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Climate change: Commission sets out agenda for revising the EU emissions trading scheme from 2013

The European Commission on 14th November adopted a Communication setting out its agenda for revising the EU emissions trading scheme (EU ETS) in the light of experience gained since it began operating in January 2005. The Commission wants to promote the environmental impact of emission trading by expanding it to new sectors and gases and further its global application as a key tool to combat climate change. The review will also seek to give greater predictability to investors and strengthen harmonisation by streamlining how it is applied in the various Member States. These and other issues will be discussed extensively with stakeholders before the Commission makes a legislative proposal to revise the Emissions Trading Directive[1] in the second half of 2007. The changes will take effect in 2013 at the start of the scheme’s third trading period. The EU ETS enables energy-intensive industry and power generators to reduce their greenhouse gas emissions cost effectively, and is stimulating emission-saving projects around the world.

Environment Commissioner Stavros Dimas said: “Climate change is the gravest challenge facing mankind and emissions trading is the most effective policy instruments for tackling it. The EU Emissions Trading Scheme is a clear proof of the EU's commitment to take resolute action against climate change and reach the EU’s Kyoto targets. We now need to see how we can further improve the scheme. The better its design, the easier it will be for other countries to adopt similar policies.”

The operation of the EU ETS to date has already generated position papers and studies by stakeholders which will feed into the review. Further consultations will take place under the European Climate Change Programme (ECCP), where Commission officials, Member States, industry, non-governmental organisations and academics work together to identify the most cost-effective and environmentally efficient measures to reduce greenhouse gas emissions. The ECCP working group on the review will report by 30 June 2007.

Communication[2] on 14th November sets out four broad categories of issues on which the review will focus:

Scope of the scheme

The review will look at expanding the EU ETS to other sectors and other greenhouse gases besides carbon dioxide (CO2). This could for instance cover nitrous oxide (N2O) from ammonia production and methane from coal mines. The review will also look at how we can ensure that small installations contribute to our fight against climate change while reducing their costs. In the light of divergent interpretations by Member States, the review will consider ways to give greater clarity on which types of combustion installations should be covered.

Separately from the review, the Commission, Council and European Parliament have all expressed support for bringing aviation into the EU ETS and the Commission intends to make a specific legislative proposal on this within the next few months.

Further harmonisation and increased predictability

Harmonisation is needed in relation to what types of installations are covered by emission trading, including how we deal with newly operating installations and of installations which close during the course of a trading period. Greater harmonisation on the allocation of emission allowances is also required.

The Commission shares the widely expressed view that giving greater certainty to investors for longer than five years ahead, as the scheme does currently, is desirable. Increased predictability, as well as further harmonisation of the process under which Member States set an overall cap on their emissions and allocate emission allowances to installations, will thus be key strategic issues for the review. The Commission plans to explore the option of setting a single EU-wide cap after 2012.

Robust compliance and enforcement

While initial experience regarding compliance with and enforcement of the ETS rules has been encouraging, there is a need to assess further harmonisation of requirements. The focus will be on guidelines for monitoring and reporting emissions and rules for third-party verification of emissions reports.

Involving third countries

The Communication opens a discussion on how the EU ETS can be linked to existing or future schemes in third countries, such as the emissions trading schemes planned by the north-eastern States and California in the US and by Australian states. The Communication also contains a clear commitment by the Commission to maintain the scheme's recognition of credits from emission-saving projects carried out in developing countries and elsewhere, while further harmonising the EU ETS' provisions in this area. This will strengthen companies' willingness to engage in action to reduce emissions globally, leading to the transfer of clean technologies to third countries and to emission reductions taking place where this is most economically efficient.