The European Commission today adopted a decision which determines for the first time a ceiling or ‘cap’ on the number of emission allowances that will be available under the EU Emissions Trading System (EU ETS) in 2013, the first year of the 2013-2020 trading period.
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What is the cap?
The cap is the total amount of emission allowances to be issued for a given year under the EU Emissions Trading System (EU ETS). Since each allowance bestows the right to emit one tonne of CO2 – or an amount of another greenhouse gas giving the same contribution to global warming as one tonne of CO2 – the total number of allowances, i.e. the cap, determines the maximum amount of emissions possible under the EU ETS.
Why has the Commission taken this decision?
The decision is part of the measures to implement major revisions to the EU ETS that will apply from the start of the 2013-2020 trading period. The changes are the result of the revision of the Emissions Trading Directive which was undertaken as part of the 2009 climate and energy package of legislation. The revised directive obliges the Commission to publish the cap for 2013 by mid-2010.
At what level has the cap for 2013 been determined, and how was it arrived at?
The cap for 2013 has been determined at 1,926,876,368, i.e. just under 1.927 billion allowances.
The revised directive stipulates that the cap is to be reduced annually by 1.74% of the average annual total amount of allowances which have been or will be allocated in 2008-2012 through Member States’ National Allocation Plans. The average annual total has been calculated at 2,032,998,912, and 1.74% of this comes to 35,374,181. This last figure thus represents the linear reduction factor by which the cap will be lowered annually. Under the terms of the directive the linear reduction factor has to be applied from the mid-point of the 2008-2012 period, ie 2010. The figure of 35,374,181 has thus been subtracted from the average annual total three times to get from 2010 to the cap for 2013.
The average annual total amount of allowances for 2008-2012 has been calculated at 2,032,998,912 by adding together:
the total quantity of allowances that have been or will be allocated to incumbent installations in the EU ETS
the total quantity of allowances that are designated to be auctioned/sold (including those which may not be allocated to new entrants from the reserve of Member States for new entrants) and
the quantity of allowances already allocated to new entrants.
Is this decision definitive?
No.
The decision is based on Member States’ National Allocation Plans for the period 2008 to 2012 and therefore reflects the current scope of the EU ETS. It will need to be revised to reflect the extended scope the system will have from 2013 when new sectors (eg aluminium) and gases (eg nitrous oxide) will be covered. This revision will also need to take account of the fact that new installations have been opted into the EU ETS in the period from 2008 to 2012 under the provisions of the revised directive.
Due to the need to collect data on the new sectors and gases, the directive foresees a later date of publication of the revised cap. The Commission expects to publish its decision in September 2010.
Moreover, further marginal adjustments to the cap are likely to be needed over time, for the following potential reasons:
Before the end of 2012 more new entrants may enter the market requesting allowances from the reserves for new entrants;
Emission-reduction projects planned under the Kyoto Protocol’s Joint Implementation (JI) mechanism (or in some cases under the Clean Development Mechanism) may not materialise and thus may not yield credits that can be used to offset emissions in the EU ETS. For this reason, allowances may be allocated from the so-called “JI set aside”.
Final figures for the 2013 cap may thus not be available before 2013. However, in order to keep the public informed, the Commission will update the figures in 2011 or later. These updates, however, may only bring about marginal changes and are not supposed to affect the overall quantity of allowances prevailing from 2013 onwards.
What will happen to the cap after 2013?
The cap will decrease each year by 1.74% of the average annual total quantity of allowances issued by the Member States in 2008-2012. In absolute terms this means the number of allowances will be reduced annually by 35,374,181. This annual reduction will continue beyond 2020 but may be subject to revision not later than 2025.
What happens if the EU increases its greenhouse gas reduction target for 2020 from 20% to 30%?
If the EU decided to move to a 30% reduction target the cap would need to be revised. Today’s decision reflects the 20% reduction target from 1990 levels as enshrined in current legislation. This translates into a 21% cut in emissions from installations in the EU ETS by 2020 compared with 2005 levels.
Which allowances can be taken into account in order to determine the cap?
All allowances that will be issued in accordance with the National Allocation Plans, as accepted by the Commission, will need to be taken into account, i.e. all allowances that will, by the end of the 2nd trading period, be allocated (either through free allocation or through auctions/sales) to participants in the carbon market. The Commission considered the following categories of allowances to be relevant in this respect:
All allowances which have been or will be allocated to installations which are in the EU ETS as from 2008. The allocations to these installations are indicated in the so-called National Allocation Plan Table (NAP table), which in its summary provides a total amount of allowances to these installations for each year of the period from 2008 to 2012.
All allowances which have been or will be auctioned (or sold) and which are indicated in the NAP table for this purpose;
All allowances which have been allocated to new entrants from the reserves for new entrants;
All allowances which have not been allocated from the reserve for new entrants by the end of 2012, if the Member State concerned has decided that these allowances will be auctioned or sold.
In addition to these quantities, however, some Member States have quantities set aside for certain purposes, such as the so-called JI set aside. These quantities could only be taken into account for the EU-wide cap as from 2013 if they are actually allocated.
Allowances from the reserve for new entrants that have not been allocated to new entrants at the end of 2012 can be taken into account only if the Member State concerned has taken a commitment to auction or sell the allowances not distributed from the reserve for new entrants. This commitment can be made by means of national law or, if there are no corresponding national provisions, through a statement in the NAP.
How are leftovers from the New Entrants Reserve treated?
The extent to which potential leftovers from the reserves for new entrants are taken into account for the determination of the cap depends on the treatment foreseen by the respective Member States. Where Member States have, by means of legal implementation or statement in the NAPs as accepted by the Commission, decided to auction or sell the allowances, the potential leftovers from the New Entrants Reserve are included in the figure representing the average annual total quantity of allowances in the period from 2008 to 2012.
Where Member States have decided not to sell or auction, the potential leftovers from the New Entrants Reserve are not included in the cap.
Where Member States have not taken a decision yet on how to deal with the potential leftovers from the New Entrants Reserve, the allowances potentially not allocated from the New Entrants Reserve are not included in the cap for the time being.
How are closures treated?
On the basis of information available to the Commission, Member States add allowances from installations which close down their business in the period from 2008 to 2012 to their reserves for new entrants. These allowances will thus be treated like allowances from reserves for new entrants that are not distributed by the end of 2012.
Is aviation included in the decision?
Aviation is not included in this decision. The cap to be allocated to aircraft operators will be determined by a separate decision of the Commission, as requested in the legislation(which will include aviation in the EU ETS as from 2012).
Source: European Commission
