EMISSIONS TRADING
Supporting document for presentation by the Environmental Protection Agency to the
Joint Committee on Communications, Marine and Natural Resources – 29 June 2005
The European Union (EU) and its Member States are signatories to the Kyoto Protocol, which
requires reductions in emissions of greenhouse gases by specific amounts over a period from
2008 to 2012 and beyond. The EU committed to an average reduction of greenhouse gas
emissions by 8% below 1990 levels. Decision 2002/358/EC apportioned this 8% reduction
among the Member States and requires Ireland to limit the growth in emissions by the period
2008-2012 to 13% above base year emissions. The EU Emissions Trading Directive
(Directive 2003/87/EC) is being implemented to assist in achieving these targets.
There is currently a significant gap between Ireland's emissions of greenhouse gases and the
target for emissions of these gases under the Kyoto Protocol. Measures in the Government’s
National Climate Change Strategy – including emissions trading and the use of flexible
mechanisms such as purchases of allowances – are forecast to allow Ireland to meet its Kyoto
targets.
Emissions Trading, which commenced in the European Union in early 2005, is a financial
mechanism designed to deliver reductions in carbon dioxide emissions at least cost to those
involved. It is a “cap and trade” scheme whereby each participant is given a free allocation (the
“cap”) with a requirement to record actual emissions of CO2 (t/a). At the end of every year each
participant must surrender allowances equal to their emissions. If there are unused allowances
they can be sold; if there is a shortfall, allowances must be bought (the “trade”) – otherwise large
penalties are involved. Hence reductions can be made by those best able to afford them while
those facing high reduction costs can instead purchase allowances from those facing lower
reduction costs.
The EPA is the competent authority for implementing the Emissions Trading Directive in Ireland
and has developed a methodology for allocating allowances to over 100 companies targeted by
the Directive. Emissions from these companies account for approximately one third of national
greenhouse gas emissions. The EPA has furthermore developed a National Allocation Plan for
the period 2005 to 2007 which has been approved by the European Commission. Both the
methodology and the National Allocation Plan were the subject of public consultations during
2004, and have both been made available on the EPA website at www.epa.ie.
The Directive has been transposed into Irish law by the European Communities (Greenhouse
Gas Emissions Trading) Regulations 2004 (S.I. 437 of 2004) under which the Environmental
Protection Agency has been assigned responsibility for its implementation in Ireland. The remit
involves the design and implementation, in accordance with the direction of the Minister for
Environment, Heritage and Local Government, of a National Allocation Plan which indicates
(i)
what proportion of national emissions has been assigned to emissions trading; and
(ii)
how the portion assigned to emissions trading is distributed among those covered
by the scheme.
The first such NAP covers the pilot phase 2005-2007.
The EPA appointed Indecon International Economic Consultants and ENVIROS Consulting to
assist it in determining the distribution of national greenhouse gas emissions to the various
industrial sectors and participants involved. The final report from Indecon/Enviros was issued in
February 2004 and was made available on the EPA website.
A National Allocation Advisory Group (NAAG) was appointed by Government to advise the
Agency on how best to discharge its obligations in formulating the National Allocation Plan. The
Group comprises the Chief Executives (or their senior nominees) of the Commission for Energy
Regulation, Fórfás, the National Treasury Management Agency and Sustainable Energy Ireland,
together with the Director General of the EPA, under the chairmanship of Dr. E. Walsh.
The Government decided what proportion of national greenhouse gas emissions to assign to the
trading sector. This issue was the subject of a separate study led by the Department of the
Environment, Heritage and Local Government, the ICF Consulting/Byrne Ó Cléirigh (ICF/BOC)
report, which was also issued in early February 2004. On 9 February 2004 the Government
conveyed its decision on the total amount to the EPA and also included a number of additional
items to be taken into account in making the allocations to sectors and to individual installations.
In reaching its conclusions on the National Allocation Plan the EPA took into account the many
submissions made to it, both prior to and during the first formal consultation period from 23/02/04
to 10/03/04, concerning the issues involved as well as the recommendations of the ICF/BOC
report, the Indecon/Enviros report, the NAAG and the Government Decision conveyed to EPA on
9 February 2004.
Following initial notification of the National Allocation Plan to the EU on 31 March 2004, a number
of questions was raised by the Commission (letter of 14 May 2004) to which a reply was sent on
27 May 2004. Further discussions with the Commission in order to ensure compliance with the
Annex III criteria of the Emissions Trading Directive resulted in the Government deciding to
reduce the overall amount allocated to Emissions Trading by 0.18 Mt/a (to 22.32 Mt/a) for each of
the three years of the plan. The Agency was also asked to re-examine the subject of allowances
arising from delays etc. and made a number of changes in the operation of the set-asides (i.e.
reserves) for new entrants and CHP (combined heat and power). The National Allocation Plan
was then approved by Commission Decision of 7 July 2004.
From March to September 2004, the Agency also carried out detailed site-by-site
verification/substantiation of the baseline data submitted by each operator in support of their
allocation. This resulted in a number of changes to the data on which the earlier “List of Proposed
Allocations” was based. These were incorporated into a second public consultation in late
September / early October 2004, together with a number of text changes to provide greater
clarity on the manner in which allocations for Known Planned Developments and from the setasides will be treated.
The resulting National Allocation Methodology was notified to the Commission in December 2004
and approved in January 2005. The Final Allocation Decision for 2005 – 2007 was taken on
March 8, 2005. The projected impact of these allocations is a 3-4% reduction in the emissions
from these facilities during the 2005 – 2008 period which will help ensure we are on target to
achieve our Kyoto commitment for the 2008-2012 period. A second National Allocation Plan
covering the period 2008 to 2012 will be developed by June 2006.
The EPA has been designated the Competent Authority for issuing greenhouse gas emissions
permits and for overseeing the monitoring, reporting and verification of emissions from
participating companies. The Agency is also required to establish Ireland’s National Emissions
Trading Registry to track ownership of allowances. The registry is expected to “go-live” as a web
based system in the next few weeks.
Summary of Basis on Which Allocations have been Made for 2005 - 2007
1.
Under the National Allocation Plan 66.96 million allowances have been allocated for the Pilot Phase of Emissions Trading.
2.
Allocations of allowances have been made in a two-stage approach that allocates allowances at sector level in the first instance
and subsequently allocates to installations within each sector.
3.
Allocations at sector level have been made on the basis of average historic emissions in 2002 and 2003 adjusted for National
Energy Policy and relevant legislation, and taking into account the Government Decision conveyed to EPA on 9 February
2004.
4.
Allocations at installation level will be issued annually and have been made on the basis of average historic emissions in 2002
and 2003 except where this is less than 90% of the average of the emissions in the highest three years of 2000-2003. In this
case the average of the emissions in the highest three years of 2000-2003 has been applied. Where any installation (or part
thereof) only commenced operations in 2002 or 2003, an allocation for the installation (or part thereof) is based on either:
a) a pro rata approach based on emissions during the appropriate month(s) of 2002 and/or 2003
or (and only in situations where the Agency considers it appropriate),
b) agreed projected emissions where the installation has not completed initial ramp-up1.
A known planned development (KPD) is an installation, or part of an installation, which had not commenced operations
before 01/01/2004 but which has been granted a Greenhouse Gas Permit by 31/03/04. A KPD only arises where there is an
increase in the installed capacity of a permittable (under S.I. 437 of 2004) installation. Allocations for KPDs are based on
agreed projected emissions (assuming use of best available technology). In addition:
(i) Allocations for KPDs have been taken from the relevant sector allocation and will be issued within one month after
commissioning of the plant is completed to the satisfaction of the Agency.
(ii) Any unrequired allocations arising from delays, cancellation or non-development of Known Planned Developments
shall be added to the New Entrant set-aside for the year in which they were intended to be allocated, on the day
following the decision by the Board of the Agency not to issue them to the intended installation.
(iii) Where any of the permissions originally required by a Known Planned Development to obtain an allocation under
the NAP expire, the allocation shall be cancelled and redistributed as per paragraph (ii) above.
Allocations calculated on the basis of projections will not be greater than 97% of agreed projected emissions.
5.
Allocations will be made to new entrants, as defined in the Regulations, on a free-of-charge basis from a general set-aside of
1.5% of total allowances. Within the general set-aside scheme an allocation of allowances will be made on the basis described
in the National Allocation Methodology.
6.
A total of 0.75% of allowances will be initially auctioned by EPA.
7.
Allowances allocated in respect of “existing emission points” shall be issued by February 28th each year. The issuing of such
allowances shall be subject to holding of a valid Greenhouse Gas Permit on January 1st of the year of issue.
Allowances allocated in respect of “planned emission points” shall be issued within one month after commissioning has been
completed to the satisfaction of the Agency.
8.
Where an installation is deemed by the Agency to have closed, no further allocations will be issued. Allowances arising in this
way will be auctioned to the benefit of the Exchequer, subject to the overall requirements of the Regulations.
9.
A CHP set-aside has been taken from the powergen sector allocation (on the basis of 148,800 t/a for each of the three years) to
be used for high efficiency CHP plants, other than Known Planned Developments, which first become operational on or after
01/01/04 at permitted installations. Within the CHP set-aside scheme an allocation of allowances will be made on the basis
described in the National Allocation Methodology, subject also to the following:
Where the thermal output from a new CHP plant, which is not also a KPD, is:
(a) displacing energy plant previously in receipt of an allocation, allowances for installations with such CHP plants will be
calculated by the EPA from the emissions associated with the installation in the absence of the CHP plant plus an
additional allowance for the CHP plant based on its agreed anticipated electricity generation as if it were a Best New
Entrant CCGT gas fired power plant; or
(b) In cases other than (a) above, agreed projected increased emissions will be used with the fraction assigned to electricity
generation coming from the CHP set-aside and the remainder coming from the new entrant set-aside.
In the case of a CHP plant which is also a KPD, the associated allowances come from the powergen sector for situation (a) or
from both powergen and its own sector in situation (b).
1
This condition is specifically for installations which have recently commenced and are still in an initial start-up phase and
where application of (a) would unfairly discriminate against them.