comments on com 2006 676 building a global market pot

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 in

Comments on COM (2006) 676 Building a global market

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Comments on

COM (2006) 676

Building a global market

‘TemaNord 2007:614

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

‘Chairaan of the Clnate Change Working Group

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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 pan ~ Simplified ealeultion based methodologies to determine

missions (in some case more simplified than approach ir 1)

= 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,

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

these sectors and ges, For the beneit of both costeffectiveness and

‘competition isues, ts important tha the inclusion is done according to harmonized rules aeoss member states (MS)

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

‘need by’ several aco, ineliding the progress of inerationa climate negotiations, the discussions om long-term EU climate commitment pol

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

aly, allocations should not he technology speci

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

+ Other sectors and gases including unilateral ineasion

4 Cashun capture and stossge Projects within the Community

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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

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

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

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,

trading perio, Denmark's total annual allocation is 33.7 Mllyear on a erage, The total numer of installations is 372, Installations with emis

‘sions fower than 25,000 tones/a constitutes 76 % of the total number of installations and account for 4.7 % of allocated allowance,

‘portunity t unary i