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EU Emissions Trading Scheme

EMISSIONS TRADING – INTRODUCTION

Emissions trading, or “cap-and-trade” as also commonly known, is becoming a key market-based approach for the control of pollutants through the provision of economic incentives to limit or reduce emissions.

General information on emissions trading with particular reference to the European Union’s emissions trading scheme may be found here. More detailed information on specific matters related to implementation and compliance may be found under the Emissions Trading Scheme – Stationary Installations, Aircraft Operators, Registry sections as applicable.

What is Emissions Trading?

The underpinning rationale of emissions trading is that emission reductions are achieved where the cost of the reduction is lowest, thus lowering the overall cost of mitigation efforts against climate change.

Principles of the cap-and-trade approach were already existent and being modeled as early as the 1960’s, with actual schemes being first developed in the United States in the early 1990s (US Acid Rain Program). Emissions trading was eventually adopted as a principal means for controlling emissions of greenhouse gases. In fact, emission trading principles became the basis for international emissions trading (trading of emission entitlements between parties with quantified emission limitation or reduction targets) as established by Article 17 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change.

An authority (for example an international or regional body in the case of a multinational scheme, or a government in the case of a national scheme) sets a cap on the total amount of pollutant that can be emitted under the scheme. Parties or companies participating in an emissions trading scheme are each allocated a quantity of tradable emission permits (also referred to as allowances), the total of which would be equivalent to the overall cap. Each emission permit or allowance is equivalent to a specific amount of pollutant; in the case of greenhouse gas emissions trading schemes, one permit or allowance is normally equivalent to the emission of 1 tonne of carbon dioxide equivalent. Schemes may also include a decrease in the cap over time.

Entities participating in such a scheme, and thus allocated emission permits, have the flexibility of determining how and where emission reduction will take place. An entity is allowed to emit in excess of the allocation of permits it has been issued by purchasing additional permits from an entity that emits less than its allocation and thus has surplus permits to sell (Figure 1). Thus entities can either reduce emissions on site or else buy permits, depending on which approach is the most cost-effective for that entity (Figure 2). The buyer of permits or allowances is effectively paying for polluting, while the seller is rewarded for reducing its emissions by more than was needed.

Most importantly, the overall environmental outcome is however not affected as the total amount of permits or allowances in the scheme, therefore the overall limit on emissions, remains fixed.

Figure 1 – Diagrammatic representation of how emissions trading works in practice. (Source: MEPA)

Figure 2 - Diagrammatic representation of the emissions trading concept (AC: abatement cost; PP: permit price). (Source: MEPA)

What is the European Union Emissions Trading Scheme?

The European Union has established the largest multi-country (to date covering 27 EU Member States, with the participation also of Norway, Iceland and Liechtenstein) and multi-sector emissions trading scheme, covering large, stationary, greenhouse gas-emitting industrial installations and, as from 2012, aviation activities. The first greenhouse gas addressed by the scheme is carbon dioxide, with nitrous oxide and perfluorocarbons coming into the scheme in the near future. The EU Emissions Trading Scheme (EU ETS) is a key policy instrument aimed at helping the bloc meet its greenhouse gas emission reduction commitments under the Kyoto Protocol.

Directive 2003/87/EC – an overview

The EU ETS Directive, Directive 2003/87/EC sets out the legal framework for the implementation of the EU emissions trading scheme in Member States. The roles and responsibilities of the principal players in the scheme, namely the competent authorities and the operators are described, some of the elements being further expanded upon in relevant legislative implementing provisions that the European Commission adopts from time to time. It should be noted here that such implementing provisions are developed by the Commission in conjunction with Member States, through the Climate Change Committee as provided for by the Directive.

The main elements that the original Directive provides for include:

Design element	Description	Article/Annex
Scope	· the activity categories and greenhouse gases that are covered by the Directive	Annexes I and II
Permitting of stationary installations	· application for a permit, conditions to be set out in a permit and rules on administration of the permitting process	Articles 4, 5, 6 and 7
Allocation and issuance of allowances	· trading periods; · developing a National Allocation Plan (NAP) that includes the national cap of allowances and a description of the methodology on which the determination of the cap is based; · method of allocation; · allocation and issuance of allowances to individual installations	Articles 9, 10 and 11, Annex III
Accounting for emissions	· provisions and deadlines as applicable for the establishment of registries to ensure the accurate accounting of the issuance, holding, transfer and cancellation of allowances; · rules on allowance transactions, surrendering of allowances to account for actual emissions, cancellation of allowances and banking of allowances between periods	Articles 12, 13 and 19
Monitoring, reporting and verification	· requirement for monitoring of emissions by operators of installations; · reporting of emissions on an annual basis to the competent authority by specified deadlines; · verification of reported emissions by accredited verifiers	Articles 14 and 15, Annexes IV and V
Penalties	· requirement for Member States to lay down rules on penalties for infringements of national provisions adopted to implement the EU ETS; · harmonized quantified penalties in the case that operators do not surrender sufficient allowances by the stipulated deadline each year to cover all emissions reported for the relevant monitoring year and obligation to subsequently still have to surrender allowances to cover emissions for which the penalty has been paid	Article 16

Other provisions cover requirements on access to information for the public (Article 17), procedures for the unilateral inclusion of additional activities and gases by Member States (Article 24) and the synergy with other relevant legislation, in particular the IPPC Directive (Articles 8 and 26).

A subsequent amendment to the EU ETS Directive, Directive 2004/101/EC allows operators in the scheme to use credits derived from projects implemented under the Kyoto Protocol project mechanisms for compliance with their surrendering obligations. These credits are the Certified Emission Reduction units (CERs) generated by Clean Development Mechanism projects (CDM) and the Emission Reduction Units (ERUs) generated from Joint Implementation (JI) projects. The use of such credits during a period is subject to a quantified limit that has to be notified in the NAP for that period, while credits derived from certain types of projects may not be used (ex. credits from nuclear facilities) or may be subject to certain conditions (ex. credits from large hydroelectric power plants). The risk of double counting of emission reductions from projects which reduce or limit emissions at installations participating in the scheme from which credits may be generated is avoided by rules set out in Decision 2006/780/EC.

One of the more major changes that has been made to the EU ETS Directive is the inclusion of aviation activities in the scheme, provided for by amendments set out in Directive 2008/101/EC . While permitting is not a requirement, various new elements in addition to those already applicable for stationary installations are introduced, such as EU-wide harmonized cap setting and allocation rules, mandatory auctioning of allowances, and, where free allocation is applicable, this takes place through benchmarking.

Revising the EU ETS Directive

A wide-ranging revision of Directive 2003/87/EC was adopted in December 2008 by the European Council and the European Parliament, in the form of Directive 2009/29/EC as part of the Climate Change and Energy Package.

This revision introduces provisions aimed at ensuring the long-term environmental and economic viability of the scheme. New elements, aimed particularly at stationary installations include mandatory auctioning (up to full auctioning in certain instances) of allowances across all sectors, the setting of an EU-wide allowance cap for stationary installations complementing the similar approach for the aviation sector, thus replacing the current practice of national allocation plans and introducing a harmonized benchmarking approach to free allocation for stationary installations where applicable, provisions on further aid where there is deemed to be a significant risk of carbon leakage and procedures to address the impact of allowance price volatility.

Implementing the EU ETS Directive in Malta

Legal Notice 140 of 2005 transposes Directive 2003/87/EC into local law. Directive 2009/29/EC amending Directive 2003/87/EC has to be transposed by not later than end of 2012.

The competent authority responsible for the overall implementation and administration of the EU ETS in Malta is the Malta Resources Authority. For any further information please call on ( 356) 2295 5115 or email us at: saviour.vassallo@office.mra.org.mt.

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