Emissions Trading Worldwide

The EU ETS
Preparing for Phase Four
Maja-Alexandra Dittel, Johannes Enzmann & Dalwon Kim
The European Commission
Background
The EU’s Emissions Trading System (EU ETS) is a cornerstone of
the EU’s policy to fight climate change. It covers more than 11,000
installations in 31 countries (28 EU Member States, as well as
Norway, Iceland and Lichtenstein) including airlines performing
aviation activities between EEA airports, and has created a functioning
market infrastructure and a liquid market.
Phase Four Revisions
In July 2015, the European Commission submitted a legislative
proposal to the Council and European Parliament to make the EU
ETS fit to enter Phase Four (2021–2030). The proposal is in line with
the political agreement of the European Council of October 2014,
to reduce greenhouse gas emissions by at least 40% domestically
by 2030.
Cap
In order to contribute to the 2030 greenhouse gas emission reduction
target, the sectors covered by the EU ETS have to reduce their
emissions by 43% compared to 2005. Therefore, the overall number
of emission allowances will decrease at an annual rate of 2.2%
from 2021 onwards, compared to 1.74% in Phase Three (2013–2020).
This means an annual reduction of 48 million tons CO 2 e amounting
to an additional aggregate reduction of 556 million tons CO 2 e
in Phase Four compared to continuing the current provisions.
Allocation and Carbon Leakage
In view of the decision of the European Council not to reduce the
share of auctioning, 57% of allowances will be auctioned in Phase
Four. It is expected that around 6.3 billion allowances will be allocated
for free in Phase Four.
The proposal fully acknowledges the need to maintain the
competitiveness of European industry. For this reason, it is proposed
free allocation to sectors exposed to the risk of carbon leakage
continues. However, the proposal aims at a more streamlined
and targeted list of sectors that should benefit from free allocation
under the carbon leakage provisions. Under the proposed measures,
the carbon leakage list may be considerably reduced and
finally only encompass around 50 sectors.
In the light of the positive experience with benchmark-based
free allocation, and the fact that the ambition level of the existing
benchmark values would decline over time due to technological
progress, the proposal foresees that the 54 benchmark values be
updated twice during the period 2021–2030 based on a methodology
that rewards innovative and fast moving sectors.
“The proposal fully acknowledges the
need to maintain the competitiveness
of European industry.”
Promoting Low Carbon Investments
In view of the 2030 targets, the proposal is designed to promote
low carbon investments and to support economic actors under
the EU ETS to cope with the challenges they face in the transition
to a low carbon economy.
cutting emissions
Faster emissions cuts after 2020
2013–2020 2021–2030
Additional emissions
reduction 556 million
tons CO 2
Figure 1: Emissions reductions in phase three and four of the EU ETS
© European Commission (2015), available at:
http://ec.europa.eu/clima/policies/ets/revision/docs/ets_revision_slides_en.pdf
Two funds are set up to this end:
• The Innovation Fund, under which 450 million allowances
will be reserved, in order to support innovation in low carbon
technologies and processes in renewable industry as well as to
stimulate the development and deployment of environmentally
safe carbon capture and storage of CO 2 . Demonstration
projects of innovative renewable energy technologies will also
be eligible. Projects in the territory of all Member States could
benefit from the Innovation Fund.
• The Modernisation Fund, from which lower-income Member
States with a GDP per capita below 60% of the EU average will
benefit. It is proposed to be financed by 2% of the total quantity
of allowances between 2021 and 2030. The Fund will support
investments with a view to modernizing energy systems and
improving energy efficiency in the eligible Member States. The
governance of the fund will involve an Investment Board with
representatives of Member States, the Commission and the
European Investment Bank.
8