The EU ETS Directive is the centrepiece of the European Union’s climate policy. It has created the European Union’s Emissions Trading Scheme (EU ETS), which is a unique and quite com-plex system. The EU ETS establishes a scheme for greenhouse gas emissions allowances trading within 31 European countries. Its functioning is based on a “cap and trade” principle, which sets a cap on the total amount of greenhouse gases that can be emitted by all participating installations. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. Today, the EU ETS covers almost half of EU’s emissions and is part of the daily life of a large number of companies. The EU ETS Directive represents the backbone of EU’s action against climate change, but it also works in combination with several other pieces of legislation in a delicate balance. Our European system has very much evolved during the last 15 years. The existing legislation operates until 2020. It has set a greenhouse gas emissions reduction target in line with EU’s 2050 low carbon economy roadmap. The time has also come to discuss the post-2020 period and the European Commission will soon put forward a new proposal with a 2030 emissions reduction target. Being the first one to have been setup, the European scheme is analysed and taken as exam-ple in other regions of the world where emissions trading starts being implemented. This course aims at giving a presentation of the EU ETS Directive, the main features of the sys-tem, the balance with other pieces of EU legislation and at offering perspectives for the on-coming review of the scheme.

1. THE EU ETS DIRECTIVE:
INTRODUCTION TO THE CORNERSTONE OF
EU’S CLIMATE POLICY
SUSTAINABLE EUROPEAN ENERGY & CLIMATE POLICY 6.1
3rd July 2015

2. FOREWORD
• Cornerstone of EU climate policy and
main decarbonisation instrument
• Financial impact on CO2-emitting
companies operating in the EU/EEA

3. Session contents:
• Origins
• Context
• Presentation of the Directive
o The legal text
o The scheme and its functioning
o Burden sharing
o Economic impact
o Perspectives
• International aspects
• Relations with other policies

4. ORIGINS OF THE EU ETS DIRECTIVE
• The idea
• The choice of instruments

5. THE IDEA
INSPIRATION FROM INTERNATIONAL LEVEL +
PROGRESSIVE EUROPEANISATION OF ENVIRONMENT POLICY
• 1986: first official EU document on climate change (parliamentary resolution)
• Mid-1980s: EU funding targets research on climate change
• 1988: establishment of the Intergovernmental Panel on Climate Change (IPCC)
• 1988: Communication “The Greenhouse Effect and the Community”
• 1990: discussion on the possibility of a carbon/energy tax at EU level; political agreement to
stabilise emissions by 2000 compared to 1990
• 1991: start of climate-related initiatives, first Community strategy to limit CO2 emissions
• 1992: set-up of UN Framework Convention on Climate Change (UNFCCC)
• 1996: EU proposes 2°C as the policy target at global level
• 1997: signature of Kyoto Protocol
• 2000: European Climate Change Programme (ECCP) launched (Kyoto Protocol implementation)
• 2001: withdrawal of the US from the Kyoto Protocol; proposal for EU ETS Directive
• 2003: adoption of (first) EU ETS Directive
• 2004: ratification date of the Kyoto Protocol

6. THE CHOICE OF INSTRUMENTS
• Principle: give a price to carbon
• Cap-and-trade or carbon tax?
 No tax (opposition by businesses and difficulty of unanimous
decision at EU level)
• The EU chose to put in place a cap-and-trade scheme
 Micro-economic computer simulation studies on cap-and-trade in
the late 1960s in the US
 Prototype as part of the US Acid Rain Program in Title IV of the 1990
Clean Air Act
 Designed as the means of achieving the "least cost solution" for a
given level of abatement: decision-makers set the cap and the
market sets the carbon price
 The European Emissions Trading Scheme (EU ETS)
emerged in 2003

7. CONTEXT OF THE EU ETS
• EU vision
• EU climate policy
• 2050 low-carbon economy roadmap
• Evolution and repartition of CO2
emissions – world vs. Europe

8. EU VISION
Objective: decoupling emissions from GDP

9. TRENDS IN TOTAL ENERGY INTENSITY, GROSS DOMESTIC
PRODUCT AND TOTAL ENERGY CONSUMPTION, EU27
Sources: World Development Indicators database (World Bank) + Gross inland energy consumption, Eurostat

10. EU CLIMATE POLICY
TWO-FOLD OBJECTIVE:
1. ”Preventing dangerous climate change” as a strategic priority for the EU
 Cut EU greenhouse (GHG) gas emissions
 Encourage other nations/regions to do likewise
2. Adapting to climate change
• “Dangerous”: endorsement by the EU of the international position to limit the
temperature increase to 2°C compared to pre-industrial times (i.e. 1.2°C above
today’s level)
 Stop growth in global GHG emissions by 2020 at the latest
 Reduce them by half of 1990 levels by 2050
 Continue reduction thereafter
• GHG emissions: EU policy covers CO2, N2O, PFCs
 N.B. The EU ETS covers only CO2 emissions (80% of European emissions)

11. CONTEXT OF THE EU ETS:
2050 LOW-CARBON ECONOMY ROADMAP
• Roadmap for moving to a competitive low-carbon economy by 2050 (2011)
 Reduction of GHG emissions to 80-95% below 1990 levels through domestic
reductions alone (almost full decarbonisation)
• EU climate policy is set until 2020 (adopted legislation goes until then)
 3 x 20% targets: for emissions reduction, for renewable energies, for energy efficiency
 For GHG emissions reduction: compared to 1990 level; 30% conditional target

12. EVOLUTION OF CO2 EMISSIONS -
WORLD 1990-2013
Source: Enerdata; Gt CO2
0
5000
10000
15000
20000
25000
30000
35000
CO2 from
fuel
combustion
CO2 from oil
combustion
CO2 from
coal
combustion
CO2 from
gas
combustion
CO2 in
energy
sector
CO2 from
industries
CO2 from
agriculture
CO2 from
transport
1990
2005
2013

13. REPARTITION OF CO2 EMISSIONS -
TOP 10 EMITTING COUNTRIES 2012
Source: IEA; Gt CO2
0 1 2 3 4 5 6 7 8 9
China
United States
India
Russian Federation
Japan
Germany
Korea
Canada
Iran
Saudi Arabia

14. EVOLUTION OF CO2 EMISSIONS -
MAJOR COUNTRIES 2005-2010
CO2 emissions (Mt); source: World Bank
.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
7000.0
8000.0
9000.0
2005 2006 2007 2008 2009 2010
EU
China
US
Russia
India

15. EVOLUTION OF CO2 EMISSIONS PER SECTOR -
MAJOR COUNTRIES 1990-2013
China
United States
European Union
Source: Enerdata (Mt CO2)
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
1990
2005
2013
0
1000
2000
3000
4000
5000
6000
7000
1990
2005
2013
0
1000
2000
3000
4000
5000
1990
2005
2013

16. CO2 EMISSIONS –
WORLD CO2 EMISSIONS BY SECTOR 2012
Allocation to end-use sectors:
* incl. commercial/public services, agriculture/forestry, fishing, energy industry other than electricity and heat generation, and other emissions not
specified elsewhere
Source: IEA
Electricity and
heat, 42%
Transport, 23%
Industry, 20%
Residential, 6%
Other *, 9%
18%
11%
1%
12%
Other Transport Residential Industry

17. SHARE OF EU GHG EMISSIONS PER SECTOR (2012)
Source: EEA, EU greenhouse gas inventory, 2014 submission
33%
27%
20%
10%
7%
3%
0%
Energy supply
Energy use
Transport
Agriculture
Industrial processes
Waste
Solvents and other

18. PRESENTATION OF
THE EU ETS DIRECTIVE
• Legal text
• Snapshot of the system
• Scheme and functioning
• Challenges
• Achievements
• Economic impact
• Perspectives

19. LEGAL TEXT (1)
• Legal basis: Treaty of the EU, Article 191
Union policy on the environment shall contribute to pursuit of the following objectives:
– preserving, protecting and improving the quality of the environment,
– protecting human health,
– prudent and rational utilisation of natural resources,
– promoting measures at international level to deal with regional or worldwide environmental
problems, and in particular combating climate change.
• Directive 2003/87/EC adopted on 13th October 2003: established the EU ETS
• Amended several times:
 In 2004 to adapt to the ratified Kyoto Protocol
 In 2008 to include aviation activities
 In 2009 to improve and extend the scheme: current status of the legislation

20. LEGAL TEXT (2)
• Policy goals:
 Establish a scheme for greenhouse gas emission allowance trading
within the Community in order to promote reductions of greenhouse
gas emissions in a cost-effective and economically efficient manner
 Contribute to the levels of reductions that are considered
scientifically necessary to avoid dangerous climate change

21. SNAPSHOT OF THE SYSTEM
• Objective: reduce GHG emissions + incentivise low carbon technologies
• Design:
 Limit on overall emissions from emitting industry sectors, reduced each year
= cap
 Within this limit, companies can buy and sell emission allowances as needed
= trade
 N.B. Participation is mandatory
• Scope: more than 11,000 power stations and manufacturing plants in the 28 EU
Member States + Iceland, Liechtenstein and Norway; aviation operators flying
within and between most of these countries
 In total, around 45% of total EU emissions are capped by the EU ETS

22. THE SCHEME AND ITS FUNCTIONING
• Trading periods:
 2005-2007: learning by doing
 2008-2012: ETS enlarged to the EEA + aviation; economic downturn
 2013-2020: EU-wide cap on emissions; auctioning is the principle
• Technical infrastructure:
 Emissions accounting system: monitoring, verification and recording of
emissions at plant level
 Registry: tracking of allowances
• Enforcement:
 At the end of each year, plant operators surrender allowances to cover
actual emissions of the year
 Sanctions for non-compliance (financial penalties)
• Market organisation:
 Everybody can participate and purchase/sell allowances
 Banking of allowances is possible

23. CAP
• Article 9 of the EU ETS Directive
• During phase 3 of the EU ETS, the cap decreases each year by 1.74% of the average total
quantity of allowances issued annually in 2008-2012
• In absolute terms, the number of general allowances is reduced annually by 38,264,246
• In 2020, emissions from fixed installations will be 21% lower than in 2005
Source: EEA

24. AUCTIONING -> TRADE
• Article 10 of the EU ETS Directive
• Auctioning is the default method of allocating allowances
 Within the cap, companies receive or buy emission allowances which they can trade
with one another as needed
 They can also buy limited amounts of international credits from emission-saving
projects around the world
 The limit on the total number of allowances available ensures that they have a value
• In 2013, over 40% of the allowances were auctioned
 100% of the electricity sector’s allowances auctioned from 2013 onwards
 The rest is distributed for free under certain conditions (see below)
 Share to increase until 2020
• Two auction platforms : the European Energy Exchange (EEX) in Leipzig (common platform
for the large majority of countries participating in the EU ETS) & ICE Futures Europe (ICE) in
London (United Kingdom's platform)
• Allowances to be auctioned are distributed among the Member States
 At least 50 % of auctioning revenues or the equivalent in financial value of these
revenues should be used by Member States for climate and energy related purposes

25. FREE ALLOCATION (1)
• Article 10a of the EU ETS Directive
• Under certain conditions, industry sectors can receive allowances for free
• Carbon leakage:
 Definition: situation that may occur if, for reasons of costs related to climate policies,
businesses were to transfer production to other countries which have laxer constraints
on greenhouse gas emissions; this could lead to an increase in total emissions
 The legislation addresses the global competitiveness of industries covered by the EU
ETS
• Criteria to be put on the carbon leakage list, adopted every 5 years:
 Quantitative assessment:
o Cumulative criteria:
 The extent to which the sum of direct and indirect additional costs induced
by the implementation of the Directive would lead to an increase of
production cost, calculated as a proportion of the Gross Value Added, of at
least 5%; and
 The trade intensity (imports and exports) of the sector with countries
outside the EU is above 10%
o Or alternative criteria:
 The sum of direct and indirect additional costs is at least 30%; or
 The non-EU trade intensity is above 30%
 Or qualitative assessment

26. FREE ALLOCATION (2)
• Sectors on the list receive 100% free allocation up to benchmark levels; other
manufacturing industry received 80% in 2013, decreasing in linear fashion each
year to 30% in 2020
• Benchmarks:
 Free allocation is carried out on the basis of benchmarks of greenhouse gas
emissions performance
 Community-wide ex-ante benchmarks ensuring that allocation takes place in
a manner that provides incentives for reductions in greenhouse gas
emissions and energy efficient techniques
 Based on product rather than on input
 Represents the average performance of the 10 % most efficient installations
in a sector or subsector in the Community in the years 2007-2008
 Fall-back approaches also exist
• Cross-sectoral correction factor:
 Applies if the total emission allowances distributed would exceed the
allowances available under the cap: reduces the free allocation volume
 5.73 % in 2013 and will thereafter increase gradually to 17.56% in 2020

27. INDIRECT EMISSIONS
• Article 10a6 of the EU ETS Directive
• Member States may adopt financial measures to compensate certain sectors
exposed to a significant risk of carbon leakage due to costs relating to GHG
emissions passed on in electricity prices
• Such financial measures must be in accordance with State aid rules
• The measures are based on ex-ante benchmarks of the indirect emissions of CO2
per unit of production (product of the electricity consumption per unit of
production corresponding to the most efficient available technologies and of the
CO2 emissions of the relevant European electricity production mix)
 Guidelines on certain State aid measures in the context of the GHG emission
allowance trading scheme post-2012 adopted on 22nd May 2012

28. INNOVATION
• Article 10a8 of the EU ETS Directive
• NER300 programme
 Programme aimed at promoting low-carbon technologies
 Up to 300 million allowances in the new entrants' reserve are
available until end 2015 to help stimulate the construction and
operation of up to 12 CCS or renewable energies commercial
demonstration projects in the territory of the Union
 Reserve dependent on the carbon price

29. INTERNATIONAL CREDITS
• Possibility to use credits generated by certain types of emission-saving
 The EU ETS aims at channeling investment and clean technologies to
promote low-carbon development in developing countries
 Projects around the world to cover a proportion of the emissions of
European operators
 Must be recognised under the Kyoto Protocol’s Clean Development
Mechanism or Joint Implementation mechanism as “bringing real
and genuinely additional emission reductions”
• Use has been limited (credits eligible only until April 2015)

30. MONITORING, REPORTING AND VERIFICATION
• Commission Regulation (EU) 601/2012 of 21st June 2012 (general MRV)
and Commission Regulation (EU) 600/2012 of 21st June 2012
(accreditation of verifiers)
• Compulsory monitoring, reporting and verification measures under the
EU ETS
 Businesses must monitor and report their EU ETS emissions for each
calendar year and have their emission reports checked by an
accredited verifier
 Emissions shall be monitored either by calculation or on the basis of
measurement

31. THE SCHEME AND ITS FUNCTIONING IN PRACTICE
• In practical terms, operators under the EU ETS
need to apply for an emission permit
 The national authorities are in charge of its issuance
• The operators are also subject to reporting and verification rules
• These administrative obligations add to the primary (carbon) cost of the
EU ETS

32. CHALLENGES OF THE EU ETS (1)
• Low flexibility of the scheme
• Surplus of allowances -> low carbon prices
• Credibility of the system harmed (quick fixes; long term objectives)
Source: European Commission

33. CHALLENGES OF THE EU ETS (2)
CARBON PRICE EVOLUTION
Source: EEA, Bloomberg

34. STRUCTURAL REFORM OF THE EU ETS
• Back-loading
 Commission Regulation (EU) 176/2014 of 25th February 2014
 The Commission postponed the auctioning of 900 million allowances until 2019-2020
to allow demand to pick up
 Temporary measure only
• Market Stability Reserve
 Proposal for a Decision expected to be
officially adopted on 6th July 2015
 More structural measure
 Aims both at addressing the surplus of emission allowances that has built up and at
improving the system's resilience to major shocks by adjusting the supply of
allowances to be auctioned
 Would incorporate the back-loaded allowances

35. ACHIEVEMENTS OF THE EU ETS (1)
• According to latest estimates, total EU
GHG emissions in 2013 were around
19% below 1990 levels; projections
show a reduction of 21% by 2020
• Decoupling between economic
activity and GHG emissions achieved
Source: European Commission, report on progress, October 2014 Source: EEA, DG ECFIN (Ameco database), Eurostat
• N.B. Influence of economic/financial crisis: reduction of industrial output (and
energy consumption); to be balanced (e.g. Germany’s Energiewende and
US shale gas revolution increased EU coal consumption)

36. ACHIEVEMENTS OF THE EU ETS (2)
REDUCTION DRIVERS - ILLUSTRATION
• European Environment Agency: analysis on basis of aggregate decomposition of
the change in total CO2 emissions from fossil fuel combustion in the EU for the
2005-2008 and 2008-2012 periods
Source: EEA

37. ECONOMIC IMPACT OF THE EU ETS
• On operators within the system:
 Energy-intensive industries: millions of €
annually per company
 Carbon price evolution has impact
 Cost still difficult to estimate (phase 3 is young)
 CEPS report of October 2013: cumulative cost
impact assessment of EU regulation on the aluminium industry
 ETS indirect costs 2012: from 50€ to 70€/tonne of aluminium
 Only indirect costs but already 45% of total costs
• On Member States:
 New public resource as from 2013
 Additional and non negligible income
 Between 10 and 20 € bn annually in total

38. EU ETS DIRECTIVE REVIEW
UNDER THE 2030 FRAMEWORK
• Commission Communication of 22nd January 2014 on 2030 framework
• European Council conclusions of 23rd October 2014
 Domestic 2030 greenhouse gas reduction target of at least 40%
compared to 1990
• To achieve the overall 40% target, the sectors covered by the EU
emissions trading system (EU ETS) would have to reduce their emissions
by 43% compared to 2005
• The target translates into a cap declining by 2.2% annually from 2021
onwards
 Legislative proposal expected on 15th July 2015

39. INTERNATIONAL ASPECTS
• Corollary of the EU ETS at global level
• EU compliance with Kyoto Protocol
• The EU on the road to Paris COP21
• Linkages with other ETS
• Towards a global carbon market?

40. COROLLARY: GIVE IMPULSE AT GLOBAL LEVEL
INTERACTION BETWEEN EU INSTITUTIONS AND INTERNATIONAL BODIES
• UNFCCC: the EU is endorsing its works
• IEA: influence, e.g. on energy efficiency policy
• OECD, e.g. Global Forum on Sustainable Development works on
emissions trading, innovation
• World Bank, e.g. studies on carbon market, price evolutions; advocacy
aiming at “putting a price on carbon”
POSITION OF THE EU AT GLOBAL LEVEL
• Ardent fighter against climate change: we cannot afford waiting
• But also: we can afford the fight… financially speaking
• EU’s ambition: be a world leader in the fight against climate change
• Has managed speaking with one voice at the latest international
conferences on climate

41. EU COMPLIANCE WITH KYOTO PROTOCOL
Source: European Commission and EEA

42. THE EU ON THE ROAD TO PARIS
EU VISION OF 2015 AGREEMENT
• Communication “The Paris Protocol - A blueprint for tackling global climate
change” (25th February 2015)
 Put the world on track to reduce global emissions by at least 60% below
2010 level by 2050
 Next step: a global carbon market
SOME MAJOR ISSUES
• Importance of financing to help developing countries fight climate change
• Technology transfer from developed to developing countries
WHAT TO EXPECT?
• The pledges from other major parties do not match the EU’s ambition
• The international negotiations move at a snail’s pace

43. LINKAGES WITH OTHER ETS
AUSTRALIA
• First linkage attempt of EU ETS with another system
• Preparation started in 2013, but the project failed
CHINA
• Joint EU-China declaration on climate change (29th June 2015)
• Could China bring the future sister ETS?

44. TOWARDS A GLOBAL CARBON MARKET?
• 2012: EU responsible of around 10% of GHG emissions worldwide
• Expectations for 2020: EU to be responsible of around 6%
Source: Carbon Pricing Watch 2015, World Bank

45. RELATIONS WITH OTHER EU POLICIES
• Energy efficiency
• Renewable energies
• Internal energy market

46. FROM THE LOW-CARBON ECONOMY ROADMAP
TO THE ENERGY UNION STRATEGY
• Global target brought by Roadmap for moving to a competitive low-carbon
economy in 2050 (2011)
 Reduction of GHG emissions to 80-95% below 1990 levels through domestic
reductions alone (almost full decarbonisation)
• Target confirmed by Energy Union Communication of 25th February 2015
ENERGY EFFICIENCY
• The EU envisages an indicative non-binding target of 27% energy savings by 2030
• Both policies are overlapping, but the emissions saved under the energy
efficiency policy are not duly taken into account in the framework of the EU ETS
RENEWABLE ENERGIES
• The EU also envisages a 27% (binding) target at EU level for renewable energies
by 2030
• The responsibility lies within the power sector subsequent to it being subject to
the EU ETS Directive and being invited to fully decarbonise by 2050
• However the economic consequences of this policy are under question

47. THE ENERGY UNION STRATEGY (CONTINUED)
INTERNAL ENERGY MARKET
• Low-carbon strategy complemented by new internal energy market
design
• Objectives:
 Completion of the internal energy market
 Adaptation to the expected future decarbonisation of the power
sector
 Consultative Communication to be published on 15th July 2015

48. THANK YOU!
Iva Ganev
ganev@euroalliages.be