Consolidating the EU Emissions Trading Scheme

Planning is well under way for the second phase of the EU Emissions Trading Scheme – and the European Commission will apply the lessons of the scheme’s operation to date when assessing Phase II emissions plans, says Stavros Dimas

In 2003, the EU Emissions Trading Scheme (ETS) was established as the major instrument to enable the European Union to meet its climate targets cost-effectively. With all participants and stakeholders mindful of both the novelty of the ETS and the strategic importance of it functioning well, it was agreed to kick off the scheme with a period of ‘learning by doing’ between 2005 and 2007.

Almost halfway through the learning period, we can now draw some initial lessons on how emissions trading is operating, and apply them to the second phase, which will run between 2008 and 2012. Preparations for this next phase are already well under way, with member states currently putting the final touches to their national allocation plans (NAPs) for submission to the Commission by 30 June.

The second phase NAPs are crucial. The bottom line is that they will need to ensure that member states, and the EU as a whole, meet their Kyoto targets, which run concurrently with the second phase of the EU ETS. As the Commission has made clear in its guidance to member states, those that are still some way off their Kyoto targets will have to use their national plans to reduce emissions.

In assessing the new NAPs in the second half of this year, the Commission will be tough where necessary, but we will also be fair.The 2005 emissions data for installations covered by the scheme, which we released on 15 May, indicate that some member states have allocated emission allowances on the basis of over-estimations by businesses of their projected emissions. In the second phase, full account needs to taken of the actual emissions when allocating the aggregate number of allowances.

Stavros Dimas: "To improve the way the emissions trading scheme functions in the second period, we need more of three things: simplicity, transparency and consistency"

To improve the way the emissions trading scheme functions in the second period, we also need more of three things: simplicity, transparency and consistency.

First and foremost, the second phase plans need to be simpler. In introducing the emissions trading scheme, the EU made a conscious decision to give market mechanisms a major role in our compliance efforts. In the second phase NAPs,we need to ensure that regulators resist their instinctive tendency to build in ‘command-and-control’-style rules and complexity. Companies should not have to make use of external consultants to understand the implications of a NAP.

A second priority is to boost the transparency of the allocation plans under preparation. Second period NAPs need to be made more accessible and more easily understandable to outside stakeholders in terms of the approach taken and the key data and assumptions underlying each plan. Even a high quality plan can create uneasiness and suspicion if it is not sufficiently transparent. In its guidance – released at the end of last year – the Commission has developed a set of tables for standardising the presentation of key data and assumptions in a transparent way.We are urging all member states to use these tables in their second phase allocation plans.

A third requirement is greater harmonisation and consistency. This is a wish that has been expressed by many stakeholders. It is, of course, in the nature of things that an allocation policy based on national plans, together with considerable margins of subsidiarity in the ETS Directive with regard to, for example, auctioning, the treatment of new facilities and the closures of plants, will inevitably lead to each plan being somewhat different.However, we need to ensure a certain degree of consistency in how the same industrial and energy sectors and the same types of installations are dealt with across the EU.

My main immediate concern in this regard is member states’ interpretation of the concept of combustion installations. The Directive requires member states to include all combustion installations above a capacity threshold of 20MW in their allocation plans. This seems to be a clear-cut approach. Nevertheless, in the first trading period, we have seen a variety of interpretations. The Commission has tolerated most of these, but I am determined to achieve a much higher degree of consistency in the second phase.

Finally, I would like to stress the importance of respecting the deadlines in the Directive for the second phase NAPs. By 30 June of this year, each member state needs to send its plan to the Commission and, by 31 December, each member state needs to take a final allocation decision based on the Commission’s reaction to its plan. The first phase taught us that the allocation process takes longer than planned, and this created uncertainties for many companies who started 2005 without knowing how many allowances they would be given for the 2005- 2007 period.We need to avoid such delays in the second phase.

Stavros Dimas is the European Union’s Commissioner for the Environment.

E-mail: stavros.dimas@cec.eu.int