EU unveils plans to beef up carbon trading scheme[fr][de] 

After months of intense discussions with member states, business and environmental groups, the Commission, on 23 January, unveiled its plans for a reformed Emissions Trading Scheme. 

The main elements of the new system, which would enter into force in 2013 and run until 2020, are the following: 

• Total EU industrial emissions in 2020 capped at 21% below 2005 levels – i.e. a maximum of 1720 million allowances. To achieve this EU-wide target, which replaces the current 27 national targets, the total number of emissions allowances circulating at the end of 2012 will be cut by 1.74% annually. 
• Scope: The scheme will be enlarged to include new sectors, including aviation, petrochemicals, ammonia and the aluminium sector, as well to include two new gases (nitrous oxide and perfluorocarbons), meaning that around 50% of all EU emissions would be covered. Road transport and shipping remain excluded, although the latter is likely to be included at a later stage. Agriculture and forestry are also left out of the scope of the Directive due to the difficulties related to measuring emissions from these sectors with accuracy. 
• In order to achieve an average 10% reduction of greenhouse gases from sectors not covered by the ETS, such as transport, buildings, agriculture and waste by 2020, the Commission has set national targets according to countries' GDP. Richer countries are asked to make bigger cuts – of up to 20% in the case of Denmark, Ireland and Luxembourg – while poorer states (notably Portugal, as well as all of the countries that joined the EU after 2004 except Cyprus) will in fact be entitled to increase their greenhouse emissions in these sectors – by up to 19 and 20% respectively for Romania and Bulgaria – in order to take into account their high expectations for GDP growth.
• Smaller installations, emitting under 10,000 tonnes of CO2 per year, will be allowed to opt out from the ETS, provided that alternative reduction measures are put in place. 
• Industrial greenhouse gases prevented from entering the atmosphere through the use of so-called carbon capture and storage (CCS) technology are to be credited as not emitted under the EU Emissions Trading Scheme  (EurActiv 16/11/07). 
• Auctioning: Today, 90% of pollution allowances are handed out to industrial installations for free. However, the proposal foresees a huge increase in auctioning as early as 2013. "Overall, it is estimated that around 60% of the total number of allowances will be auctioned in 2013," states the text. It adds that "full auctioning should be the rule from 2013 onwards for the power sector", which is expected to lead to a 10-15% rise in electricity prices. In other sectors, free allocations will gradually be completely phased-out on an annual basis between 2013 and 2020. Nevertheless, certain energy-intensive sectors could continue to get all their allowances for free in the long term if the Commission determines that they are "at significant risk of carbon leakage", i.e. relocation to third countries with less stringent climate protection laws. However, the sectors to be concerned by this measure are yet to be determined.
• The distribution method for free allowances will be developed at a later stage by expert panels within the Commission (through the so-called 'comitology procedure'). The Commission nevertheless says that "the rules may for instance specify that allocations are to be based on so-called benchmarks, e.g. a number of allowances per quantity of historical output". It says: "Such rules would reward operators that have taken early action to reduce greenhouse gases, would better reflect the 'polluter pays' principle and would give stronger incentives to reduce emissions, as allocations would no longer depend on historical emissions". 
• Competitiveness: The Directive underlines the fact that the risk of "carbon leakage" – and subsequently, the need for compensatory measures for European companies – is dependent on whether or not an international agreement subjecting all countries to similar climate change mitigation measures is reached. It therefore delays any decision on eventual compensation measures until 2011, when the Commission will have to present a review of the situation. Nevertheless, the text warns that if no global pact is reached by then, some sort of "carbon equalisation system" will be introduced – whether in the form of additional free allocations or by making third-country producers of carbon-heavy goods participate in the ETS in order to access the EU market. 
• Flexibility and third countries: Assuming a global climate change deal is reached, member states will continue to be entitled to meet part of their target by financing emission reduction projects in countries outside the EU, although the use of such credits will be limited to 3% of member states' total emissions in 2005 – or, in other words, around one quarter of the total reduction effort. 

Commission President José Manuel Barroso justified the fact that the Directive fails to name the sectors that will continue to receive free allowances, saying: "At this stage, we cannot draft a precise list of industries that will really be affected by the carbon leakage phenomenon […] So what we have done now is establish the criteria to determine, at a later stage, precisely which sectors are affected." 

He nevertheless stressed that the EU would take action if it proves necessary to maintain the competitiveness of European businesses: "We all know that there are sectors where the cost of cutting emissions could have a real impact on their competitiveness against companies in countries which do nothing. There is no point in Europe being tough if it just means production shifting to countries allowing a free-for-all on emissions. An international agreement is the best way to tackle this - but […] if our expectations about an international agreement are not met, we will look at other options such as requiring importers to obtain allowances alongside European competitors, as long as such a system is compatible with WTO requirements." 

Energy Commissioner Andris Piebalgs added: "We are doing everything to avoid the need for such legislation. But, if common sense does not prevail […] then in 2011, we will assess the situation and determine whether energy-intensive industries in the EU will be compensated for the lack of climate measures in other countries." 

Industry is disappointed by the Commission's failure to decide which sectors could benefit from free allowances and which measures may be taken to protect European companies from competition from third countries with less demanding climate legislation. 

"This neither ensures predictability nor certainty for business," lamented Folker Franz, senior advisor on industrial affairs and the environment for the European employers organisation BusinessEurope. 

Environmental associations criticised the fact that the plans for the new scheme are solely based on a 20% reduction target, rather than on a 30% goal. "The European Union should be planning for the success, not failure, of international negotiations to cut climate pollution. The 20% target is not even in line with the latest Bali agreement - that developed countries should cut emissions by 25-40% by 2020," complained the WWF. "Overall, it is a very small effort to cope with a threat that might lead to Arctic melting and displacement of millions of people in developing countries because of increased floods," said Dr Stephan Singer, head of the European Climate and Energy Unit at WWF.