United Kingdom

UK-2:EU Emissions Trading System (EU ETS)

Policy Description

The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The EU-ETS officially began on January 1, 2005 with a “warm-up” phase (phase I) from 2005-2007. The second phase (phase II) from 2008-2012 was set to coincide with the Kyoto compliance period and phase III runs from 2013 to 2020.  The EU ETS sets a cap on total direct GHG emissions for its participants (mostly energy generation and heavy industry) in participating countries but allowances can be traded internationally.

Description

The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively [1]. The EU-ETS officially began on January 1, 2005 with a “warm-up” phase (phase I) from 2005-2007. The second phase (phase II) from 2008-2012 was set to coincide with the Kyoto compliance period [2] and phase III runs from 2013 to 2020.  The EU ETS sets a cap on total direct GHG emissions for its participants (mostly energy generation and heavy industry in participating countries (*1)(*2).

Phases I and II (2005-2012)

Individual participants in phase I and II get a number of emission allowances for free and can buy additional allowances if they need more, assuming other participants have spare allowances to sell. The price of the allowances is aimed at influencing participants' decision to invest in emission reduction measures or to buy allowances when they are faced with a shortage of allowances compared to their actual emissions. In phases I and II, each country determines the total amount of allowances available for its national participants, but allowances can be traded internationally (i.e. there is no national cap on emissions).

The EU ETS phase I and II covers CO2 emissions from some 11,000 installations (see Target Group). Nitrous oxide emissions from certain processes are also covered. Between them, the installations currently in the scheme account for almost half of the EU's CO2 emissions and around 40% of its total greenhouse gas emissions.

Phase III (2013-2020)

The system for allocating emission allowances in the current phase of the EU ETS (phase III) has changed significantly compared to the two previous two phases (2005-2012). Emission allowances will be distributed according to fully harmonised and EU-wide rules, meaning that the same rules will apply across all EU Member States. A centralised EU-wide cap on emissions was introduced to ensure a more consistent approach across the EU, rather than country specific caps. The EU-wide cap is set at 2.04 billion tonnes of CO2 in 2013 and  will reduce by 1.74% each year, delivering an overall reduction of 21% below 2005 levels by 2020 [10].

For the power sector, allowances are primarily auctioned meaning that the majority of allowances under the EU Emissions Trading System will not be allocated for free. Sectors that are considered to be at risk of carbon leakage will receive 100% of their allowances for free. Sectors that are not considered at rik of carbon leakage will receive 80% of their allocation for free in 2013, declining annually to 30% in 2020 and 0% (i.e. full auctioning) in 2027.

The scheme has been expanded in Phase III to include petrochemicals, ammonia, and aluminum sectors; nitrous oxide emissions from acid production; and PFC emissions from the aluminum sector. Aviation emissions were also included in 2012, both for flights within Europe and those flying in and out of Europe. However, due to strong opposition from other countries, inclusion of the latter emissions has been suspended. A decision is expected in late September 2013 [11]

A few of the final product benchmarks for post 2012 EU ETS are included in the list below. For the full list see [3]. Note that this is based on a carbon leakage status for these products for the year 2013 and 2014 and that the full definitions and included processes can be found in the full list [3].

  • Coke: 0,286 allowances / tonne
  • Hot metal: 1,328 allowances / tonne
  • Aluminium: 1,514 allowances / tonne
  • Grey cement clinker: 0,766 allowances / tonne
  • White cement clinker: 0,987 allowances / tonne

The UK introduced a carbon floor price for the power sector due to the fluctuation in the carbon price in the EU-ETS resulting in uncertainties to the investors. At the 2011 Budget, the Government announced the introduction of a carbon price floor. The carbon price floor is a tax on fossil fuels used to generate electricity and and it amends the existing climate change levy (See UK-5) by applying CCL rates to gas, solid fuels and LPG used in electricity generation [12] and [13].

The floor price started at about £16 per tonne and was implemented from April 1, 2013.

 

Policy Information Expand this section for information on the key features of the policy, such as its date of introduction, categorization, main objective(s) and linkages with other policies.

Policy Categorisation

Policy Instrument Type: Economic, Administrative

Position in the Pyramid

About Us

Participation: Mandatory

Period

Start Date: 2005

Policy Linkages

Complements Enhanced Capital Allowance (ECA) Scheme Supporting Measure
Complements Pollution Prevention and Control (PPC) Act Supporting Measure
Complements Climate Change Agreements (CCA) Effort Defining
Supported By Climate Change Levy (CCL) Supporting Measure

Agencies Responsible

Department of Energy and Climate Change
Environment Agency

Primary Objective: GHG Emissions

Objective

To reduce GHG emissions in Europe at lowest cost (through trading)

Target Group

Cover electricity generation and the main energy-intensive industries – refineries and offshore, iron and steel, cement and lime, paper, food and drink, glass, ceramics, engineering and the manufacture of vehicles (*2) (*4) [5].

Driver of energy consumption or emissions affected by policy: Total GHG emissions

Implementation Information Expand this section for information on targets, monitoring, verification and enforcement regimes, and implementation requirements and tools.

Coverage

UK has around 1000 participants in the EU-ETS

Quantitative Target? yes

Target: 246Mt/yr (*5) The cap for the year 2013 has been determined at 2,039,152,882 allowances, i.e. just under 2.04 billion allowances. The cap will decrease each year by 1.74% of the average annual total quantity of allowances issued by the Member States in 2008-2012. In absolute terms this means the number of allowances will be reduced annually by 37,435,387. This annual reduction will continue beyond 2020 but may be subject to revision not later than 2025 [8]

Time Period: 2005 onwards

Progress Monitored? yes

Monitoring Done By

Organisation Type Organisation Name
Target Group Participants

Verification Required? yes

Verification Done By

Organisation Type Organisation Name
Government Agency Environment Agency

Enforced? yes

Enforcement By

Organisation Type Organisation Name
Third Party Commercial Verifiers

Sanctions: Penalty: €100/t CO2 not surrendered + make up shortfall Possibly revoking of permit to emit

Requirements on the Target Group

  • Obtain an emission permit for GHG emissions (subject to approved monitoring protocol)
  • Annual monitoring and reporting of emissions according to harmonised rules
  • Surrender each year enough allowances to cover the emissions of the previous year

Support by Government

No specific financial support is provided to ETS participants in addition to existing energy efficiency and renewable energy policies. The UK government does provide substantial technical support (via the UK Environment Agency as the competent authority for the EU ETS) in the areas of monitoring, reporting, verification, baseline data validation, application for allocations (including for new entrants), permitting procedures, registry transactions, etc. (See Implementation toolbox).

Implementation Toolbox

  • Tools are provided to support facilities in implementing the EU ETS. The most important tools relate to the monitoring, reporting and verification of emissions, the validation of base year data and the application of/changes to the ETS permit (including guidance documents, templates and examples). A helpdesk is available to participants [6].
  • ­The Environment Agency has launched the Emissions Trading Scheme Workflow Automated Process (ETSWAP), to complete and submit applications for emissions plans, verified emissions reports and change requests/variations to existing emission plans [2] .

Complexity of Implementation

Government

­Until 2013, National Allocation Plans must be developed, in which BaU scenarios for a large variety of industry as well as improvement potential (information asymmetry) must be assessed, competitiveness issues must be taken into account and made explicit, and new entrants reserves and auctions must be arranged [7]. To inform EU-harmonized allocation of permits under phase III, the UK government prepared a document outlining National Implementation Measures (NIMs) for submission in December 2011 to the European Commission. The methodology for determining free allocation is outlined in Commission Decision (2011/278/EU), adopted on 27 April 2011, after agreement by Member States in 2010.

Target Group

Develop explicit scenarios for production and emissions levels, develop benchmarks, take uncertain carbon price into account in investment decisions, participate in auctions.

Impacts, Costs & Benefits Expand this section to find information on policy effectiveness and efficiency.

Impact Quantitative Estimate Qualitative Estimate
Estimated effect on energy consumption or emissions
Estimated costs/benefits for industry
Estimated cost for government
Other Benefits
General Benefits Increased security of supply, reduced local air pollution, improvement of energy efficiency
Specific Benefits Better insight into emissions, better monitoring & reporting systems, better awareness of environmental and societal costs and ability to address risks associated with this.

References & Footnotes

References

[1] EU ETS European Commission’s Website (2012). http://ec.europa.eu/clima/policies/ets/cap/index_en.htm

[2] UK Environmental Agency (2012). ETSWAP - the EU ETS web portal. http://www.environment-agency.gov.uk/business/topics/pollution/134073.aspx

[3] Department of Energy and Climate Change (2011). The UK’s National Implementation Measures for Phase III of the EU Emissions Trading System. December 2011

[4] European Commission (2011). Decision of 27.4.2011: determining transitional Union-wide rules for the harmonized free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:130:0001:0045:EN:PDF

[5] DECC (2012). EU Emissions Trading System (EU ETS): http://www.decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/emissions/eu_ets/eu_ets.aspx

[6] Environment Agency. http://www.environment-agency.gov.uk/business/topics/pollution/32244.aspx

[7] Defra, Approved Phase II National Allocation Plan 2008-2012: http://www.decc.gov.uk/assets/decc/what%20we%20do/global%20climate%20change%20and%20energy/tackling%20climate%20change/emissions%20trading/eu_ets/euets_phase_2/phase_2_nap/nap-phase2.pdf

[8] Szabo, M., and Wynn, G., (2010). EU ETS CO2 emissions down 11.2 pct in 2009, Reuters, April 2010: http://uk.reuters.com/article/idUKLDE6300RV20100401

[9] MURE II Database on Energy Efficiency Policies and Measures (Industry). Available from: http://www.isisrome.com/data/mure_pdf/industry/UK11.PDF

[10] UK Government (2013). Participating in the EU-ETS. Available at https://www.gov.uk/participating-in-the-eu-ets#aviation-in-the-eu-ets

[11] European Commission (2012). Press Release. “Stopping the clock of ETS and aviation emissions following last week's International Civil Aviation Organisation (ICAO) Council”. Available at http://europa.eu/rapid/press-release_MEMO-12-854_en.htm

[12] UK Parliament (2013) Carbon Price Floor - Commons Library Standard Note. Available at http://www.parliament.uk/briefing-papers/SN05927

[13] HM Revenue and Customs (2013). Carbon Price Floor. Available at http://www.hmrc.gov.uk/tiin/2012/tiin4013.pdf

Footnotes

(*1) Currently 27 EU Member States + Norway, Iceland and Liechtenstein

(*2) DIRECTIVE 2009/29/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 April 2009: - Combustion of fuels in installations with a total rated thermal input exceeding 20 MW (except in installations for the incineration of hazardous or municipal waste), - Refining of mineral oil, - Production of coke, - Metal ore (including sulphide ore) roasting or sintering, including palletisation, - Production of pig iron or steel (primary or secondary fusion) including continuous casting, with a capacity exceeding 2,5 tonnes per hour, - Production or processing of ferrous metals (including ferro-alloys)where combustion units with a total rated thermal input exceeding 20 MW are operated. Processing includes, inter alia, rolling mills, re-heaters, annealing furnaces, smitheries, foundries, coating and pickling, - Production of primary aluminium, - Production of secondary aluminium where combustion units with a total rated thermal input exceeding 20 MW are operated, - Production or processing of non-ferrous metals, including production of alloys, refining, foundry casting, etc., where combustion units with a total rated thermal input (including fuels used as reducing agents) exceeding 20 MW are operated. Production of cement clinker in rotary kilns with a production capacity exceeding 500 tonnes per day or in other furnaces with a production capacity exceeding 50 tonnes per day, - Production of lime or calcination of dolomite or magnesite in rotary kilns or in other furnaces with a production capacity exceeding 50 tonnes per day, - Manufacture of glass including glass fibre with a melting capacity exceeding 20 tonnes per day, - Manufacture of ceramic products by firing, in particular roofing tiles, bricks, refractory bricks, tiles, stoneware or porcelain, with a production capacity exceeding 75 tonnes per day, - Manufacture of mineral wool insulation material using glass, rock or slag with a melting capacity exceeding 20 tonnes per day, - Drying or calcination of gypsum or production of plaster boards and other gypsum products, where combustion units with a total rated thermal input exceeding 20 MW are operated, - Production of pulp from timber or other fibrous materials, - Production of paper or cardboard with a production capacity exceeding 20 tonnes per day, - Production of carbon black involving the carbonisation of organic substances such as oils, tars, cracker and distillation residues, where combustion units with a total rated thermal input exceeding 20 MW are operated

(*3) For industry and heating sectors, allowances will be allocated for free based on ambitious (greenhouse gas performance-based) benchmarks. Installations that meet the benchmarks (and thus are among the most efficient installations in the EU) will in principle receive all allowances they need. Installations that do not meet the benchmark will have a shortage of allowances and the option to either lower their emissions (e.g. through engaging in abatement) or to purchase additional allowances to cover their excess emissions.

(*4) See Annex I of the original Directive (2003). As of 2012 also aviation, as of 2013 also non-ferrous metals, chemicals, installations for carbon capture and storage, see Annex I of the revised Directive (2009)

(*5) NB the quantitative target, i.e. the cap, is set at a system level for the EU ETS as a whole, among which all participants can trade. Therefore it is not possible to state a quantitative target for individual participants, or even for the UK participants as a whole. Note that the quantitative target mentioned here is the total amount of allowances allocated to the UK participants by the UK government average annual allocation for all UK participants between 2008-2012, including energy sector and industrial sectors. Of this, 107Mt/yr is for large electricity producers, 15Mt for CHP, 1.5Mt for installations in the service sector and 17Mt for the purpose of auctioning, and the remainder (106Mt) for industry [7]

(*6) This 12,5% reduction of the EU-ETS can not be fully attributed to the impact of the policy instrument emission trading. There are likely to be several reasons for this, including the impact of the economic downturn, the ETS incentivising abatement, the effect of other policies (such as renewables), and less coal and more nuclear power being used to generate electricity.

Other Useful Resources

EU Transaction Log

The European Commission has an online database containing information about emissions, allocations and transfers for every installation in the EU. The database is updated regularly with information from each country’s national registry.

EU Emissions Trading Scheme Fact-sheet

A fact-sheet on the background of the EU Emissions Trading Scheme provided by the EU Commission.