European Union Emissions Trading Scheme (EU ETS)

Currently largest active cap-and-trade program (as of 1/2011).

http://ec.europa.eu/environment/climat/emission/


Overview
Market Size and Scope
Offset Project Eligibility
Additionality Requirements and Project Methodologies
Project Approval Process


Overview

Type of Standard and Context

The European Union Emissions Trading Scheme (EU ETS) is a mandatory cap and trade program, which allows operators use of compliance carbon credits from Kyoto project based mechanisms (Clean Development Mechanism and Joint Implementation), up to a certain limit. The EU ETS includes 30 European countires and began in January 2005 as the first emissions trading scheme to regulate GHG emissions and continues to be the largest. The EU ETS is a key component to the EU climate policy commitment to the Kyoto Protocol and beyond. Emissions sources regulated by the EU ETS include 12,000 downstream emissions sources, accounting for half of all EU emissions, from the following industrial sectors: iron and steel; cement, glass, and ceramics; pulp and paper; electric-power generation; and refineries. The implementation of the EU ETS began with Phase I (2005-2007) which - although mandatory - was primarily designed as a trial period. It is currently in Phase II (2008-2012), which coincides with the Kyoto commitment period. For Phase III (2013-2020) of the EU ETS several revisions to the scheme are planned including a single EU-wide cap to increase harmonization. Airlines will join the scheme in 2012. As from 2013, the scope of the ETS will be extended to also include other sectors and greenhouse gases. CO2 emissions from petrochemicals, ammonia and aluminium will be included, as will N2O emissions from the production of nitric, adipic and glyocalic acid production and perfluorocarbons from the aluminium sector. The capture, transport and geological storage of all greenhouse gas emissions will also be covered.

Under the EU ETS program, the use of CDM and JI project credits is supposed to be “supplemental” to emissions reductions that take place within the EU. Limitations on the use of CDM/JI credits for compliance under the EU ETS vary by member state. Under Phase II of the EU ETS, the member state emissions cap, the CO2 emission source allowance allocations, and member state limit on the use of CDM/JI credits are based on National Allocation Plans (NAPs) submitted by each member state for approval by the European Commission. Member States specify a limit up to which individual installations will be able to use external credits to comply with the ETS. These limits vary between 0% (Estonia) and 22% (Germany) of allowances. There are also restrictions on use of CERs from forestry projects and from certain types of large hydro projects. Under the third phase (2013-2020) the system of national allocation plans will be abandoned to make place for harmonized EU-wide caps and allocation rules.

The Directive for phase III extends the rights to use these credits for the third trading period and allows a limited additional quantity to be used in such a way that the overall use of credits is limited to 50% of the EU-wide reductions over the period 2008-2020. For existing installations, and excluding new sectors within the scope, this will represent a total level of access of approximately 1.6 billion credits over the period 2008-2020. In practice, this means that existing operators will be able to use credits up to a minimum of 11% of their allocation during the period 2008-2012. Furthermore, from 1 January 2013 measures may be applied to restrict the use of specific credits from project types, for example creditsa from HFC and adipic acid projects may be excluded.

Standard Authority and Administrative Bodies

The EU ETS has been established through binding legislation proposed by the European Commission and approved by the EU Member States and the European Parliament. The Member States are responsible for the implementation of the emission trading scheme at the national level, in line with the National Allocation Plans approved by the Commission. Member States also have to submit annual reports on the implementation of the Directive to the Commission, in line with Article 21 of the ETS Directive. National administrators of the scheme manage national registries, while the Commission oversees the Community Independent Transaction Log (CITL) at the Community level, which registers changes in national registries.

Regional Scope

The EU ETS focuses on emission reduction targets for the 27 member states of the EU and targets for the countries that have linked their trading system to the EU ETS. For the time being this includes Norway, Iceland and Lichtenstein.

Recognition of Other Standards/ Linkage with Other Trading Systems

The EU Linking Directive, which was passed in 2004, allows operators in phase 2 of the ETS to use credits from Joint Implementation and the Clean Development Mechanism to meet their targets in place of emission cuts within the EU.

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Market Size and Scope

Tradable Unit and Pricing Information

Tradable units and pricing information for offset credits under the EU ETS are based on those used for the CDM and JI project based mechanisms respectively. Because the EU is the greatest purchaser of such credits the secondary market price for JI/CDM credits follows the same trend as the price for EUA's, be it with a discount to take account of delivery uncertainties.

Participants/Buyers

Participants and buyers of CDM and JI offset credits under the EU ETS include regulated emissions sources, as well as EU Member States themselves. Major European banks and other financial institutions both in the private and public sector have also become active in providing finance or managing funds for prospective emission reduction projects.

Current Project Portfolio

To date, European buyers have dominated the CDM market and it is estimated that much of the demand from EU ETS regulated entities for CDM and JI credits has already been contracted either directly by the regulated installations themselves, or indirectly by institutions planning to sell the credits back on the secondary market.

Values calculated by the author based on emissions cap and JI/CDM % limit.

Source: European Commission, 2007a

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Offset Project Eligibility

Project Types

During the second phase all CDM and JI project types are eligible, except those from land use, land-use change and forestry activities. In the case of hydroelectric power production project activities with a generating capacity exceeding 20 MW, Member States shall ensure that relevant international criteria and guidelines, including those contained in the World Commission on Dams November 2000 Report “Dams and Development: A New Framework for Decision-Making”, will be respected during the development of such project activities.

Starting in 2013 (thrid phase), HFC and adipic acid credits will be excluded.

Project Locations

CDM and JI requirements apply.

Project Size

CDM and JI requirements apply.

Start Date 

CDM and JI requirements apply.

Crediting Period

CDM and JI requirements apply.

Co-benefit Objectives and Requirements

CDM and JI requirements apply.

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Additionality Requirements and Project Methodologies

Additionality Requirements

CDM and JI requirements apply.

Project Methodologies

CDM and JI requirements apply.

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Project Approval Process

Validation and Registration

CDM and JI requirements apply.

Monitoring, Verification and Certification

CDM and JI requirements apply.

Registries and Fees

CDM and JI requirements apply.

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