The European Union Emissions Trading Scheme (ETS) is a major pillar of the European Union climate policy and the first and largest greenhouse gas (GHG) emissions trading scheme in the world. It was launched by the European Commission in 2005 to fight global warming.
This scheme regulates emissions in more than 13,000 heavy energy consuming installations (e.g. power generation, industrial plants, manufacturing, etc.) that emit about 50% of the total European GHG emissions. 31 countries participate in the scheme: the 28 EU Member States plus Lichtenstein, Norway and Iceland.
The EU ETS is based on the so-called ‘cap and trade’ principle. A cap (ceiling) is set on the total amount of certain greenhouse gases (e.g. carbon dioxide) that can be emitted by all participating installations. A number of allowances equal to the annual cap are issued and distributed at the beginning of every year.
One emission allowance gives the holder the right to emit one tonne of CO2 (or its equivalent). Each regulated installation must monitor and report their emissions each year and surrender a number of allowances equal to their annual emissions. Those allowances can be traded in a market (the so called carbon market) and every one can hold and trade allowances.
Installations covered by the EU ETS that are short of allowances, have a choice between taking measures (e.g. investing in low carbon technologies) to reduce their emissions or by buying additional allowances from other installations (or other allowances holders) that have allowances in excess. Thanks to the carbon market we have price on the emission allowances (called carbon price), which can be seen as price on emitting GHG. The cap is reduced each year, making the system more and more stringent and forcing the regulated installations to gradually reduce their emissions.
The development of the EU ETS has been a ‘’learning by doing’’ process which has gone through a number of different phases.
The first EU ETS directive was enacted in 2003 and included a first trial phase (2005-2007) to test the system, followed by the second phase (2008-2012) that was designed to comply with the Kyoto protocol. In 2009, there was a major revision of the EU ETS to be applied to phase III (2013-2020). A new directive was enacted in the context of the 2020 EU energy and climate package. In the context of the Roadmap 2050 and the 2030 Climate and Energy Policy Framework, in July 2015 the European Commission presented a legislative proposal to revise the EU ETS for the period after 2020 to apply as of 2021 for phase IV. In the coming months, the new Directive will be defined, approved and then implemented.
The goal of the LIFE SIDE project is to support European policy makers (e.g. politicians, civil servants, member of environmental agencies) with the design and implementation of the new EU ETS legislation.
Specifically, the project aims to:
- Collect and disseminate empirical knowledge and information on the economic functioning of the EU ETS
- Establish a network bringing together EU ETS experts
- Create a forum enabling interaction amongst policy makers, stakeholders and EU ETS experts.
Economic Assessment of the EU ETS
The project is carrying out an updated economic ex-post assessment of the EU ETS, through the collection and analysis of all relevant existing empirical research.
Feedback from stakeholders is also taken into account and is gathered through the organisation of four workshops focused on the four areas of the assessment:
- Free allocation of emission allowances (workshop held on 2 December 2016). This is a key issue which will be tackled by the reform of the EU ETS. It is important that policy makers are well informed on how the system operates in the allocation of allowances, and the risks of carbon leakage to date.
- Impact of the EU ETS on investment and innovation (workshop held on 3 April 2017). There is a current debate on whether the carbon price is too low to support investment. New measures to support the price were approved (2014/0011(COD) and need to be monitored. Furthermore, the new proposal of the EU ETS directive envisages a reform on existing funding mechanisms to support innovation.
- Interaction between energy policies and the EU ETS (workshop held on 4 April 2017). It is crucial that policy makers are well informed on the interactions between the different policies (especially renewable energy and energy efficiency) and on how these have operated during the past years.
- International dimension. International cooperation on climate policy will be one of the most important topics in the context of the implementation of the Paris agreement. The EU ETS, as the largest cap and trade scheme in the world, can play an important role to foster cooperation on pricing emissions.
An ad-hoc training course on the EU ETS will be offered to policy makers and stakeholders to provide a comprehensive analysis of the functioning and regulation of the EU ETS and its interaction with other policies. The course will be composed of a 3-day residential course and a 3-week online course.
Involving policy makers: targeted events
Three major events will be organised to stimulate interaction with policymakers on the design and implementation of the EU ETS legislation: two conferences (one in October/November 2017 and a final one at the end of the project) and a meeting in Brussels, to be held at the European Parliament (December 2017-January 2018) where the results of the EU ETS assessment will be presented and discussed. This will lead to a set of recommendations on the design and implementation of the EU ETS legislation.