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Ecofys predicts 2nd phase of EU carbon market will be long
There is a risk that the European emissions trading market will be long rather than short, thereby failing to drive reductions in greenhouse gas emissions in European industry. This is the conclusion of Ecofys’ analysis of the proposed allocations for 2008 - 2012 under the European Emission Trading Scheme. Under such a scenario, the Kyoto targets would have to be achieved by other sectors such as smaller industries, households and transportation or much higher levels of purchases of carbon credits from the developing world.
Ecofys conducted an assessment of the draft National Allocation Plans (NAPs) for the 2nd phase of the EU Emission Trading Scheme (EU ETS), which is due to run from 2008 to 2012. The focus is on Member States’ progress towards the Kyoto targets and the level of the cap relative to Business as Usual (BAU) emission developments. The proposed allocation plans still need to be approved by the European Commission. Decisions on the first NAPs are due to be published in the next few days.
Market risks becoming long
Ecofys’ independent calculations indicate a 2.5% annual surplus (50 million tonnes of CO2) for the 2nd phase of the EU ETS. This conflicts with the official emission projections of the Member States, which suggest an annual shortage of 7% of total emissions (150 million tonnes of CO2). The explanation can be found in inflated projections for the BAU scenarios by some EU countries. Monique Voogt, Director of Energy and Climate Strategies at Ecofys: “If the European Commission follows the Member States’ proposals, we don’t expect to see a shortage of allowances in the market in the second phase. The market would rather be long than short, especially taking into account the additional supply of project-based emission credits from the Clean Development Mechanism and Joint Implementation. The market will only work properly if the caps are tightened, giving a clear price signal which will stimulate emission reductions within the EU.”
Some national emission projections are inflated
The country-by-country assessments were based on draft and notified versions of NAPs from 18 of the 25 EU Member States, plus Romania and Bulgaria, thus representing 97% of 2005 ETS sector emissions in the 27 countries. Especially surprising are the huge differences between official national emission projections and Ecofys’ estimates based on the official EU energy scenarios. For 9 of the 20 countries investigated, the national emission projections are more than 10% higher.
Uneven contribution to achieving Kyoto targets
The current allocation plans of nine Member States suggest that European industries that are within the ETS will not contribute sufficiently to achieving the overall Kyoto targets. These targets would then need to be met by other market sectors (domestic, smaller industries and transport) or by purchasing project-based emission credits (JI/CDM). However, only one of these nine Member States has planned sufficient purchases to make up for the gap, assuming that the credits are evenly spread over the different sectors in the economy.
Note for editorial staff:
A summary of the initial assessment is available in the publications section of Ecofys’ website (www.ecofys.com).
Ecofys International BV (www.ecofys.com)
Ecofys is a leading company in the field of renewable energy, energy efficiency and climate change. More than 250 employees in ten countries deliver sustainable energy services and innovations. Ecofys is part of the Econcern group, a European Top 500 growth company, with the mission to ensure ‘a sustainable energy supply for everyone’.
EU ETS
The EU Emission Trading Scheme is a cap and trade system which sets a limit on carbon dioxide (CO2) emissions from power stations and heavy industrial sites across the EU25. The aim of the scheme is to provide incentives for emission reductions in those sectors at the lowest possible cost by allowing trading of emissions rights between companies. If participants have emitted more in one year than the number of emissions rights (allowances) they were allocated, i.e. they are ‘short’ of allowances, they can choose whether to comply with the scheme by making emissions reductions or by purchasing additional allowances on the market from those who are ‘long’ (i.e. have an excess of allowances). Phase I of the EU ETS, which started operating on 1 January 2005, will run for the three-year period to 31 December 2007. It covers over 11,000 sites, which are responsible for approximately 50% of the EU’s total CO2 emissions. Phase II of the scheme will start on 1 January 2008 and run for a five-year period (until the end of 2012).
NAP
Each EU Member State is required to develop a National Allocation Plan (NAP) for their country which includes details of “European Union Allowances” (EUAs) to be allocated to participants in the scheme and also how this fits in with Member States’ international obligations under the Kyoto Protocol. Phase II NAPs were due to be submitted to the European Commission for approval by 30 June 2006. To date however not all NAPs have been formally notified to the Commission and many NAPs are still only available in their original language.
JI/CDM
Member States can choose to allow installations in their country to use project-based credits to contribute to meeting their EU ETS target. These can be generated either through Joint Implementation (JI) or Clean Development Mechanism (CDM) projects, the so-called Flexible Mechanisms under the Kyoto Protocol. By purchasing project-based credits participants support development of projects that reduce carbon dioxide emissions elsewhere instead of achieving own reductions. One of the main triggers for using project-based credits is that the costs of obtaining these credits per ton of CO2 are lower than prices on the EU market.
For more information please contact:
Linda van Maaren
PR Manager
T: + 31 (0)30 – 280 8390
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