Emission Trading Schemes

Summary

Driver description
Interactions with the Environment Domain
Interactions within the Social Domain
Interactions with the Economy Domain
Interactions with the Technology Domain
Impacts on Mobility and Transport

Driver description

  • “For countries that are signatories to the Kyoto Protocol and with legally binding emission targets, a tool to help them is the Emissions Trading Scheme. This is a so-called cap-and-trade scheme, which means countries are allowed a certain amount of emissions which should decrease over time to achieve overall emission reduction. In the Kyoto scheme each allowance is called an Assigned Amount Unit (AAU), equivalent to one tonne of carbon dioxide. These allowances are tradable among countries. At the end of a set period each country must hold the same amount of AAUs as it has emitted tonnes of greenhouse gases. In case the country emitted more, they can add to the AAUs offsets that have been created under the Kyoto Protocol mechanisms in order to balance the additional emissions. This is where the CERs, ERUs and Removal Units from Carbon sinks (RMUs), etc. play their role.” (Ref: CO_0091)
  • “The EU ETS[1] is a key policy instrument to achieve the climate policy objectives in the European community. It was established by Directive 2003/87/ EC (the Emission Trading Directive) and entered into force on 1 January 2005.” (Ref: CO_0131)
  • “The EU ETS is being implemented in distinct phases or ‘trading periods.’ Phase 1, form 1st January 2005 to 31st December 2007, was a three year pilot-phase of “learning by doing” in preparation for the crucial phase 2. It successfully established a price for carbon-free trade in emission allowances across the EU and the necessary infrastructure for monitoring, reporting and verifying actual emissions from the businesses covered. (...) Phase 2, running form 1st January 2008 to 31st December 2012, coincides with the “first commitment period” of the Kyoto Protocol – the five-year period during which the EU and its Member States must comply with their emission targets under the Protocol. (...) Phase 3 will run for eight years, from 1st January 2013 to 31st December 2020.This longer trading period will contribute to the greater predictability necessary for encouraging long-term investment in emission reductions. The EU ETS will be substantially strengthened and extended from 2013, enabling it to play a central role in the achievement of the EU’s climate and energy targets for 2020.” (Ref: CO_0202)
  • “The EU ETS covers CO2 emissions from large stationary sources including power and heat generators, oil refineries and installations for the production of ferrous metals, cement, lime, glass and ceramic materials, and pulp and paper.” (Ref: CO_0131)
  • “All EU Member States participate in the scheme. Bulgaria and Romania joined the ETS in 2007 as they became Members of the EU. Iceland, Liechtenstein and Norway, which do not belong to the EU, joined the EU ETS in 2008 and must comply with the same rules and regulations as the EU Member States.(...) Switzerland has a separate emissions trading scheme but intends to link its system to the EU ETS.” (Ref: CO_0131)
  • “The EU's vision is to create a carbon market among member countries of the Organisation for Economic Co-operation and Development (OECD) by 2015 and then to expand this to include the big emerging economies from around 2020. The company-level cap-and-trade systems that have been put in place in Switzerland, New Zealand and the north-eastern US states, the plans to set up such systems in Japan, Australia and California and the interest being shown in establishing a US federal system are all welcome developments in this context.” (Ref: CO_0202)

[1] Emission Trading Scheme

Interactions within the Environment Domain

Climate change impacts

Implementation of the Emission Trading Scheme is expected to have positive impacts in reducing climate change as it is directly targeted to a reduction of CO2 emissions, which are the main cause of global warming.

GHG mitigation

  • “The European Union is leading global efforts to reduce greenhouse gas emissions from human activities that are threatening to cause dangerous changes in the world’s climate. As the cornerstone of its strategy for cutting its own greenhouse gas emissions cost-effectively, the European Union has developed the EU Emissions Trading Scheme (EU ETS).” (Ref: CO_0202)
  • “The 2009 verified emissions from the sectors covered by the EU Emission Trading Scheme (EU‑ETS) decreased by 11.6 % compared to 2008 (EEA, 2010b).” (Ref: CO_0140)
  • “A large proportion of the GHG emission reductions achieved in Europe over the last two decades took place during the 1990s as a result of the economic restructuring that occurred mainly in eastern Europe. Further reductions were achieved as a combined result of policies and measures implemented to reduce GHG emissions, such as the EU Emission Trading Scheme (EU ETS), and more recently from the short-term effects of the global economic crisis.” (Ref: CO_0131)
  • “The flexibility that the EU Emission Trading Scheme (ETS) is designed to create may be limited by the need to meet national emission ceilings or local air quality limits at the Member State level.” (Ref: CO_0134)

Energy availability, production and consumption

  • “The EC expects that this regime will provide an incentive to companies to pursue rationalization and efficiency, leading to considerable reductions in the energy consumption levels.” (Ref: CO_5037)

Scarce resources of fossil fuels

The diffusion of the Emission Trading Scheme will probably boost the technological development of alternative fuels, thus decreasing the dependence of fossil fuels.

Interactions with the Social Domain

Tourist flows

  • “Whilst much debate continues on introducing aviation fuel tax as an emissions trading scheme for airlines it must be borne in mind that, for many developing nations, reliance on the benefits derived from tourism are considerable. Cheap airfares, thanks to the success of budget carriers, are appearing throughout the developing world, leading to increases in passenger volumes.” (Ref: CO_4010)

Interactions with the Economy Domain

GDP trends

  • “The EU ETS should allow the European Union to achieve its emission reduction target under the Kyoto Protocol at a cost of below 0.1 % of GDP, significantly less than would otherwise be the case.” (Ref: CO_0202)

Regional differences in economics

  • “Besides providing a cost-effective means for EU-based industries to cut their own emissions, the EU ETS is also channelling substantial amounts of investment and clean technology to developing countries and economies in transition, thereby supporting their efforts to achieve sustainable development. This is happening because the system allows companies to use credits from emission-saving projects carried out under the Clean Development Mechanism (CDM) and JI to offset a proportion of their emissions.” (Ref: CO_0202)

Availability of public and private resources and investments in the transport sector

  • “It is estimated that auctioning could raise an EU wide total of € 30-50 billion per year by 2020, depending on the carbon price. Governments have agreed that they should use at least 50% of this income to combat climate change, in both Europe and developing countries.” (Ref: CO_0202)

Foreign trade, globalisation

  • “The market is EU-wide but taps into emission reduction opportunities in the rest of the world by accepting credits from emission-saving projects carried out under the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation instrument (JI). The EU ETS is also open to establishing formal links with compatible mandatory cap-and-trade systems in third countries that have ratified the Kyoto Protocol.” (Ref: CO_0202)

Energy availability and prices

  • “In the first trading period; the price for 1 tonne of CO2 started at around EUR 7 per EUA[1], rising later to a maximum of over EUR 30 per EUA mainly due to limited liquidity in the market. At this time the power sector faced rising gas prices that incentivised a switch to coal power production; as a consequence emissions increased and thus the sector faced a shortage of allowances.” (...) The allowances price dropped sharply after the publication of the first verified emissions in April 2006 to below EUR 10 per EUA. (...) Commission's decision on the NAPs for the second trading period market participants expected that, even though allowances of the first trading period lost their value due to the excess of free allocation, the situation would be different in the second trading period. Prices decoupled and the value of 2009 EUAs rose up to nearly EUR 30 in July 2008. Due to the economic crisis, the production of industrial products as well as the demand for electricity and consequently the emissions fell in autumn and winter 2008. Since spring 2009, the prices for EUA have remained at round about EUR 15 for over two years.” (Ref: CO_0131)

[1]    European Union Allowance

Interactions with the Technology Domain

Technology development in general and innovation diffusion

  • “Pricing pollution emitted by energy use through environmental policies is an important driver for technological innovation and change (Jaffe et al., 2003).” (Ref: CO_5009)

Pollution abatement and monitoring

  • “By putting a price on each tonne of carbon emitted, the EU ETS is driving investment in low-carbon technologies. It has forced the cost of emissions onto the agenda of company boards, thus marshalling the ingenuity and creativity of the business community in finding innovative and least-cost ways to fight climate change.” (Ref: CO_0202)

Renewable energy production

  • “The EU ETS will be critical in driving a wide range of low carbon technologies into the market, so that the power sector itself can adapt its investment and operational strategies to changing energy prices and technology. For the ETS to play this role on the identified pathway to 2050, both a sufficient carbon price signal and long-term predictability are necessary. In this respect, appropriate measures need to be considered, including revisiting the agreed linear reduction of the ETS cap[1]. Other tools, such as energy taxation and technological support may also be appropriate to ensure that the power sector plays its full part.” (Ref: CO_0194)

[1]    Directive 2003/87/EC as amended by Directive 2009/29/EC foresees a linear reduction of the cap of 1.74 percentage points per year. This reduction is legally enshrined in the ETS and continues after 2020.

Energy efficiency

  • “The EU ETS (Emission Trading Schemes) is the European Union’s main policy instrument for improving efficiency and reducing CO2 emissions in the power and industry sectors. It is the world’s largest greenhouse-gas emissions trading scheme. It covers around 12000 installations and nearly 50% of all European Union CO2 emissions.” (Ref: CO_0153)
  • “In the implementation of the 20% energy efficiency target, the Commission will have to monitor the impact of new measures on the ETS in order to maintain the incentives in the ETS rewarding low carbon investments and preparing the ETS sectors for the innovations needed in the future. In this respect, appropriate measures need to be considered, including recalibrating the ETS by setting aside a corresponding number of allowances from the part to be auctioned during the period 2013 to 2020 should a corresponding political decision be taken. This would also ensure that the contribution to the energy efficiency target would be made in a cost efficient manner in both, the ETS and non-ETS sectors.” (Ref: CO_0194)

Impacts on Mobility and Transport

Increased cost for air transport

  • “From 2012 the EU ETS will also include CO2 emissions from civil aviation. This means airlines of all nationalities will need allowances to cover the emissions from their flights to, from or within the EU. Using emissions trading to tackle the fast-growing emissions from the aviation sector is fully in line with the EU’s obligations and which decisions taken by the 2004 assembly of the International Civil Aviation Organization.” (Ref: CO_0202)
  • “The impacts on air transport activity are expected to be somewhat neutral for airlines. Firstly, at economic and social levels, the EC’s studies indicate that companies will pass on, to a large extent or even in full, the cost of participating in the scheme to their customers, which by 2020 will represent an increase of €4.6 to €39.6 per flight, which is a value significantly lower than rises due to oil prices change in recent years.” (Ref: CO_5037)

The transport sector might be increasingly regulated by similar mechanisms

  • “Around 40 % of EU greenhouse gas emissions are covered by emission trading. Trading ensures that emissions are reduced as long as allocation plans are made properly, the market is transparent, and monitoring, reporting and verification works properly. At the same time, however, it is also based on a principle that over‑achievements in one year can be banked and used in another year. This way it allows for proper planning and predictability but at the same time makes over‑achievements less likely. Flexibility on emission reduction achievements thus arises mainly from sectors not covered by emission trading. With transport being one of the biggest sectors not covered by trading this means that transport represents, if not a 'low hanging fruit', at least one that may have to be picked.” (Ref: CO_0238)