Overview of European National Allocation Plans

Transcription

1 Research report no. 8, April 2006 Claire Dufour Alexia Leseur claire.dufour@caissedesdepots.fr alexia.leseur@caissedesdepots.fr Overview of European National Allocation Plans In order to facilitate meeting emission reduction objectives, as laid down within the framework of the Kyoto Protocol, the European Union has set up a scheme for trading CO 2 emissions allowances, which came into force in January The progressive start-up of institutional mechanisms to approve National Allocation Plans (NAPs) for the first trading period ( ) has influenced the behaviour of the various players on what is today the biggest trading market of CO 2 allowances. It covers 44% of greenhouse gas emissions in the European Union and particularly affects electricity producers. Although both the reduction targets and the industrial structure of the Member States differ, the evaluation of these first NAPs indicates a need to standardise certain rules of allocation. Greater transparency of future regulations is also desirable in order to simplify access to the scheme and to ensure economic and environmental efficacy. Figure 1 Geographical distribution of allowances for the first period ( ) Austria 1.6% Netherlands 4.2% Others 12.2% Germany 23.7% Czech Republic 4.6% United Kingdom 10.5% New EU member states 21.5 % Poland 11.4% France 7.4% Spain 8.3% Italy 10.6% Source: NAPs, DEHSt Directive 2003/87/EC requires Member States to provide National Allocation Plans, setting out the total quantity of allowances they intend to allocate for each period and the manner in which they propose to distribute these amongst installations. Slightly fewer than 11,000 installations, belonging to approximately 5,000 operators, have seen their CO 2 emissions capped at 6.57 billion tonnes of CO 2 for the period 2005 to Acknowledgements: the authors wish to thank Chiara Arcarese (APAT), Istvan-Laszlo Bart (Environment DG), Raimond van den Berg van Saparoea (SenterNovem), Frederic Hug (Elyo) Rohan Alleyne (DEFRA), Sébastien Merceron (D4E), Stefan Moser (Environment DG), and the German Emisssion Trading Authority (DEHSt). However any errors or omissions remain the sole responsibility of the authors. 1

2 I. Situation after one year of trading A. Timeframe By approving the Kyoto Protocol in April 2002, the European Council committed Member States to reducing their greenhouse gas (GHG) emissions by 8% compared to 1990 levels over the commitment period. In order to facilitate meeting this objective, the European Union (EU) has put in place a scheme for the exchange of allowances over two periods: the period which covers the setting up and trialling of the scheme, and the period, which corresponds to the Kyoto commitment period. Figure 2 Key dates in the establishment of the European Union Emission Trading Scheme World Ratification by Russia Kyoto Protocol comes into force First period of compliance with Kyoto International trading Europe EU ratification of Kyoto Protocol 13 October: European Directive establishing CO 2 emissions allowance market 27 October: «Linking directive»* 30 September: final date for EU allowance allocation for st phase of the EU Emission Trading Scheme (ETS) 2 nd phase of the EU ETS Phase I 28 February: European operators receive their allowances for March: Final date for submission of 2005 emission report 30 April: final date for surrender of allowances used by operators in May: publication of 2005 emissions data for all European installations Phase II preparation June: Mid-term review and notification of NAPs II Source: European Commission, Mission Climat * See glossary The declaration of emissions, the delivery of allowances corresponding to the emissions of the ongoing year and the allocation for the following year will be made every year until 2008 on the dates indicated in Figure 2. 2

3 The year 2006 plays a pivotal role for three reasons: The first data on emissions by European operators participating in the allowance trading scheme will be made public in May. This step will clarify the position of buyers and sellers in the market, when comparing allowances and emissions. The report on the operation of Directive 2003/87/EC (hereafter the Directive ) establishing a scheme for greenhouse gas emission allowance trading, presented by the Commission to the European Parliament and to the Council in June at the time of the Mid-term Review, should offer greater transparency to operators particularly with regard to regulations for the third period of trading from A decision could be made to bring in new sectors to the emission trading scheme and to harmonise allocation methods. The NAPs for the 2 nd phase must be provided to the Commission by the end of June 2006 and Member States will have to make a definite decision by 31 December 2006 on allocations by installation for the five years of Phase II. So at the end of the year, all installations participating in the allowance trading scheme will know the size of the allocation that they will receive annually until B. Initiation of the trading mechanism With the first trading of allowances on the organised market having commenced in February 2005, the start-up of the mechanism under the aegis of the European Commission has taken more than a year. The national plans of the 25 Member States were to have been notified by 31 March 2004 at the latest to the Commission, who would then have had three months to approve or reject the plans. The Greek plan was the last to be approved by the European executive in June Examination of the NAPs was therefore spread out over 15 months rather than three. This delay is mainly due to the late presentation of plans to the Commission by certain Member States. The majority of NAPs were approved subject to conditions. The two main types of amendment requested by the Commission have been the following: Removal of ex-post adjustments: a State cannot intervene in the market after the initial allocation phase and cannot modify amounts allocated to individual operators during the trading period ( ). Ex-post adjustments generate uncertainty for the operators it is unlikely that they will reduce emissions or sell their surplus allowances if they are not confident that the government will not amend their allocation in the course of the period in question. Germany, for example, had included in its NAP the possibility to adjust the allocation for installations where part of their activity has ceased or for installations where plant utilisation is less than originally anticipated. The Commission considered that these clauses would contradict the 10 th criterion of Annex III of the Directive, which stipulates that the quantities of allowances allocated to each installation must be determined at the outset in the NAP for the period in question; 3

4 Reduction of a given country s proposed allocation, since it was greater than projected emissions and not compatible with Kyoto objectives for the country in question. During the validation period the Commission asked for cuts of around 300 MtCO 2 for 14 plans out of the 25 submitted. The greatest reductions have been made on the Polish, Czech and Italian plans, who have seen their allowance envelope diminish by 47, 23 and 10 MtCO 2 per annum respectively. The market has taken this reinforcement of carbon constraint into account by an increase in price (see Figure 3). Figure 3 The effect of the institutional environment on the price of CO 2 35 Rejection of Czech plan (-10 MtCO 2 ) Rejection of Polish plan (-47,1 MtCO 2 ) Rejection of Italian plan (-23 MtCO 2 ) Decision of ECJ on UK NAP* jan.- 05 feb.- 05 mar- 05 apr.- 05 may- 05 june- 05 jul.- 05 aug- 05 sept.- 05 oct.- 05 nov.- 05 dec Price per tonne of CO2 Source: Point Carbon * See Box 1 on page 7 At the beginning of 2006 three countries - Italy, Hungary and Poland - had still not had their list of installations approved. The first two achieved this in March, but the Polish list of installations was still under discussion with the European Commission at the beginning of April. The approval of this list and the accreditation of the national registry 1 by the Commission are the two conditions that must be met in order to open the account of each installation on the registry and to deliver the allowances to its account. Distribution of allowances to installations is made in one of two ways, depending on the country: either the allowances are transferred directly by the government on the approval of the Commission, or they are indirectly transferred on application from the operator of the installation following confirmation of its emissions permit by the registry s administrator (see Figure 4). 1 The national registry ensures the registration in real time of ownership of the allowances. The registry only retains the amounts traded and does not contain any record of the allowance price. Accreditation of the registry means that it is technically operational. 4

5 Figure 4 - Description of the setting up process for the institutional mechanism Source: Mission climat Just as there will be an international registry of transactions, held by the UN, the European scheme provides for the establishment of an equivalent registry for administration of the trading of allowances among players in the European scheme. National registries are linked to the European registry, the CITL (Community Independent Transaction Log), administered by the Commission, which registers and verifies each transaction. Between March and May 2005, the German, British and French installations, which represent almost 41% of European allowances for the initial phase, received their allowances into their accounts. Germany chose to transfer the allowances directly - these make up 495 million allowances, which came on to the market at the beginning of March. The month of June, furthermore, has seen the transfer of the Austrian and Spanish allowances on the national registries (9% of total allowances). 5

6 Figure 5 Movement of allowances traded in 2005 and number of operational registries Nombre de quotas échangés Number of allowances traded (in MtCO2) (en MtCO2) Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Nombre Number de of registres operational opérationnels registries (cumul) (cum.) Nombre Number de of quotas allowances échangés traded sur les on marchés the market (en by MtCO2) mutual agreement and OTC (MtCO 2 ) Nombre de registres opérationnels Number of operational registries Source: Point Carbon and Mission Climat C. Scheme in place at the beginning of 2006 At the end of January 2006 there were still some difficulties affecting finalisation of the plans. The most problematic concerned Poland, Italy and the United Kingdom: Poland, which is the second most important beneficiary of allowances in Europe (more than 11%), was the only country at the beginning of April 2006 that had not reached an agreement with the Commission on its new list of installations submitted on 28 December It had therefore one month to validate its NAP, set up its registry, transfer allowances to the accounts and verify declarations of 2005 emissions from the 1,088 installations participating in the emission trading scheme; The United Kingdom successfully sued the European Commission in the European Court of Justice (ECJ) in November 2005, in the face of the refusal of the Commission to increase its total allocation by 2.7%. The Commission has not appealed this decision, but has rejected the British demand all the same (see Box 1). The final outcome of the case could set a legal precedent, and at the same time open the way for renegotiations of the NAPs with regard to both the national ceilings of allocated allowances and the initial individual allocated allowances, the latter being likely to entail exemptions, like all forms of ex-post adjustment; The final Italian NAP was approved by the Commission in February and it was linked to the CITL registry in March. The delay in finalisation of the Italian NAP, which represents 10% of the European allowances, has prevented the stakeholders from trading on the carbon dioxide market for more than a year. 6

7 Box 1 The decision of the European Court of Justice (ECJ) of November 2005 Stand off between London and Brussels - 30 April 2004, Britain submitted its NAP, which allocated 736 MtCO 2, adding that the proposed NAP was provisional, pending the results of public consultations. - In its decision of 7 July 2004, the Commission ruled amongst other things that certain aspects of this plan were incompatible with some criteria of Annex III of Directive 2003/87, and set a deadline of 30 September for the United Kingdom to amend the plan, taking into account installations situated on Gibraltar and indicating means of permitting new entrants to participate in the scheme. - The United Kingdom forwarded the changes to its NAP on 10 November 2004, proposing an increase in its allowances to MtCO 2 to take account of the latest emissions forecasts. - On 12 April 2005, the Commission declared this change to be unacceptable. London goes to court - Britain submitted its case to the ECJ s Court of First Instance on 5 May 2005 requesting that the Commission s decision be overturned. - On 23 November, the ECJ overturned the European Commission s decision of 12 April 2005, declaring on the one hand that the Commission could in no circumstance prevent a country from proposing changes and on the other hand, that it would have to prove in what way this increase in allowances constituted a threat to the stability of the market. The Commission was therefore obligated to take into account the British amendment. The Commission has not appealed the ECJ decision. On 22 February 2006, however, the Commission rejected the demands of the British government: the Commission s obligation to take into account amendments submitted by Member States ceased on 30 September 2004, so the United Kingdom made its application for an amendment a month and a half too late. These uncertainties are still creating obstacles for players in the market today. Transparency on the market has nevertheless increased in the course of 2005 with the progressive establishment of the registries. Over the whole of 2005, transactions amounted to more than 260 millions tonnes, i.e. 12% of the total European allowances. All procedures should be finalised by June 2006, which will allow all parties concerned to use the market mechanism to achieve their carbon constraint. 7

8 II. Geographical and sector distribution of allowances: global view of the first European allocation phase A. Weighting of individual countries in the EU emission allowance trading scheme Each of the twenty-five Member States of the European Union (EU25) has allocated allowances to installations included in the sectors mentionned in Annex I of Directive 2003/87/EC 2 so as to meet the GHG emissions reduction required by the Kyoto Protocol. The EU25 countries have made different commitments according to their level of development and the carbon intensity of their economy 3. Thus Germany and Denmark are committed to reducing their greenhouse gas emissions by 21% in relation to 1990, Britain by 12.5% and Italy by 6.5%. At the other end of the scale, countries such as Spain, Portugal and Ireland do not have to reduce their emissions compared to 1990 levels, but must however control the increase in emissions: a maximum of +15% compared to 1990 for Spain, +27% for Portugal and +13% for Ireland. France, mainly as a result of the overall low emissions of its electricity system, must maintain its emissions at 1990 levels, which constitutes a major effort with regard to the current situation. Finally, the 10 new Member States of the EU must reduce their emissions by 8% compared to 1990 levels 4, except for Hungary and Poland where the reduction objective was 6% compared to For these 10 countries, which have seen strong reduction in their emissions following the collapse of the Soviet economy in 1990, the effort at reduction in actual fact corresponds to a limitation on any increase of their emissions of greenhouse gases since Two countries escape this regulation - Malta and Cyprus have allocated allowances to two and thirteen installations respectively even though the two countries do not appear in Annex B of the Kyoto Protocol, which lists countries commited to reducing their GHG emissions. Malta and Cyprus are prepared to participate in the European effort by allocating 5.7 MtCO 2 per annum to its installations, Cyprus has set itself the objective of reducing emissions of its sites subject to allowances by 6% compared to the average of its emissions from 1990 to 2003, while the island of Malta has committed itself to not producing more than +32% of its 2000 CO 2 emissions, foreseeing the introduction of a significant number of new installations. The fixing of a global emission cap corresponding to an effort in reduction, and then its distribution amongst the installations, constitute the starting point for the allowance trading scheme. Indeed, all other things being equal, the fixing of a cap is what makes carbon dioxide scarce and valuable. 2 See paragraph B 3 The carbon intensity represents the ratio between CO 2 emissions and the Gross Domestic product (GDP). 4 Certain signatory Parties of the Protocol with economies in transition can use a different basis year to 1990: Bulgaria (1988); Hungary (average from 1985 to 1987); Poland (1988); Romania (1989) and Slovenia (1986). 8

9 Pays Table 1 Distribution of allowances and installations within the EU25 No. of allowances No. of allowances allocated p.a. in MtCO 2 (incl. allocated for whole period in MtCO 2 (incl. % of allowances allocated to each No. of installations initially concerned No. of installations included in No. of instal- lations excluded temporarily TOTAL of installations % of installations concerned in relation to rapport au total reserves) réserves) country "opt-in" * (opt-out) * concerned Germany % % Poland % % Italy % % UK % % Spain % % France % % Czech Republic % % Netherlands % % Greece % % Belgium % % Finland % % Portugal % % Denmark % % Austria % % Hungary % % Slovakia % % Sweden % % Ireland % % Estonia % % Lithuania % % Slovenia % % Cyprus % % Latvia % % Luxembourg % % Malta % % TOTAL % % Sources: NAPs, European Commission and DEHSt * See glossary and details in Section III Note: Allocations corresponding to installations temporarily excluded from the scheme are subtracted here from the number of allowances allocated, except for Poland and Belgium, which in February 2006 had not received the approval of the Commission for these exemptions. This table highlights three important facts: More than 70% of allowances are held by six Member States: Germany (23%), Poland (11%), Italy (10%), United Kingdom (10%), Spain (8%) and France (7%); Germany alone has allocated twice as many allowances as Poland, which is however the 2 nd most important beneficiary of allowances in Europe; 80% of installations are situated in the EU15 and, among the new Member States, the main stakeholders are Poland and the Czech Republic, which hold approximately 75% of the allowances of new Member States of the EU and more than 15% of European allowances. If the allocation of allowances among the various Member States is highly heterogeneous, this also applies to the installations. The Lorenz concentration curve shows that the majority of allowances are held by a very limited number of installations: 10% of the installations of the six countries holding the most allowances (Germany, Spain, France, Italy, Poland and the United Kingdom) have received approximately 83% of total allowances allocated by those countries for the initial period. The distribution of the allowances shows a tendency to concentration in all countries. Moreover, it can be seen that it is stronger for example in Poland than in France: 10% of installations hold almost 90% of allowances in Poland, as opposed to 75% in France. 9

10 Figure 6 Distribution of allowances by installation: the Lorenz curve applied to 6 principal European NAPs 100% 90% 80% % of allowances received 70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100 % % of installations concerned Equal distribution Distribution of allowances of 6 main countries * Distribution of French allowances Distribution of Polish allowances Source: Mission climat from NAPs * Germany, Poland, Italy, UK, Spain and France Figure 6 reveals two significant facts. On the one hand, the allowance trading scheme affects a large number of small operators, i.e. installations that emit comparatively little CO 2. These installations bear higher administrative costs compared to the amount of carbon emission that they represent. It would seem appropriate, therefore, to introduce a single minimum emission, thereby excluding the smallest installations 5. On the other hand, with 10% of installations holding more than 80% of European allowances, the efficiency of the market may be compromised by the behaviour of the more dominant players. The changes taking place will repay careful observation as the market matures. One example is enough to illustrate the concentration of allowances in a small number of operators: approximately 17% of French allowances have been allocated to 6 installations belonging to the steel producer Arcelor, which therefore holds almost all French allowances for the metal sector. Furthermore, European allowances are mainly held by the energy sector. In Germany, for example, five big electricity production companies (RWE, Bewag, E.ON, EnBW and STEAG) collectively hold 50% of German allowances (see Figure 11 in Annex). The 24 installations of RWE have received 119 Mt of allowances per year, therefore more than the allowances allocated for the whole Czech Republic, and almost 80% of French allowances. Consideration from a sector perspective allows a better understanding of the importance of the energy sector within the scheme. 5 See Section III, paragraph B 10

11 B. Which are the sectors concerned? In conformity with Annex I of the Directive, allowances have been allocated to installations in sectors involved in the following activities: the production of energy comprising: o combustion installations with a rated thermal input exceeding 20 MW in all sectors: this includes heating systems and large-scale boiler systems, for example those used in hospitals or any other public institutions, and industrial burners; o refineries; o coke ovens. industrial production comprising the production and processing of ferrous metals (mainly steel production), mineral industry (production of cement, lime, glass, ceramics, etc.) and the paper industry. Figure 7 Distribution of allocations in Europe by sector Cement, glass & lime 12% Paper 3% Others 9% Metals 12% Energy - Combustion 56% Refining 8% Source: Estimation from Point Carbon The majority of allowances are allocated to energy production (coal, gas or oil-fired power stations and thermal power stations) and to refineries. Electricity producers, at the heart of the energy sector, are the principal beneficiaries: the 23 biggest European companies, producing 70% of Europe s electricity, hold approximately 30% of European allowances and 54% of energy sector allowances 6. 6 Source: Facteur carbone européen. Comparaison des émissions des CO 2 des principaux électriciens européens Les cahiers du développement durable, PricewaterhouseCoopers and Enerpresse, November

12 Figure 8 Allocation distribution by activity in Germany, Spain, France, Italy and United Kingdom Percentage of allowances allocated for each activity 100% 3% 7% 90% 10% 5% 14% 7% 80% 18% 10% 6% 70% 13% 7% 60% 9% 50% 40% 79% 75% 30% 63% 20% 10% 0% Germany Energy: combustion Metal Glass Paper and others 57% United Kingdom Italy Spain 12% 19% 13% 49% France Energy: refineries and coke ovens Cement and lime Ceramics, tiles, bricks Source: NAPs The five countries in Figure 8 are those which have allocated the most allowances, except for Poland. Allowances of the Energy-Combustion sector are shared between two sub-sectors: electricity producers and other combustion installations. For all countries, with the exception of France, more than 50% of the total of national allowances has been allocated to electricity producers. The electricity sector plays a major role in the allowance trading scheme, particularly in Germany and the United Kingdom. For these two countries, the very large share of allowances allocated to the energy sector and more precisely to electricity producers is explained by massive use of fossil fuels and particularly by the high proportion of coal in their electricity generation 7. Spain also consumes a great deal of coal but 44% of its electricity generation comes from renewable sources, particularly hydro and from nuclear power, both low in GHG emissions. In France, nuclear energy represents almost 80% of electricity production, which explains the minimal role of this sector in the allocation of allowances: a mere 24% of allowances have been allocated to producers of electricity. In Italy electricity generation is principally based on gas and oil. 7 The CO 2 content in tonnes per MWh of electricity produced is approximately 0.9 tco 2 /MWh for coal, 0.7 tco 2 /MWh for oil and approximately 0.5 tco 2 /MWh for gas. 12

13 C. Percentage of covered emissions The portion of GHG emissions and the portion of CO 2 covered by the European market are represented in Figure 9. Figure 9 Percentage of GHG emissions and CO 2 emissions under CO 2 allowances 80% 74% 70% 60% 50% 40% 30% 62% 49% 58% 43% 53% 46% 44% 41% 38% 28% 38% 44% 54% 20% 10% 0% Poland Germany Spain Italy United Kingdom France EU 25 Annual allocation/ghg emissions in 2003 Annual allocation/co2 emissions in 2003 Sources: Mission climat from data from UNFCCC and NAPs The European CO 2 emission allocation market covers 44% of European GHG emissions: it is therefore essential to the EU as an instrument to limit GHG emissions, but it is not sufficient as the remaining 56% includes the CO 2 emissions not covered (i.e. 46% of total CO 2 emissions), and the emissions of other greenhouse gases (18% of total European GHG emissions). Due to the nature of the emissions in certain countries, the allocation market is in some cases the main policy to be implemented to fight climate change: this is the case for Poland in particular, as 62% of its greenhouse gas emissions are covered by the emission trading scheme, i.e. almost three quarters of its CO 2 emissions. For Germany, Spain and Italy, the percentage covered by the scheme represents more than 40% of total GHG emissions. This is due to the preponderance of CO 2 emissions from energy sources being covered by the trading scheme in the total GHG emissions. CO 2 is Europe s principal greenhouse gas (82% of total emissions) and is the only gas affected by the emission trading scheme. Most of its emissions come from the energy sector and industry, which are the sectors affected by the allowances. 13

14 Figure 10 Distribution of GHG emissions in % 90% 16% 15% 18% 14% 14% 27% 18% 80% 70% 60% 21% 34% 33% 37% 37% 34% 50% 46% 40% 30% 20% 10% 62% 51% 49% 49% 48% 29% 48% 0% Poland Germany Spain United Kingdom Italy France EU 25 CO 2 emissions : energy and industry CO 2 emissions: other sectors Non CO 2 emissions (CH 4 et N 2 O) Sources: Mission climat from data from UNFCCC and NAPs NB: The CO 2 from energy and industry covers energy categories with the exception of transport emissions and industrial processes under the UNFCCC classification. In the report that it should present in June 2006, the Commission could decide to extend the scheme to include other GHGs (methane, nitrous oxide, fluorinated gases, etc), which in Europe represent 18% of GHGs. The inclusion of other fairly big polluters such as the chemical industry, aluminium smelting and air transport (2.2% of European GHGs) is therefore envisaged. However, the allowance trading scheme does not seem to be the best instrument for all sectors for achieving a reduction in emissions: it would hardly be appropriate to allocate allowances to sectors such as transport, building and agriculture, because of their very diffuse and difficult to measure emissions, although they represent a large part of European emissions, particularly in France (43% of emissions) and in Spain (35% of emissions). 14

15 III. Allocation methods: general principles declined in various ways depending on individual Member States A. Methodology for the allocation of allowances to existing installations 1. Importance of the grandfathering criterion Each sector (energy and industry) and sub-sector specified in Annex I of the Directive has received allowances for the period according to the volume of their emissions over a past reference period selected by each Member States. This approach is justified by the principle known as grandfathering, according to which it is considered that the installation has acquired the right to produce emissions, assessed in terms of its past emissions, while new installations must conform to a new standard. The allocation, calculated on the basis of past emissions, has been corrected in relation to reduction objectives desired for each sector and the possibilities of emissions reduction, which vary from one sector to another according to the technology available and the growth anticipated. With the exception of Germany, Luxemburg and Malta, who have calculated the allocation for each installation directly, Member States have set up allocation by sector and sub-sector, typically determined by a formula such as that in Box 2. Each installation has then received an allocation according to its historic percentage of the emissions of the sector in the reference period. Box 2 Exemple of formula for determining allocation by sector Allocation = Historic emissions of years of reference (average) x rate of growth in sector x technical progress factor x compliance factor Comments: i) The technical progress factor represents the technological potential for the reduction of emissions in the sector. It can be calculated using a benchmark, an indicator that takes as its reference the best available technology used by similar operators. No country has taken this into account on a systematic basis. ii) The compliance factor corresponds to the reduction objective for the sector. The Member States have often applied a more ambitious compliance factor for energy sectors than for industrial sectors. For example, Sweden has defined a compliance factor of 0.8 for combustion installations (i.e. a reduction of 20 % in comparison with historical emissions) whose principal activity is electricity generation, and a factor of 1 for the other sectors 8. Austria has used compliance factor of for energy sector installations (i.e. a reduction of 2.6 %) and of for industry sector installations (a reduction of 2.2 %). iii) The formula is generally modified by a correction factor taking into account certain sector specifics, such as emissions linked to industrial processes. Although the formula has been the same for almost all countries, each Member State has been able to take into account to some degree its particular circumstances and use different factor values. Furthermore, reference periods used by the European NAPS are not harmonised: even if they all take into account past emissions, the fact that they refer to different years affects the amount of the allocation, all other things being equal. Some countries, like France for example, have even used different reference years for different sectors. 8 A compliance factor of 1 is equivalent to limiting emissions to those of the year of reference. 15

16 2. Alternative consideration of early action Fifteen countries have laid down special regulations for installations which have made efforts to reduce greenhouse gas emissions prior to the years of reference. This involves regulations that have a direct impact, such as granting a bonus in the form of allocations, or regulations that have a more indirect impact, which generally modify aspects of the allocation formula: lengthening the reference period in order to take into account years before changes in technology and thus increasing the allocation; definition of a correction factor; or alternatively, introduction of benchmark factors for certain sectors. Table 2 Early action Method for taking into account early Country action Benchmarks Austria, Denmark, Lithuania, Netherlands Extending reference period Belgium, Finland, Slovakia (for industrial installations only), Estonia, France (for some sectors) Other (allocation bonus, by means of a reduced compliance factor in the allocation formula etc.) No special regulation Czech Republic, Germany, Hungary, Italy, Latvia, Poland Cyprus, Spain, Greece, Ireland, Luxembourg, Malta, Portugal, Slovenia, UK, Sweden Source: DEHSt Certain countries therefore have chosen to encourage manufacturers who have voluntarily made efforts to reduce emissions. Operators in the 11 countries not profiting from special measures appear to be slightly disadvantaged compared with their neighbours. Fore example, within a particular sector, if a Spanish operator has invested of his own accord in emission reduction, he will receive fewer allowances than his French competitor who has also already invested in new technologies, other factors being equal. 3. Emissions linked to industrial processes Industrial emissions are divided into two categories: emissions associated with the consumption of energy and emissions associated with industrial processes. The former stem from the combustion of fossil fuels while the latter result from a chemical reaction linked to industrial transformation activities. About half the Member States have distinguished these two sources of emission in their allocation formulas. The aim of this distinction is to take account of the technological limitations of some processes, in order to expect a less significant effort at reduction of their emissions: the allocation is more generous because it is more expensive to achieve an equivalent reduction. This is the case, for example, in the steel and cement sectors. For the latter, some of the emissions are linked to energy combustion, and the rest to the chemical process of limestone conversion. 16

17 Table 3 Treatment of emissions linked to industrial processing by country Treatment of emissions linked to Country industrial processing Taken into account by means of the Germany, Austria, Denmark, Spain, France, Finland, sector cap: the compliance factor is Greece, Italy, Luxembourg, Slovenia, Sweden equal to 1 (see Box 2). Taken into account by means of the United Kingdom, Lithuania sector cap: rate of growth is most important (see Box 2). Others Cyprus, Hungary (allocation formula does not include correction factor), Malta, Netherlands (uniform correction factor), Czech Republic (emissions linked to process are taken into account in the calculation of the cap for the sector if they constitute more than 5 % of total emissions) Source: DEHSt NB: Information is not available for other countries. 4. Auctioning part of the allocation Article 10 of Directive 2003/87/EC legislates that Member States so desiring may choose to offer up for auction up to 5% of the country s allocation for the initial period ( ) and up to 10% for the second period ( ). The Commission recommends that Member States make maximum use of this option for the 2 nd period. Auctioning a portion of the allocation allows increased liquidity in the market, especially when limited visibility in the development of regulations leads operators to prefer to retain their allowances whereas their marginal costs for emission reductions will place them in the position of seller on the market. It is also a source of revenue for the government, which allows it to cover part of the administrative costs for administration of the scheme. Only four countries have chosen to make use of this option for their allocation during the first period 9. Country Table 4 Allocation auctioned Portion of allocation for sale Number of allowances for sale (MtCO 2 ) Denmark 5 % 5.02 Hungary 2.5 % 2.34 Ireland 0.75 % 0.50 Lithuania 1.5 % 0.55 Total (percentage of the allocation for these % 8.42 countries) Total (percentage of allocation of EU25) 0.13 % Source: NAPs All countries have allocated allowances gratis to all existing installations and have established a supplementary reserve made up of allowances to be auctioned. Anticipated utilisation of the profits differs between countries: Ireland, Denmark and Lithuania intend to use this resource to cover the administrative costs of the trading scheme, while the Hungarian sales will finance national measures for climate protection. In January 2006 Ireland put up for sale 250,000 allowances in lots of 500. The auction was open to any European operator holding an account on a registry linked to the CITL. Total 9 Furthermore, 11 countries have chosen to auction reserve allowances not distributed by the end of the period. See Table 5 on page

18 allowances put to auction were sold to 5 bidders at a price of per allowances, thus generating an income of more than 6 million euro for the government. The price per allowance achieved at auction was very similar to the prices on the market and OTC, which were on the day the auction closed. Lithuania, Hungary and Denmark are in the process of formulating regulations for auction procedures. However Lithuania, who is seeing a rush of new applicants, will probably reduce the quantity of allowances offered for auction, in order to increase their reserves, after which they are allocated gratis to new entrants. B. Applications with slight differences between countries 1. Definition of combustion installation The definition of a combustion installation is not identical from one NAP to the other. Two definitions have been used: a wide definition, covering all combustion installations of a capacity greater than 20 MW that produce energy, whether the combustion material is separate or integrated into the production process; a narrow definition which only covers installations of a capacity greater than 20 MW where the activity is centred on generation of electricity or heat or where the combustion material is not integrated into the production process. For example, industrial furnaces used for activities not listed in Annex I are not included in the NAP according to this definition. Thirteen countries have chosen the narrower definition: Austria, Czech Republic, Finland, France, Germany, Greece, Italy, Luxembourg, Poland, Portugal, Spain, Sweden and the United Kingdom. This definition therefore affects 85 % of total allowances distributed. The other countries have chosen the wider definition. 2. Unilateral inclusion and temporary exclusion of installations Eight countries have made special application to the Commission to include unilaterally (optin) or exclude temporarily (opt-out) installations from the Emissions Trading Scheme. Opt-in: Four countries have decided to include installations with a heat capacity of less than 20 MW for two main reasons: to avoid creating distortions in competition between several installations and to reward voluntary participation in the Emissions Trading Scheme. Thus Finland and Sweden have decided to include heat distribution installations with a capacity equal or less than 20 MW so that they do not compete unfairly with other installations producing heat for the same network. Austria has included a hospital cogeneration system, and Slovenia and Latvia have included respectively 15 and 23 installations, which have chosen, despite their small scale, to participate voluntarily in the Emissions Trading Scheme, on account of their experience in monitoring their emissions. Opt-out: Requests to opt-out submitted by some countries have been justified by two principal considerations: the existence of a national policy constraining CO 2 emissions, or the small scale of the installations. 18

19 In the United Kingdom, 329 installations have been excluded because of their participation in Climate Change Agreements (CCA 10 ), and 59 form part of the UK Emissions Trading Scheme which was initiated in March The installations participating in the CCA belong to diverse sectors (combustion, ceramic, steel and cement production) while all installations taking part in the UK Emissions Trading Scheme are installations concerned with combustion (platforms for gas and oil production and exploration). The Commission considered that they would not cause competitive distortion insofar as these excluded installations will be subject to the same commitments and the same sanctions as they would if taking part in the European scheme. The Netherlands have excluded 150 installations, including 142 installations that individually emit less than 25,000 tco 2 per annum, i.e. collectively less than 1% of emissions of Dutch installations participating in the scheme. The eight other installations participate at a level of around 6% of emissions of operators subject to allowances. The Commission has allowed the exclusion of these small installations because the Netherlands is one of the few countries to have chosen a wide definition of combustion installations. Meanwhile Belgium and Poland have proposed the temporary exclusion of respectively 22 and 212 installations deemed not suitable for participation in the European scheme. In Poland s case, the proposal is to exclude installations emitting less than 5,000 tco 2 per annum. The Commission has not yet delivered its decision. Here one can see one of the complications of the next phase of the European scheme the majority of these excluded installations are very small installations bearing very high costs for participation in the scheme in relation to the low environmental benefit derived from their inclusion. It would be possible to exclude installations by introducing an emission threshold of 5,000 to 25,000 tco 2 per annum and/or raising the capacity threshold of the installations concerned to 50MW, without damaging the principles of the allocation scheme. In France, withdrawal of the lowest polluting installations would reduce by almost 50% the number of operators subject to the scheme, but reduce the total quantity of allowances by only 4%. The objective would therefore be to focus the market on the biggest polluters in order to reduce the transaction costs associated with allowances trading: following up emissions, verification, accounting, access to markets, etc. C. Mechanisms for entry into and exiting from the scheme 1. New entrants Member States are obliged to detail in their NAPs the number of allowances that they wish to reserve for new participants in the emission allowance market, termed new entrants. The definition of a new entrant differs from one country to another. Generally, the countries have fixed a date from which the installation is considered to be involved in the market, the date of 31 December 2004 being the most often used. Extensions to installations are also treated as new entrants. The delivery of allowances to the account of the new entrant is carried out on 28 February of each year, as for any operator. The new entrants receive allowances that are drawn from a reserve, the initial size of which is set down in the NAP, taking into account suggestions from the organisations of the various sectors participating in the Emissions Trading Scheme. In order to determine the quantity of allowances to allocate to a new installation, most countries have chosen to base the allocations on the emissions forecast, but evaluated by benchmark: according to the capacity and the type of installation entering the market, the allowances are allocated on the basis of the emission factor of the best technology available to the sector. 10 The CCAs are voluntary agreements between businesses and the government that fix objectives for energy. The businesses concerned are subject to a tax (a levy on energy use in the industry and commerce sectors, as well as the public sector), which is only payed at a level of 20 % if the company achieves its objectives. They are able to participate in the UK Emissions Trading Scheme to buy and sell emission credits. 19

20 Box 3 - Allocation to new entrants: methodology applied by Germany Allocation = installation capacity x average use predicted (number of hours) x emission factor for best technology available for this type of installation x compliance factor Even if the majority of countries have elected to use this method, the emission factors applied, derived from national benchmarks, are not the same from country to country, especially for electricity generation. For example, Germany applies a maximum emission factor of 0.75 kgco 2 per kwh produced and a minimum of kg CO 2 /kwh for new heating plants. This factor is derived from the average of emissions linked to electricity generation by coal and gas fired power stations. On the other hand, the United Kingdom uses a factor of 0.3 kg CO 2 per kwh produced for all new power stations, in reference to emissions by a gas fired combined cycle power station. France also uses this reference although nuclear technology, highly developed in France, is a priori one of the best available technology from the GHG emissions point of view. Furthermore, the compliance factor is not applied universally Germany has chosen not to impose this on new entrants, while France uses a factor of (i.e. an effort of 2.43%). Table 5 Reserves for new entrants Pays Reserves (MtCO 2 ) Reserves in % of total sum of allowances What happens to unused allowances at the end of the period? United Kingdom % Sale by auction Italy % Sale on the market France % Cancelled Spain % Cancelled Greece % Sale by auction Portugal % Sale by auction Germany % Cancelled Czech Republic % Sale by auction Belgium % Sale on the market Netherlands % Sale by auction Denmark % Cancelled Poland % Sale by auction Finland % Sale on the market Malta % N.P. Sweden % Sale by auction Slovakia % N.P. Lithuania % Cancelled Estonia % Sale on the market Hungary % Sale by auction Latvia % Cancelled Luxembourg % Sale on the market Ireland % Sale by auction Austria % Sale by auction Slovenia % Sale by auction Cyprus % N.P. TOTAL % Source: NAPs, MEDD/D4E N.P: Not provided 20

21 A special reserve, representing a total of 3% of European allowances, has been created for each country. The size of the reserve varies significantly between different countries, according to their estimates of the emergence of new entrants and the quantity of allowances to be allocated to them. The United Kingdom and Italy are the countries that have allowed for the biggest reserve, 46 Mt and 44 Mt respectively. New entrants automatically receive their allocation free of charge in all countries, as long as the number of allowances remaining in the reserve is sufficient. In cases where the reserve allowed is not sufficient to satisfy the demand, some countries, such as Italy and France, plan to buy allowances before the reserve is exhausted and to allocate allowances free of charge to all new entrants. But this is not the case in all countries the British and German NAPs specify that if the demand for allowances is greater than the quantity available in reserve, the new entrants must buy the allowances on the market, unless an installation shuts down and makes allowances available. The methodology for allocations to new entrants and the question of them being absolutely free of charge will be two fundamental parameters when taking into account carbon values at the time of the new entrant s decision to invest although the United Kingdom and Italy have an almost equal reserve, an operator is certain to receive his allowances without charge in Italy while he may perhaps have to pay for them if he decides to base himself in the United Kingdom. Allowances unused from one year to the next remain in the reserve. For the last year of the first period (2007), they will be, depending on the country, either cancelled, or put up for sale on the market or by auction from 1 March 2007 within the limit of 5% of the total authorised allocation. 2. Installations closure A closed installation is one that has shut down. It is also sometimes defined as an installation whose emissions are less than average emissions historically or than those of the reference year or of the initial allocation. Only Dutch and Swedish closed installations can keep their allowances until the end of the period. In Ireland the outgoing installation returns its allowances, which are then put up for auction. Other Member States have elected to put allowances not used by the operator into the reserve at the time of shut-down. This last regulation encourages manufacturers to continue to operate, even at a minimum, an installation that is a substantial emitter of CO 2 in order to preserve their allowances, rather than pass them on to a new installation that emits less CO 2. However this incentive is in part mitigated by the decision by certain Member States to permit the transfer of allowances from the old to the new installation, as for example in Germany. 21