Phase III of the EU ETS builds upon the previous two phases and is significantly revised to make a greater contribution to tackling climate change. A more ambitious, EU-wide cap on emissions; auctioning as the preferred means of allocation; and reduced access to project credits from outside the EU will result greater emission reductions, greater certainty and more predictable market conditions.
Proposals for Phase III of the EU ETS were published by the Commission in early 2008. The UK carried out a formal consultation on these proposals, publishing its response and summary report in November 2008:
Following agreement among Member states and the European Parliament, the EU ETS Directive was significantly revised, as part of the EU 2020 Climate & Energy Package in December 2008.
Phase III of the EU ETS will deliver two-thirds of the EU’s unilateral 20% emissions reduction target by 2020 on 1990 levels. This equates to 21% reduction by 2020 compared to the 2005 verified emissions baseline under the EU ETS.
This means that by 2020, the EU ETS will be saving 500 MtCO2e per year, making it the biggest single policy instrument for addressing climate change in the EU. These emissions reductions will increase further if the EU moves to a 30% GHG emission reduction target.
For the UK, the EU ETS will cover about 48% of national CO2 emissions from Phase III. It is expected that the ETS will deliver two-thirds of the first three UK carbon budgets under the Climate Change Act 2008.
A summary setting out our plan for the continued implementation of Phase II and for the implementation of Phase III is here:
From 2013, the revised EU ETS Directive provides for:
- A centralised EU-wide cap on emissions, which will reduce annually by 1.74% of the average annual level of the Phase II cap. The cap will deliver an overall reduction of 21 percent below 2005 verified emissions by 2020. The provisional cap for 2013 will be 1927Mt, although this will be revised in September 2010 to take account of the increased scope of the EU ETS for Phase III.
- There will be an increase in auctioning levels – at least 50% of allowances will be auctioned from 2013, compared to around 3% in Phase II. This will improve the environmental effectiveness and economic efficiency of the EU ETS. In the UK, there will be 100 percent auctioning to the power sector. This will also be the case across most of the EU.
- Access to project credits under the Kyoto Protocol from outside the EU will be limited to no more than 50% of the reductions required in the EU ETS. This is a reduction from 226% in Phase II, and means many more emissions reductions will happen in the EU.
- 12% of the total allowances auctioned will be re-distributed to Member States with lower GDP in the interests of solidarity. These are mostly the newer eastern Member States.
- There is a non-legally binding commitment from EU member states to spend at least half of the revenues from auctioning to tackle climate change both in the EU and in developing countries.
- Industrial sectors will be allocated allowances for free on the basis of product benchmarks. The benchmarks will be set on the basis of the average of the top 10% most greenhouse gas efficient installations in the EU.
- Sectors deemed at significant risk of relocating production outside of the EU due to the carbon price (i.e. carbon leakage) will receive 100% of the benchmarked allocation for free.
- Sectors not deemed at significant risk of carbon leakage will receive 80% of their benchmarked allocation for free in 2013, declining to 30% in 2020 and 0% in 2027.
- Up to 300 million allowances from the new entrants reserve of the EU ETS will be used to support the demonstration of carbon capture and storage (CCS) and innovative renewable technologies.
- There is the potential for Member States to opt out small emitters and hospitals so as to reduce regulatory burden.
Transposing the revised EU ETS Directive into UK law and implementation
The Directive is required to be transposed in two stages: Stage 1 by 31 December 2009, and Stage 2 by the end of 2012.
A consultation on first stage transposition of the revised EU ETS Directive was published on 24 June 2009 which is now closed. A formal response and summary of stakeholder responses were published on 30 November 2009.
The Regulations were laid before Parliament on 2 December 2009, and came into force on 31 December 2009. Further details of these can be downloaded from Office of Public Sector Information: The Greenhouse Gas Emissions Data and National Implementation Measures Regulations 2009.
The Environment Agency website contains further information in relation to:
Please see the DECC EU ETS: publications and research page for more information and documents about Phase III. Please also refer to EU ETS legislation for text of the Revised EU ETS Directive.
Phase III free allocation
The UK submitted its National Implementation Measures to the European Commission on 12 December 2011.
The NIMs document sets out the levels of free allocation of allowances to installations under Phase III of the EU Emissions Trading System (2013-2020), in accordance with Article 11 of the revised ETS Directive (2009/29/EC).
The allocations have been determined in accordance with EU harmonised rules, using data provided from operators of EU ETS Phase III installations in 2010/11. These rules, along with associated guidance, can be found in EU Commission’s Decision of 27 April 2011 determining transitional Union-wide rules for harmonised free allocation of emission allowances. More information is also available on the European Commission: Emissions Trading System (EU ETS) web pages.
The Commission will embark on a process of checking the UK’s NIMs into 2012. The allocations are not final at this stage until the European Commission accepts all UK’s EU Member States’ NIMs and has made any necessary adjustments to allocations, expected in late 2012.
Small emitter and hospital opt-out
Article 27 of the EU ETS Directive provides for an opt out of small emitters and hospitals from the EU ETS from 2013 to 2020, to reduce administrative burdens on these installations. The Directive sets the threshold for small emitters: annual emissions of less than 25,000tCO2e and, where the installation carries out Annex I combustion activity, a rated thermal input (net) of less than 35MW (excluding emissions from biomass). The opt out is discretionary for Member States and depends on emissions from opted out installations being subject to alternative domestic instruments that achieve an equivalent contribution to emission reductions.
The Government has now agreed the UK’s policy for a voluntary ‘Opt Out Agreement scheme’ that will enable eligible UK operators to opt out from the EU ETS from 2013. This policy aims to offer a simple alternative to the EU ETS and reduce regulatory burden on opted out small emitters whilst maintaining incentives for emission reductions. The UK’s proposal has been submitted to the European Commission for approval, as required by the EU ETS Directive. Discussions with the European Commission are ongoing and as such the UK’s policy remains provisional.
Following approval by the Commission, we will publish the UK’s final policy and provide a period for eligible operators to decide whether they will opt out. We expect this to be in early 2012.
Previous stakeholder engagement
A stakeholder meeting was held on 12 October to discuss development of the opt out policy and the proposed process for opting out. This also provided an opportunity for operators to seek clarification on the initial proposals. An informal paper was circulated setting out the proposed policy and two presentations were given at the meeting. The policy has since been further refined in light of stakeholder feedback.
Auctioning of aviation and Phase III allowances
Background
In Phase III of the EU ETS at least 50% of emissions allowances will be auctioned across the EU (a significant increase from the current EU average of around 3%). In addition, the introduction of aviation into the ETS will see Member States auctioning 15% of aviation allowances. In preparation for this step change, new EU-wide rules on auctioning have been adopted.
On 19 November 2010, Commission Regulation (EU) No. 1031/2010 on the timing, administration and other aspects of the auctioning of greenhouse gas emissions allowances (‘the Auctioning Regulation’) came into force. This Regulation sets out the detailed requirements for auctioning of aviation and Phase III allowances.
The Auctioning Regulation provides for the appointment of a common auction platform by EU member states and the European Commission, but also permits individual Member States to opt out of the common platform . The UK, Germany and Poland have all opted to set up their own national auction platforms.
Timing
Member States are required to auction 15% of their aviation allowances by the end of 2012. In addition, following an agreement to amend the Auctioning Regulation in July 2011 by the EU Climate Change Committee, Member States are obliged to auction 120 million Phase III emissions allowances before the start of Phase III in 2013. Further information on this, including the amending Auctioning Regulation (EU) No. 1210/2011, is available on the European Commission website.
Next steps
In preparation for the start of Phase III and aviation auctions, the Government launched its tender process for a definitive national auction platform on 22 December 2011.
Bidders can request a copy of the Invitation to Tender document by contacting: euetsauctionplatform@decc.gsi.gov.uk
This follows a Prior Information Notice published on 26 August 2011 to inform decisions relating the UK’s procurement strategy for its national auction platform.
The UK’s Phase III and aviation auctions are due to begin in late 2012.