Vienna, February 27, 2007
Austrian Federal Economic Chamber (AFEC)
Revision of the EU Emissions Trading Scheme (EU ETS)
Our paper is structured like Eurochambres consultation paper “Emissions Trading System –
Review” issued on December 12th 2006. Supported Eurochambres´ suggestions are shaded.
1. Preliminary note
For our Chamber, the issue “REVIEW OF THE EMISSIONS TRADING DIRECTIVE” in general is of
very high importance.
The future of the EU ETS must not be addressed in isolation – it is crucial to address also other
EU and national policies with similar climate change or energy related measures. We think
that the ongoing pressure on the ETS sector is undue.
Without a globally binding Post-Kyoto arrangement the discussion of the EU ETS is not well
balanced. The European industry does not accept any trading system without the background
of a globally working Post-Kyoto regime.
2. Introduction
We agree with the Commission that it is of utmost importance that the EU ETS, as a marketbased instrument, is streamlined so that greenhouse gas emissions can be reduced in a costeffective manner and so that it can serve as a role model for schemes in other parts of the
world. But we are concerned about the current non liberalised EU electricity market and the
missing global ETS approach.
We welcome the fact that the Commission takes the regulatory stability and predictability
seriously and starts already now to develop the measures that will take effect at the start of
the third trading period in 2013, since timely information about any changes is paramount for
businesses to adjust.
To highlight the importance of the regulatory stability and predictability we urgently suggest
the following:
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The Revision should follow the principles of harmonisation (combustion installation,
benchmarks etc.) and cost effectiveness (small emitters, etc.). Every proposal should be
discussed and assessed under these principles.
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We do not support the inclusion of the aviation into the ETS, because no major
environmental benefit but major economic disadvantage for both, aviation and stationary
installations, would be caused. A separate position paper is being developed by AFEC on
aviation and ETS.
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If the inclusion of aviation can not be avoided in general, we strongly reject the idea to
start the ETS for aviation during the trading period (at the moment the proposal sets 2011
for domestic and 2012 for intercontinental flights at starting years). The inclusion of
aviation during a trading period would cause major market distortions (mostly by
establishing large buyer aviation) with price increases which were not bases of the
negotiations of the NAPs for the Kyoto period. The earliest starting year for the inclusion
of aviation is 2013.
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The time schedules for developing NAP I and NAP II were chaotic: work for developing
NAP I started before the EU ETS directive was in force. After setting NAP I as well as NAP
II the Monitoring and Reporting rules were respectively amended. Today the initiative to
include aviation will be the leading case for the Revision of the EU ETS as a whole.
Æ legislative and administrative actions must be streamlined:
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To ensure that the legislation can consider every important argument, the EU ETS
should not be amended twice: firstly by including aviation, secondly by revising the
whole system. We urge to consolidate both initiatives, the inclusion of aviation and
the revision of the ETS directive into one single legislative action.
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To ensure legal stability the “rules of the game” must be stated early enough (at least
at the end of 2010 (for every aspect like the inclusion of aviation, monitoring and
reporting, design of the NAPs or EU-wide allocation, benchmarks and status of process
emissions).
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Due to the fact that small emitters (< 50.000 to. CO2 p.a., combustion installations <
50 MW) face enormous costs by monitoring and reporting without an environmental
benefit by the EU ETS, these small emitters should be excluded as soon as possible. To
avoid major changes to the market within trading periods, the allowances could be
kept by the Member States, if the small emitter is excluded of the system during the
period.
We propose to exclude small emitters as soon as possible. Small emitters should be
part of ETS on a voluntary basis (“opt-in”) only.
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Energy taxation and enforcing energy efficiency by the ETS are interconnected. Two
measures for the same environmental goal! Therefore in addition to the harmonization of
the ETS there is also a need of harmonizing the energy tax system: all installations
participating in the ETS should be exempted legally binding from energy taxation by
European legislation.
3. Strategic Issues for the Review:
In order to develop clear discussion paths we suggest distinguishing between two major
developments:
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Harmonization and consolidation of the EU ETS
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Further development of the EU ETS
o
New gases
o
New sectors
o
Linking with systems of third countries
The differentiation is needed to point out the advantages and disadvantages clear enough.
Impact assessments should address the proposed change exactly.
4. The Scope of the Directive:
We support measures that lead to more clarity and uniformity of application of the ETS in the
Member States.
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Major problems occur because of the unclear definition of the combustion installation
exceeding the thermal input of 20 MW. This discussion leads to market distortions. For
example parts of the Austrian textile and ceramic industry are covered by the ETS while
Germany’s are not, etc.
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In the IPPC context, Europe does not face such problems. Therefore we strongly support
the idea to set a 50 MW threshold in the ETS.
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Accept sector specific definitions of the term “energy activities” as proposed from
Germany for NAP I. Only those energy activities focussed on the production of energy for
the purpose of delivery to the public or external users are “energy activities” under
Annex I of the directive. We urge that Germany’s interpretation should be accepted by
the directive expressively.
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Differences in the status of 20 MW installations and other sectors in concern with the
reserves must be avoided.
The first priority is to avoid market distortions in the future system.
5. Participation of Small Installations on an opt-in basis only:
We welcome the fact that the cost/benefit ratio of the participation of small installations in
the scheme is being looked into before any changes are made.
Participation of small emitters
Taking into consideration that participation in the ETS entails much paper work on the side of
the company as well as on the side of the authorities/agencies that have to monitor this, we
would in general assume that it makes more sense not to oblige small installations to
participate in the ETS.
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We think that an installation with a smaller thermal input than 50 MW should be treated
as a small installation. This would lead to a streamlined EU legislation because the IPPC
threshold is 50 MW, too.
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There is also the need to adapt the thresholds in the ceramic industry to 75 t/d only, in
order to avoid the inclusion of very small emitters. The threshold value for the ceramic
industry should be redefined: Only installations with a capacity of > 75 t/d should be
covered by the ETS. Installations with a kiln capacity exceeding 4 m³ and with a setting
density per kiln exceeding 300 kg/m³ should not be covered by EU ETS any more. In other
words: the second criterion in Annex I should be eliminated. This unclear definition leads
to market distortions because the Member States differ in the execution of this clause.
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Furthermore any installation emitting less than 50.000 to. CO2 p.a. should be treated as a
small installation. Installations exceeding the threshold during the trading period should
be treated as new entrants.
These thresholds have to be implemented in the same way across all Member States so that
distortions of competition are avoided.
Considering the fact, that excluding small installations (defined as above with the threshold <
50.000 to. CO2 p.a.) would release approximately 65 % of the Austrian installations but only
less than 6 % of the Austrian NAP I cap the economic benefit would exceed the environmental
benefit enormously. The European figures prove the economic benefit: 75 % of the
installations emit up to 56.731 to. CO2 p.a.
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“Other policies”
We view with a critical eye the “other policies” mentioned in this paragraph as an alternative
to including small installations in the ETS. Given the fact that other sectors of the economy
have substantial shares in the total amount of greenhouse gas emissions, we believe, that
those should be tackled first, before imposing further measures on industry.
Furthermore we remind, that directive 2003/96/EG (Restructuring the Community Framework
for the taxation of energy products and electricity) states that the energy taxes for energy
intensive industry may be decreased to zero if (inter alia) the industry is covered by a
“tradable permit scheme” (Art. 17). This shows that European legislation already accepts the
Member States decision to impose energy taxes or to take part in a trading scheme.
Therefore we suggest making legally clear that small emitters are excluded if “the
installations are covered by other policies, especially energy taxation according to directive
2003/96/EC”.
Negative stimulus for the Industry
To avoid negative stimulus for the industry because of the motivation to go below the given
thresholds, any threshold value needs to be set high enough (esp. 50 MW). Following that, the
outsourcing of installations and the decreasing of permitted capacities would loose more and
more sense.
6. Extending the ETS to other Sectors and Gases:
Harmonised application is more urgent than extension of the EU ETS.
Some of the questions raised (for example the inclusion of petrochemical production) are to be
resolved by the harmonization of the EU ETS. The petrochemical production is already
included in Austria.
Including any sector or gas during a trading period must be avoided anyway. The
calculation and the design of NAP II is finished already. Any major changes (causing an
increasing demand on allowances) will lead to major impacts to the price that were not
considered during negotiating NAP II.
7. Member States´ unilateral inclusion of activities and gases
One major priority is to harmonize the EU ETS. Therefore it is not useful, that the inclusion of
any sector or gas is up to the Member States. This leads to major market distortions.
The same problem occurs, if a single operator not listed in Annex I may opt in.
The unilateral inclusion, as well as opting in of a not mentioned gas or sector must cause
market distortions.
We oppose any opt in by Member States or installations except the voluntary opt in of
installations already listed as activities of Annex I below the threshold.
8. Recognition of CO2 capture and storage (CCS)
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Recognizing CCS should be a major part of an EU-wide climate policy. This and the stable
legal framework should be established as soon as possible to ensure, that CCS is used to reach
Kyoto-Targets. As outcome of these projects the tradable EU-allowances should be granted to
widen the carbon-market for every installation.
Also other projects involving carbon sinks (e.g. reforestation, hydration of CaO or MgO)
carried out under defined conditions should be taken into account. Again, the conditions for
being able to include those emission reductions into account must be applied in a harmonised
way across the EU.
9. EU-Level approval process for reduction projects
We strongly support the idea, that these (new) types of projects within the EU are
recognized. Generating EU-allowances by such projects within the EU should support the
flexibility of the EU ETS and are needed to find the most cost effective way to reduce
greenhouse-gas emissions.
We strongly urge that these projects must not be treated by the same administrative burden
like CDM projects. Simple rules should be established to link with the EU ETS.
10. Harmonised approaches to installations that are new or that close during a trading
period
Reserves:
As long as the allocation is managed with National Allocation Plans the treatment of new
entrants must be kept at the Member States´ disposal in principle. Due to the fact that long
term investment projects need planning security the question of making free allowances
available is an integrated part of the Member States decision.
We believe that common rules for the administration of the national reserves can contribute
to a comparable treatment for new entrants in all Member States. This is welcomed, as it will
allow operators to choose the location for a new installation on the basis of purely businessrelated criteria, without having to take the availability of allowances or the different policies
applied to new entrants in the Member States into account.
Pooling all Member States’ new entrant reserves for the sectors with EU-wide allocation may
be more beneficial as a smaller amount of allowances will have to be set aside as compared
to the situation where each Member State keeps the reserve for itself. Thus, more allowances
will be available for allocation to the existing companies in the first place, which will help
avoiding too steep an increase in prices. For sectors having still a national allocation plan,
national reserves have to be managed.
There is no reason to drop the reserves in future EU ETS. For most of the covered sectors the
question of getting free allowances is essential for sustainable production and investmentdecisions. The system to set the reserves aside should be changed, because there will be too
much competition distortion between incumbents and new entrants in the future.
Reserves should be granted additional to the CAP for the existing installations to ensure, that
the balance between new and existing installation can be kept. There are no reasons for the
idea that new installations should be granted more free allowances than existing ones. The
benchmark (as the ideal allocation model) should be the only measure (were applicable; see
point 11).
Closing installations during a trading period:
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We think that closing installations should loose their allowances for the years following the
date of closure. “Closing” should be defined by the loss of the permission according to Art. 4
ETS directive. Allowances allocated to these installations should be transferred into the
reserves.
If the permit according article 4 ETS directive is still existing but the installation is not
operating, the authorities should have the right to stop the granting of the allowances like in
the cases were the article 4 permit is lost.
Switching to bio fuels or transferring allowances from one (closing) to another (existing or
new) installation of the same operator should be allowed.
11. EU-wide allocation or one for each Member State after 2012?
Post-Kyoto:
Without a globally binding Post-Kyoto arrangement the discussion of the EU ETS is not well
balanced. The European industry does not accept any trading system without the background
of a globally working Post-Kyoto regime.
As long as the Post-Kyoto arrangement does not include every major global emitting country
(like US, India, China, etc.) imposing the European industry with the EU ETS is a major
economical disadvantage, which we oppose.
Harmonizing the allocation criteria and method at least EU-wide for large emitters
producing homogenous (benchmarkable) products/goods:
Under the umbrella of a Post-Kyoto arrangement covering all major emitting countries the
major principle “harmonization” means with respect to the allocation criteria to
Step 1: Examine which sector (group of installations) manufactures goods which can be
brought into a homogenous benchmarking system (especially cement, lime or steel);
Step 2: Set EU-wide benchmarks for benchmarkable goods;
Step 3: National Allocation Plans (NAPs) will remain for sectors with not benchmarkable
products
ad Step 1) To ensure an acceptable EU-wide allocation the allocation criteria must be based
on an carbon-efficiency benchmark for a comparable group of products. Installations
producing efficiently must not be limited in their production (Lisbon Strategy).
Benchmarkable/comparable products are electrical energy, tonne-kilometre, cement clinker,
lime and steel. It has to be assessed very carefully if a product/group of products can be
benchmarked in a fair manner.
It has to be said, that not every installation or group of installations will be covered by EUwide allocation, because many of them are producing extremely different goods which can
not be benchmarked (like chemical industry and refineries (petrochemical industry)).
ad Step 2) An EU-wide benchmark should be set for every benchmarkable good, or group of
goods. This benchmark should be defined as a value of CO2 per unit of output (see the
definition of benchmarking above).
It is obvious, that main parts of the ongoing discussions lack a clear definition of the
“benchmark system”.
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It should be made clear, that benchmarking means the following:
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Each installation/branch in the EU producing benchmarkable products/goods has to be
assessed on the question, how much CO2 is emitted to produce on unit of product (e.g. to
CO2/ to lime). The average value of these figures is the benchmark for these
products/goods.
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Reasonable differentiations for example in several production technologies and fuels have
to be considered by different benchmarks.
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Installations meeting the benchmark must not bear a reduction of the needed volume of
free allowances.
Therefore, the benchmark is not a politically set factor but a technology based figure to
ensure, that the sectors producing homogenous products/goods are stimulated to reduce
emissions in a cost effective way.
For these installations producing benchmarkable/comparable goods an EU-wide allocation
process could be based on the following variables:
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allocation by benchmarking: Every installation gets free allowances according to the
realised production multiplied with a benchmark (defined as above).
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Installations producing at the benchmark must not be treated by a reduction target.
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Expected growth in the future (examined by energy scenarios as well as other studies for
activity data (especially for branches with process emissions) should be used to calculate
the needed allowances
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Free Sector Reserves for new entrants added on top in a reasonable amount
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A reasonable and challenging contribution of the non ETS sectors to the Post-Kyoto
targets taking into account the already reached efficiency (early actions)
ad Step 3) To manage the groups of installations which can not be benchmarked (for example:
textile, chemical industry, refineries, food processing etc.) the allocation must be kept by the
Member States and are up to the national climate strategies and NAPs.
A benchmarking example for the lime industry:
Based on the experience of the Austrian lime enterprises in the Emission Trading System (ETS) a benchmark-system
(BMS) could be basis of discussion for an optimized ETS post 2012, because the rules of the existing ETS support
effects of distortion on competition. Therefore a BMS needs carefully selected basic conditions. We explicitly
stress that lime industry is very sensible because the lime production process is characterized by the highest
amount of process-CO2 and also by the biggest economic impact (cost ETS / t CaO).
The final agreement on a BMS depends on the conditions of the system. From the point of view of the Austrian
lime industry the following conditions are at least necessary for the system to work without any distortion of
competition:
¾ EU-wide uniform Benchmarks ( kg CO2 / t lime)
¾
No limitation of lime production (Lisbon strategy)
¾
¾
Specific Benchmarks (BM) for each kiln-type with consideration of kiln capacity
No reduction potential for stoichiometric process-CO2
¾
specific BM for hard and soft burnt lime
¾
Central allocation authority (no national allocation authorities)
¾
Baseline for allocation = production of last year
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¾
Once allocated certificates must not be confiscated by an ex-post-adjustment
¾
Ex post adjustment is necessary only for enlargement of an existing plant or establishment of a new plant
¾
Controlling and reporting by national authorities
¾
Simplified monitoring system
¾
No auctioning
¾
Quick decision on EU-level to have enough time to create an optimum BM-system
¾
Installation of activity-specific working groups (representatives of lime industry and the EU) to define the BM
Keeping the National Allocation Plan for small emitters producing inhomogeneous (not
benchmarkable) products/goods:
It is a fact, that the wide scope of the ETS leads to the followings distortions:
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A huge number of small emitters are burdened by an enormous administrative burden.
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A number of larger emitters are covered producing not benchmarkable products. This
type is often seen in the chemical industry for instance covered unnecessarily by the large
scope of the 20 MW clause.
We therefore urge to release these groups of emitters out of the scope of the ETS by using
the 50 MW / 50.000 to. CO2 p.a. thresholds (see above).
In order to avoid undue benchmarks or EU-wide allocation processes, the national allocation
plan must be kept for these installations producing not benchmarkable goods .
Establishing longer trading periods
The trading periods have to be harmonized with the eventually Post-Kyoto arrangement time
periods.
Longer trading periods than 5 years would increase the planning security for the long term
investments in theory. The main question is if this advantage of the long time period would
be contradicted by major changes during the long periods (as for example the proposed
inclusion of the aviation during the Kyoto period). Therefore we think, that longer trading
periods should be established only if major changes (new sector, gases etc.) are not expected
any more (Æ wait for a stable system) or the possibility of ex post adjustment is foreseen.
If the EU ETS is stable, periods longer than 10 years using benchmarking are useful.
12. Allocation of allowances to sectors/installations
It is important that allocation mechanisms are designed such that there is no discrimination
between or within sectors. A certain degree of harmonisation on European level would also be
useful in order to avoid distortion of competition.
Realistic sector or trade specific benchmarks that also allow for future growth are a valuable
tool for authorities to allocate allowances correctly. Basing allocation only on historical
output data may have a counterproductive effect, as it “punishes” early action and thus may
give companies with installations not yet covered by the ETS a disincentive to proactively
reduce their GHG emissions. Therefore we propose to establish an allocation procedure by
benchmarking as defined above.
As emissions related to the transformation of certain raw materials (process emissions such as
in the production of steel, glass, or cement, lime, bricks etc.) cannot be reduced except by
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decreasing the production volume, it should be considered whether they could be exempted
from the ETS, if the company can show that BAT is being applied. If the process emissions can
not be exempted from ETS, allocation for process emissions must respect the missing
technical potential of reduction. We urge the Commission to accept that.
We fully agree with the idea to examine whether costs for allowances (also “costs” for free
allowances) are forwarded to the final consumer by the covered sectors. It is to be discussed
whether caps for these sectors should be made stricter, because this would shorten the
market once more.
13. Auctioning of allowances
Being market-based, auctioning is often seen as an efficient mechanism for the allocation of
scarce goods. However, when strategic thinking of market actors is taken into account, it is
evident that some financially strong companies may buy up as many allowances as possible
and simply keep them, attempting to drive up costs for their competitors.
SMEs, especially, would most likely find it difficult to finance the “investment” in the
quantity of allowances needed for a certain period of time. They may be forced to take out
loans and would thus incur interest expenses in addition to the cost of the allowances.
An exclusion of new entrants from free allowances would prevent them from entering the
market. It it is to be expected that the different costs between an existing and a new
installation would lead to a stop of investments.
Another open question is how the revenue from the auction should be spent. Depending on its
use, an unjustified redistribution from one sector of the economy to another may occur.
Therefore, if auctioning is adopted for more than a marginal portion of the total allocations,
it must be ensured that the revenue is used to propose support for energy efficiency
investments to enterprises covered by the ETS.
For this reason, we believe, that all, or at least a significant portion, of the allowances should
still be allocated for free, without an auction. Changing the share of auctioning would
question a large number of already calculated investments.
14. Predictability – periodic redesign of the EU ETS
We oppose the idea to periodically redesign the major principles of the EU ETS.
We suggest regularly investigating which problems interfere with the effectiveness of the
system. Therefore we support a periodically evaluation but no periodic redesign.
The rules of the game must become stable.
15. Monitoring and Reporting
We acknowledge that monitoring and reporting is important for the evaluation and further
development of the ETS, and that market transparency helps the efficient working of the
system. However, monitoring and reporting requirements must respect the participants’ need
to keep some business information confidential. The requirements must be designed in such a
way that the amount of time spent on form-filling – be it on paper or electronically - is kept
to a minimum.
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The installations covered by EU ETS should be exempted from other reporting obligations like
the E-PRTR Register. Published data from the EU ETS reporting can automatically be
transferred into E-PRTR respecting the confidential parts of information.
We propose to introduce simplified monitoring for installations with emissions of less than
100.000 tonnes per year.
Instead of monitoring, reporting and verifying CO2 emissions from combustion in todays strict
manner, it should be possible to just use a document of the energy supplier that describes the
delivered fuels and the total CO2 emissions coming from burning these fuels (emission
factor). In most cases it is very easy for energy suppliers to put this information on the
invoice. This will significantly reduce the administrative burden on small companies without
reducing the accuracy required for monitoring and verification.
15. Verification
Our industry wants independent verifiers to be acknowledged EU-wide if once acknowledged
by a Member State. Uniform rules should be set for the acknowledgement.
We think that Annex V of the ETS directive is detailed enough for the verifying process.
16. Additional Compliance Provisions:
We think that the compliance provisions are well set in Austria. Site inspections may be
conducted by the competent authority to ensure the compliance based on the existing
legislation for permitting installations.
EU-wide provisions should be set only in accordance with the ongoing IPPC revision
discussions. An EU ETS site inspection etc. is not needed. Bureaucracy would increase without
any advantage for the climate.
17. Linking EU ETS with ETS in third countries, means to involve developing and transition
countries
Climate change is a global problem and should thus also be tackled at as wide a scale as
possible.
However, there should not be a unilateral imposition of restrictions on EU firms, which add
cost but are not reflected in increased market share.
It is therefore important to involve as many other countries as possible, also with a view to
creating demand for the technologies developed in Europe, so that EU companies can profit
from their first mover advantage.
We welcome all efforts to extend the ETS to other countries, as additional participants make
the market more efficient and more economic, as newly participating states may have more
potential for cost-efficient emissions reductions left. This will prevent the price of allowances
from rising too high and at the same time benefit the environment.
In addition, large emitters in Asia and the Americas as well as regions should be encouraged
to join the ETS as of 2013 at the latest, as this would remove the competitive disadvantages
imposed on installations located in Europe.
The linking with third countries has to consider the following:
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Similar rigorous provisions must be provided in the systems
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Transparency as well as a market system similar to the European has to be provided.
18. Institutional and Procedural Aspects
We do not think that new authorities need to be established on EU or national level. EU-Wide
allocation processes could be managed through the existing authorities by harmonizing the
Member States` activities.
New efforts should be made to enable Carbon Capture and Storage, sinks in industrial
production processes, Domestic Offset Projects and setting other incentives for climate
protection.
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