti 50 MW vil udelukke et stor anal anleg tra detagese i ETS For Sverige og Danmask vil he holdssis 588 op 154 anlage blive udelokbe, dekkende emissioner i ieliethenhotkvis3.1 0g [4 M tom CO: pera

Det esiledes mligt a reducers antallet a dltager BU ETS aden a det picker omfanget af emissionerdekket af kotesystmet sig me- {1 Hvis disse ang blvertelukket fra EU ETS er det novel 3s Pi akrnative miler i at begreose disse emissioner og fr at relists {et reduktonspotentiae der er for disse MIder Fora fe bate billed af omostingcr og Fowdcle ved smal anys dehiagelse (ETS foreslir i a folgende emner undenoges natmere

+ enopasrshe det sleds redusionspotenta fe sd nls per sektor + emfvanitati analyse af omkostningere ved dltagelse IETS og altenative styringsinstymenter Inddvageive af andee seltorer og dhivhusgasser

Inddragclhe af andre sektorce og drivhusgasser 1 EU EIS vil genert forbedse ombostingseeksviteen, da ydetigeve muligheder for eis ‘onsbegrenstinger kan ways Det forsee ivilertid en efektv moniteving, og a inddragelsen

foror ti rele emissions reduktioner.Inddeagelse af andee sekioer og vivhusgasserforudseter etblering af en haseine for disse sektorer 08 soso Fora 1 ford! af hide sgt omkostningseffekiitet og vast kon

Khmteiee re gạt at inddragelsen skergennen harmonisetedetepker ptvars af landeae

(psamling o lagring of COs

'Opeamling og lagsing af CO2 (CCS, Carbon capture atl storages) er ea poventcl vise motode at redueerc CÓ2-nievemr mơ, De mat tendo tldelingsrepler forskelsbebandcr lekndlogier đai CO2

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46 1 OCS Tchnologipecifkke đidelnger ~ hư jo men: đe Hides jo me er ulslippet ~ beter at ETS éhodste fal kun svagt iRkynder ti investeringer | COvtie leknologet EL problem der ikke vile eksisee,

huis alle tikeligerbley borauktioneret

Tnvesteringsysten er gs pvirket af frskllige stotcordninger (sub sidir) for OCS Ú ehssteonde si vel som aye ang) Spirgsmel er om et skal ware mulig a i re COs-kvoer eller investeringssate CCS projehier Ahengig af stramfeden af ETS kan bortitioering ver wi

suekkeligt si a gure investeringeri CCS profitable

Tngesteringer CCS kan undeestotes af Toes lee irkning af disse miler tr vorderes

1 tepler og dew sa Lolate profelier

En alternativ metode at inde redubtoner i andre sektorer op af and Avivhuygasse (samt penjekter pier gennem projekter, der lk aebojder for at nedringe whip af deshusgaser Disseprojeker ma Tokusere pi ‘islip fa aktviteter, der ikke passer til el system med emissions of, 0g som har et sasentigt potentisl for a rucere wisp af drivhusgasscr, Projekreme kunne udloes af dltagere | ETS, men i soktowe udenfor LETS, Men emissioner fra disse setore sil Kune indskes mod andre Virkendler op eekten af sidanne pojebierer wiv

Hvis mulighoden bliverindfrt bar de «

Implementation projeer, anwendes Disse regler er komplcerede og bbekosclige og problemer omkriag dobbeltueling skal ops handlers

Det er vores umidlharevardering, at lok prjektr tke bie printrss pi muvsrene spank,

Fovudeiglighe

Markedsaktoce og investover betaster forudsgelgheden af EU ETS som det vigtigste emne, vitket er forstisigt hetrgining af de lange lssivningsperiodsr, dor nodvendige for mange af investeingere Fox- lusigeligheden er pavirket af mange fktocer, som friet af de interna ‘ionale Kimaforhandlnger,dishussioner af de langsigtede Khnafoxpligt agelser i EU ambitionen for og stringensen af EU ETS, udvklinge iat

\ergcomhenininger og den dtaljerede wlormning af EU ETS, Den pliiske det af wsikherhoden kun reduosres gennem ch tabi po Titik pk omdet, Selvom en Meksielfleang er madvendig for ainda bejde ny viden bo den oteronlnederering sĩ polidkken ve fan

Ie, I dette perspekt hor politike, herunder fillings reler, vt formet side skaber ot orekt inctument for investringer, og si incitament ikke fordrejes af hortids pres fr nterescegrupps Langsigede EU mal ope iho} geud forudsigelighede

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ouligeligheder, Roraltioneing vi eduecre đẹn polifeke oikkerhed, ‘men pi same tl die den finansille mdiderhed, n sư korepla er ‘ops en faktor der seduccter fonudsigeligheden Handelsperadee af omtrent den nuvarrende keogde, kombinerst med Tangsigtode mal, er sandsyaligvis den bedste losing For kote handel period kan skabe prisfrskelle over tid og fr stor prsfosome

he don

Der er aft seserer al nye aktorer (NER, now entrants reserve) Det er for al ufordeaglige idebnger aye abner ikke skal shabo en skeshed | forhold ti a opretholde gamle ante og forsinke ayinveseriager Med