list of installations and their respective allowances;11. how competition from outside the EU would be taken into account.Furthermore, Article 9 established an assessment procedure where submitted NAPswere to be scrutinized by the European Commission. The right to not approve partsor the whole of the NAP plans was established for cases where these were found tobe not in line with the ET Directive or the Treaty.Inevitably, these criteria were couched in quite general terms, and the need arosefor a more speciﬁc guidance document. In early January 2004, the Commissionpublished a Communication aimed at clarifying the criteria.52 Among other things,this document speciﬁed that four of the 11 criteria were to be considered as mandatory(assessments of emissions development; non-discrimination; public involvement;and list of installations). Three criteria were in a grey zone, involving a mandatoryelement (consistency with Kyoto; potential to reduce emissions; and consistencywith other legislation). Finally, there were four optional criteria (new entrants; earlyaction; clean technology; and outside competition).53 As indicated in Chapter 2,within these numerous implementation criteria, the most important and overridinggoal was that implementation should be ambitious. We will also assess timeliness,for reasons to be speciﬁed below. Let us then brieﬂy elaborate these two goals.Timeliness and AmbitiousnessTimeliness was important not only in order to get the market going and deliveremission reductions: it was also politically important to demonstrate the realism inthe EU’s declared ambitions of leadership in global climate diplomacy – to showprogress by 2005 in accordance with the Kyoto Protocol (Wettestad 2005). On amore pragmatic note, within this complex multi-level, multi-issue and multi-state52 European Commission (7 January 2004), COM(2003)830 ﬁnal, Communication fromthe Commission on Guidance to Assist Member States in the Implementation of the CriteriaListed in Annex III to Directive 2003/87/EC (Brussels).53 The Communication stated that ‘<the Member State> can choose whether it wants totake speciﬁc action with respect to some of the criteria 1, 3 and 4, and the criteria 6,7 and 8’(Ibid., 3, our emphasis).
Development of the EU ETS
51
subject matter, this criterion is fairly simple to measure. With regard to preparationof NAPs for the EU ETS pilot phase (2005–07), the formal deadlines were 31 March2004, for the old EU-15; and 1 May 2004, for the new EU-10 – that is, the Centraland Eastern European Countries (CEECs), as well as Malta and Cyprus. Moreover,the installation-level allocation was to be determined at least three months before thebeginning of the ﬁrst period (in other words, before October 2004).54 The deadlinefor all countries for preparing the NAPs for the second phase of the EU ETS (theKyoto commitment phase, 2008–12) was 30 June 2006.The criterion of ambitiousness is clearly the most important from an environmentalperspective. Unless emission caps can be set far enough below the business-as-usualneeds of industries to lead to a scarcity of allowances (and hence drive allowanceprices high and stable enough to warrant investments in abatement efforts), the overallobjective of the emissions trading scheme – to promote reductions of greenhousegas emissions – will simply not be met.55 However, measuring the ambitiousnessof the implementation in the NAP context is no straightforward task. At least threeimportant points must be kept in mind.First, the EU ETS covers around 45 per cent of EU CO2 emissions: the focusis on relatively large installations within certain sectors, and includes the importantpower and heat sector. The Kyoto Protocol and the EU’s commitment within theKyoto framework cover six main greenhouse gases and most societal sectors (butnot, for example, aviation). Hence the real and full climate policy ambitiousness andperformance of the EU countries is to a considerable extent determined by their effortsin relation to sectors and gases not covered by the ETS. Second, EU countries varywith respect to both the targets agreed on within the EU Burden-sharing Agreementand their progress so far in relation to these targets. Hence, the need for governmentsto squeeze the part of industry covered by the ETS varies between the countries. Third,the basically decentralized ETS approach and the related ﬂexibility in the guidelinesfor developing NAPs mean that countries have chosen and utilized somewhat differingbaselines, and have treated issues such as new entrants in differing ways (see forexample CEPS 2005), further complicating inter-country comparisons.With regard to the pilot phase, there were prescriptions for a certain ambitiousnessin the setting of total emission caps. As indicated, the ET Directive and theCommission’s 2004 guidelines prescribed several criteria for the overriding goalof ambitiousness – most importantly that the allocation was to be consistent with apath to the Kyoto target, and the total quantity of allowances to be allocated shouldnot be more than necessary in view of projected emissions. Of these two, we willargue that the relationship between the total cap and projected emissions would bethe central indicator of whether pilot-phase NAPs should be considered ambitious,as this would indicate the actual emission reductions to result from implementationof the EU ETS.With regard to the NAPs for the second ETS phase (2008–12), in itsCommunication published in late December 2005 the Commission indicated that if54 The October 2004 deadline was stated in Article 11 in the 2003 ET Directive.55 As noted by Vis (2006b, 188): ‘Only if there are fewer allowances than there would beemissions in the absence of a trading scheme will there be any environmental added value’.
52
EU Emissions Trading
the emissions trading sector were to contribute a proportionate share of the reductionneeded in member-states with a gap to close in order to reach the Kyoto target, thenthe overall cap for the second phase should be 6 per cent lower than in the pilotphase.56 Allocations to any member-states that were off-track from their Kyoto targetin comparison with actual 2003 emissions should be further tightened.57With regard to the latter, and as an additional criterion that did not apply inthe ﬁrst phase, member-states were required to specify a maximum amount ofintended government purchase of Kyoto units. Described by the Commissionas criterion 12 in Annex III of the ET Directive (although the Directive initiallycontained only 11 criteria), the established percentage should be consistent with thestate’s supplementarity obligations under the Kyoto Protocol and decisions adoptedpursuant to the UNFCCC or the Kyoto Protocol.58 This was further speciﬁed in theCommunication accompanying the ﬁrst round of Commission NAP II decisions inlate November 2006.59To determine the more speciﬁc required reduction, the proportion of the overallemissions represented by the trading scheme was relevant ‘in comparison withemissions from sources not covered by the Directive’.60 As a minimum threshold,installations should be allowed to use JI/CDM credits up to a level of 10 per cent.The practical implications of all these elements were then summed up in speciﬁcformulas.61Furthermore, as further elaborated later in this chapter, the ﬁrst veriﬁed ETSemission ﬁgures, summing up 2005 emissions, were put on the table in May 2006.The publication of these ﬁgures changed the NAP II process somewhat. In November2006, it became clear that in addition to the earlier announced criteria, also the2005 emission data would ﬁgure as a central assessment criterion. Hence, the 29November press release stated that the Commission would be requiring changes56 European Commission (22 December 2005), COM(2005)703 Final, Communicationfrom the Commission: Further Guidance on Allocation Plans for the 2008 to 2012 TradingPeriod of the EU Emissions Trading Scheme (Brussels), 6.57 These states should aim for a balanced mix between lowered allocation for secondphase; implementing additional measures in the non-trading sector; and ‘potentiallysupplemented’ by government purchase of Kyoto unit credits (Ibid., 6).58 Ibid., 7.59 A key statement was here: where a Member-state with a remaining gap to closebetween its actual emissions and allowed emissions according to the Kyoto target doesnot substantiate or insufﬁciently substantiates the intended government purchase of Kyotounits this contravenes criterion 1 (setting a cap consistent with each Member-state’s KyotoProtocol commitment), and as a consequence the intended total quantity of allowances isreduced proportionally. European Commission (29 November 2006), COM(2006)725 ﬁnal,Communication from the Commission to the Council and to the European Parliament onthe Assessment of National Allocation Plans for the Allocation of Greenhouse Gas EmissionAllowances in the Second Period of the EU Emissions Trading Scheme, AccompanyingCommission Decisions of 29 November 2006 on the National Allocation Plans of Germany,Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, Sweden and the UnitedKingdom in Accordance with Directive 2003/87 (Brussels), 7.60 Ibid.61 Ibid., 7, 10.
Development of the EU ETS
53
to NAPs where ‘the proposed total of allowances is not consistent with expectedemissions and the technological potential to reduce emissions, taking into accountindependently veriﬁed emissions in 2005, anticipated changes in economic growthand carbon intensity’ (our italics).62 Hence, the Commission had now explicitlyspelled out its procedure and ‘formula’ for NAP II assessments, in fact drawingupon only very limited information from the submitted NAPs (primarily relatedto additional installations).63 This meant that the Commission, quietly and almostunnoticed, had introduced a more centralized model for the setting of caps.Let us then sum up some main outcomes of the ﬁrst two EU NAP processes,assessing them in relation to timeliness and, especially the key dimension ofambitiousness. We will seek to provide both a rough overview of the complete pictureas to implementation outcomes, while also drawing attention to some interestingnational variations.Producing NAPs for 2005-07 (NAP I)Timeliness: many delays, but still variation As mentioned, there were three maindeadlines in 2004: 31 March for EU-15; 1 May for the new EU-10; and 1 October forall (the installation-level allocation). The UK started strong and published its draftNAP as early as 19 January 2004,64 but nevertheless failed to meet the 31 Marchdeadline for the EU-15 countries. Only ﬁve countries met the deadline (Austria,Denmark, Finland, Germany and Ireland), which meant that two out of three missedthe deadline.65 Only Slovenia met the 1 May deadline for the new members.66 Atthis point, three more countries from the EU-15 had delivered (Luxembourg, theNetherlands and Sweden), bringing the total to eight – which, however, meant thatalmost half of the plans were still missing.67By mid-June, the NAP process was said to be ‘grinding to a halt’.68 Although theUK had ﬁnally submitted its NAP to Brussels (raising the total number of ‘old-timer’NAPs to nine), Spain and two others still had not published their drafts, two and ahalf months after the deadline. Of the new members, Estonia and Latvia had joinedthe submitter group, so half of the CEECs had formally delivered. Big-emitter Poland
62 Ibid.63 The formula is: 2005 veriﬁed emissions * growth trend development 2005 to 2010* carbon intensity trend development 2005 to 2010 * additional emissions covered by anextended scope of combustion installations. Ibid., 5.64 ENDS Daily (19 January 2004), ‘UK Takes Pole Position in EU Carbon TradingRace’, Issue 1590.65 EU Energy (9 April 2004), ‘Two Out of Three Miss Emissions Allocation PlanDeadline’, Issue 80, 1.66 EU Energy (7 May 2004), ‘Slovenia Only New EU Member to Meet NAP Deadline’,Issue 82, 1.67 International Environment Reporter (5 May 2004), ‘EU Countries Face Liability forDelay in Submitting Emissions Trading Plans’, 27:9, 343.68 Point Carbon (18 June 2004), ‘NAP Progress Grinding to a Halt’, Point Carbon,Carbon Market Europe, 3.
54
EU Emissions Trading
was lagging behind, not even having published a draft at this point.69 This meant thatplans from only eight countries were included in the Commission’s ﬁrst NAP verdictround in early July: Austria, Denmark, Germany, Ireland, the Netherlands, Slovenia,Sweden and the UK. All plans were approved, albeit only conditionally for Austria,Germany and the UK.The third main deadline in this process was 1 October 2004, when installationlevel allocations were to be completed. Several prominent member-states failed tomeet this deadline – Germany, for instance, did not publish its full installation-levelNAP until January 2005. The Czech Republic, Hungary, Italy, Poland, and Spainwere also delayed with their detailed installation-level NAPs.70 Here, however, theUK was a notable exception, publishing its installation-level NAP already in July2004.In sum, there were signiﬁcant delays among both old and new EU member-states,but with some variations. Germany and the UK performed reasonably well (althoughthe European Commission’s requests for adjustments prolonged the processes).Spain must be put down as a clear laggard. Within the group of new member-states,big emitters like the Czech Republic and Poland were also considerably delayed,with Poland as perhaps worst offender within the EU.Ambitiousness: murky, but on the low side As a starting point, we will sum upsome main conclusions from several independent NAP ambitiousness assessmentefforts.71 On the whole, none of these reports was particularly impressed by theambitiousness of the pilot-phase NAPs.As early as August 2004, a Swedish research group at the IVL institute, led byLars Zetterberg, analysed 12 NAPs72 and concluded:generally most countries have allocated generously to the trading sector. The allocationhas often been based on future needs. For most sectors the allocation is higher thancurrent emissions. Many countries will have to make large reductions in the nontrading sector and/or buy credits through JI and CDM projects in order to fulﬁll theircommitments according to the EU burden-sharing agreement of the Kyoto Protocol. Inmany of the allocation plans the emission reducing measures in the non-trading sector ispoorly described and the credibility of the measures are hard to determine’ (Zetterberg etal., 2004, 1; emphasis added).
The NAP assessment report produced by the German Ecofys institute was alsopublished in August 2004. Although with some exception the set caps were assessedto be below expected business-as-usual (BAU) emissions, ‘the caps imposed on the69 Ibid.70 However, the Czech Republic, Hungary, Poland and Spain delivered in the course ofOctober.71 Zetterberg et al., 2004; Grubb et al., 2005; CAN (2006), ‘National Allocation Plans2005-7: Do They Deliver?’, CAN Europe, April; Ecofys (August 2004), Analysis of theNational Allocation Plans for the EU Emissions Trading Scheme (Utrecht, NL: Ecofys).72 The NAPs assessed were those of Austria, Denmark, Finland, Germany, Ireland,Lithuania, Luxembourg, the Netherland, Sweden, the United Kingdom, as well as BelgiumFlanders (draft) and Portugal (draft).
Development of the EU ETS
55
EU ETS participants are less strict than would be required if these sectors were tomake an equal contribution to meeting Kyoto as other sectors, or if no use of theKyoto mechanism was envisaged’ (Ecofys, 2004, iv; emphasis added). Furthermore,eight out of 18 countries had not provided sufﬁcient information in their NAPsto assess the cap and compare it with business-as-usual developments, making it‘difﬁcult to draw ﬁrm conclusions about the environmental additionality of the EUETS’ (Ibid.).73Published about a year later, the assessment carried out by a group of Britishresearchers led by Michael Grubb compared the total pilot-phase allocations againsthistorical emissions, projections, and national Kyoto targets, and noted that ‘mostPhase 1 allocations are excessive on all these measures, particularly the last’ (Grubbet al., 2005, 127). Compared to recent emissions, only Germany and Slovenia hadnot allocated more than they were currently emitting. Compared to ofﬁcial BAUprojections, many allocations were in line with or almost as high as BAU projections.Compared to Kyoto targets, in contrast to a perceived necessary cut of about 3 percent, there was an increase of 3 to 9 per cent allocated for 2005–07 (ibid., 128–129).So Grubb et al. ended up by concluding that ‘even if the BAU projections are takenat face value, the collective picture is one of weak allocations’ (ibid., 130; emphasisadded).The most recent pilot phase NAP assessment of which we are aware waspublished by Climate Action Network Europe in April 2006. Here it was noted thatof 25 countries, only Germany and the United Kingdom had asked the participatingindustry sectors to reduce their emissions over historic levels (based on the informationprovided for respective base years, mainly 2000–2002). Hence, the main conclusionhere echoed the earlier critical assessments: ‘considering that around half of the EU25 countries are not on track to meet their Kyoto Protocol emission targets, such laximplementation of the ETS is a major disappointment and a worrying precedence for2008–12’ (emphasis added).74In sum, although these assessment reports vary somewhat with regard toapproach, methodology and ﬁne-print conclusions, they basically agree on an overalllow ambitiousness score for the pilot-phase NAPs, regardless of whether these arejudged on past emissions, future projections, or distance to Kyoto targets. Withregard to top EU emitters more speciﬁcally, Germany, Spain and the UK seemedto come out moderately well. Due to its delayed and drawn-out process, Polandwas not included in the IVL and Ecofys assessments, but was indicated as having acomparatively weak cap in the two later assessments.Table 3.2 displays the allocation data for the ﬁrst trading period, showing therelative contribution to the scheme among member-states.
73 The NAPs assessed in this report were those of Austria, Belgium, Denmark, Estonia,Finland, France, Germany, Ireland, Latvia, Lithuania, Luxembourg, the Netherlands, Portugal,Slovenia, Spain, Sweden, and the United Kingdom.74 CAN (2006), ‘National Allocation Plans 2005-7: Do They Deliver?’, CAN Europe,April, 5.
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56
Table 3.2
Distribution of allowances under the ETS 2005–07
GermanyUKPolandItalySpainFranceCzech RepublicNetherlandsGreeceBelgiumFinlandPortugalDenmarkAustriaHungarySlovakiaSwedenIrelandEstoniaLithuaniaSloveniaLatviaLuxembourgTotal
CO2 allowancesin million tonnes
Share in EUallowances (%)
1497.0736.0717.7697.5523.7469.5292.8285.9223.2188.8136.5114.5100.599.093.891.568.767.056.836.826.313.7
22.811.210.910.68.07.14.44.33.42.92.11.71.51.51.41.41.11.00.90.60.40.2
Installations covered1849107811661240927117243533314136353523937820526120949914343939895
10.0
0.2
19
6572.7
100.0
11,536
Source: Based on Delbeke (2006, 8–9).
When the ﬁrst veriﬁed EU ETS emission ﬁgures (for 2005) were announced in midMay 2006, it was tempting to interpret these ﬁgures as further conﬁrmation that theambitiousness in this round was rather low.75 In essence, CO2 emissions were about80 million tonnes or 4 per cent lower than the number of allowances distributed toinstallations in order to cover 2005 emissions. Seventeen countries were on the ‘longside’ (with more permits than needed), with Lithuania topping the list and around50 per cent long, and four countries around 25 per cent long (Denmark, Estonia,Finland and Latvia). The important emitters Germany and Poland were respectively4.2 per cent and 12.8 per cent long. Only ﬁve countries were on the ‘short side’:Greece (–0.2 per cent), Italy (–4.4 per cent), Spain (–6.3 per cent), Ireland (–16.4
75 Ellerman and Buchner, 2006; European Commission (15 May 2006), IP/06/612,EU Emissions Trading Scheme Delivers First Veriﬁed Emissions Data for Installations(Brussels).
Development of the EU ETS
Table 3.3
57
NAP I 2005 allocations and veriﬁed emissionsAllocation 2005 Emissions 2005Mt CO2Mt CO2
DifferenceMt CO2
Differencepercentage (%)
GermanyPolandItalyUKSpainFranceCzech RepublicNetherlandsGreeceBelgiumFinlandDenmarkPortugalAustriaSlovakiaHungarySwedenIrelandEstoniaLithuaniaSloveniaLatviaLuxembourg
495.0235.6215.8206.0172.1150.496.986.571.158.344.737.336.932.430.530.222.319.216.713.59.14.13.2
474.0205.4225.3242.5182.9131.382.580.471.355.433.126.536.433.425.226.019.322.412.66.68.72.92.6
20.930.1–9.5–36.4–10.819.114.56.1–0.13.011.610.80.5–1.05.24.23.0–3.24.16.90.41.20.6
4.212.8–4.4–17.7–6.312.714.97.1–0.25.125.929.01.3–3.017.213.913.3–16.424.651.14.629.919.4
Total
2087.9
2006.6
81.3
3.9
Source: Ellerman and Buchner (2006, 3).
per cent), and the UK (–17.7 per cent) (Ellerman and Buchner 2006). The completepicture is presented in Table 3.3.There is a somewhat complex and indirect relationship between NAP ambitiousnessand these ﬁgures. As noted by Ellerman and Buchner (2006, 10), a ‘short’ positioncould be due to higher levels of economic activity than predicted, or other unexpectedevents (for example, high natural gas prices), so the basic NAP approach of thegovernment in question could still be sound. For example in the case the UK, onereason that has been indicated for the UK’s ‘short’ position in 2005 is a shift togreater use of coal for power generation as gas prices have risen while coal priceshave been static or falling.76 Hence, despite this complexity, the emissions ﬁguresfurther strengthened suspicions of Poland’s rather lenient approach to handing outallowances, in contrast to a seemingly more sound and sobering British approach.76 EU Energy (2 June 2006), ‘Emissions Prices Plunge as EU Emits Less than Expectedin 2005’, Issue 134, 9.
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EU Emissions Trading
The publication of these data also sent shock waves into the until then surprisinglyﬂoundering allowance trading market, leading to a steep price drop for allowancesin the pilot phase – from a top level of around €30 per tonne CO2 in late April 2006down to around €12 in early May and further down in the spring of 2007, hitting alow point at €0.5 in the end of April. We will come back to possible explanations forthis ‘over-allocation’, related lacking scarcity in the market, and apparently low, butvarying ambitiousness in Chapter 6.Producing NAPs for 2008-12 (NAP II)The deadline for all member-states for preparation of NAPs for the second phaseof the EU ETS was 30 June 2006. However, by this date only two NAPs had beendelivered to the Commission: those of Estonia and Germany.77 By mid-July, fouradditional NAPs had been submitted: from Ireland, Lithuania, Luxembourg and(interestingly, in light of its NAP I lateness) Poland.78 In the beginning of August,the Commission then sent letters of formal notiﬁcation to 15 states that had failedto submit NAPs.79 After that, more NAPs gradually trickled in, including the Britishone in late August. However, by the end of October 2006, four months after thedeadline, 10 NAPs were still lacking, including those from the Czech Republic, Italyand Spain.With regard to the crucial issue of ambitiousness, the overall picture at this pointwas not encouraging. On 22 October, EU environment commissioner Stavros Dimasnoted that ‘much to my regret, taking the ﬁrst 17 notiﬁed national allocation plans,they propose a cap about 15 per cent above actual emissions in 2005’.80 This statementalso made it clear that the Commission would use the veriﬁed 2005 emissions dataas a key measuring rod in assessing the NAPs. Several independent assessments alsopainted a rather bleak picture. A study carried out by Climate Strategies concludedthat ‘if currently proposed phase II NAPs were approved, prices would tend to bevery low and only small volumes of CDM/JI would enter the EU ETS’. Takingno account of CDM/JI, there was a 15 per cent chance that the price of carbonwould fall to zero, this chance increasing considerably with higher levels of CDM/JIinﬂows (Neuhoff et al. 2006, 2).This message was supported by the Ecofys institute. Based on an assessment ofproposed NAPs, Ecofys Director of Energy and Climate Strategies stated:if the European Commission follows the Member States’ proposals, we don’t expect tosee a shortage of allowances in the market in the second phase. The market would rather77 EU Energy (14 July 2006), ‘NAP2 Revealed: EUAs Capped at 482 mil mt/year’, Issue137, 22.78 ENDS Daily (18 July 2006), ‘EU Emission Trading Plans Trickle In Slowly’, Issue2140.79 Point Carbon (4 August 2006), ‘NAP Watch and Carbon Politics’, Point Carbon,Carbon Market Europe, 3. Formal notice is the ﬁrst stage in the EU’s infringementprocedure.80 ENDS Daily (23 October 2006), ‘Dimas Gives Damning Verdict on Emissions Plans’,Issue 2190.
Development of the EU ETS
59
be long than short, especially taking into account the additional supply of project-basedemission credits from the Clean Development Mechanism and Joint implementation. Themarket will only work properly if the caps are tightened, giving a clear price signal whichwill stimulate emission reductions within the EU’ (Ecofys 2006).81
Furthermore, on the basis of a study carried out by Ecofys, the World Wide Fund forNature (WWF) warned that member-states were indeed aiming to allow much morecredits from JI and CDM projects into the EU Emissions Trading Scheme. This, incombination with lax caps on emissions, would discourage European companiesfrom reducing their own emissions and could cause the price of carbon to collapse.82This basically gloomy message was further supported by a study published inNovember 2006 by the Fraunhofer/ISI research group (Rogge et al. 2006).However, there was variation among states. As the main exception to the gloomypicture summed up above, the UK plan was lauded as good and pioneering. Accordingto an analysis carried out by Point Carbon, the UK had set a strict cap, considerablylower than what it could have got away with in relation to Commission guidelines.Hence, the UK was ‘leading the way again, ensuring that the CO2 market continuesto function’.83 Moreover, the plans from Italy and Spain were hailed by independentexperts as being relatively ambitious;84 referring to a study by the Carbon Trust.But most other plans were criticized for being overly generous, including those ofGermany and France.85 Furthermore, with regard to the new member-states, it wasclaimed that Poland aimed for an allocation 34 per cent over the 2005 level, whileother CEECs such as the Baltic states seemed to go for allocations even higher thanthat (some 80 per cent over 2005 levels).86Hence, when the Commission’s ﬁrst NAP II assessment of ten plans waspublished on 29 November, it did not come as a total surprise that only the UK planwas unconditionally accepted. All the other plans were modiﬁed (Germany, Greece,Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, and Sweden), mainly withreduced caps, as shown in Table 3.4 below.In particular, it should be noted that although Germany just prior to theCommission’s ‘verdict’ had unilaterally adjusted its cap down to 465 million tonnesCO2, the Commission adjusted its cap further down to 453 million tonnes CO2.Germany then responded by increasing its planned use of CDM from 12 per cent upto 20 per cent.81