EU to cut utilities’ free CO2 allowances from 2013

(pointcarbon, Oslo)European companies participating in the cap-and-trade scheme for carbon dioxide (CO2) emissions will see a sharp reduction in free allowances during the post-2012 trading period, according to a draft European commission document obtained by Point Carbon.

Electricity producers will take the biggest hit, with the commission proposing that the “transitional free allocation” in 2013 be “half” of the average annual allocation which the installations received in the period 2008-2012, the draft report said.
“Thereafter, this allocation should decrease by 10 per cent each year,” it said.

The EU emissions trading scheme, which started in 2005, is the world’s biggest market for CO2 emissions.

The market covers some 12,000 installations and nearly half of the 27-member bloc’s emissions of climate-changing gases. The EU has plans to link its scheme with similar trading schemes in non-EU countries Norway, Iceland and Liechtenstein.

The EU commission has been reviewing potential changes to the market for the third trading period, which starts in 2013. The commission is expected later this month to announce changes to market rules, as well as how member states will share the burden of reducing overall emissions by up to 30 per cent below 1990 levels by 2020.

EU officials have been keen to increase the amount of auctioning of emissions allowances in order to curb any potential for companies to enjoy windfall profits when allowances are given away for free.

“Auctioning should be the principle for all allocation, as it is simplest and most economically efficient for all allowances to be auctioned,” the document said. For the trading period 2008-2012, member states can auction up to a maximum of 10 per cent of their emissions allowances.

The commission reckons that the free allocation for industrial installations participating in the scheme in 2013 be 90 per cent of the average annual allocation during the period 2008-2012, followed by a 5- per cent decrease in allocations in each successive year.

The commission’s proposal, if adopted, would significantly increase the demand for allowances in the European market, analysts said.

“The suggested level of free allocation implies that the shortage of allowances before auctioning and reserves coming to market would be three times higher than the average in phase two,” Henrik Hasselknippe, manager of Point Carbon’s EU ETS team, said.

He explained that in the 2008-2012 period, EU member states will hand out some 1,900 million allowances for free annually, not including auctions and new entrant reserves. With the new EC proposal, this will be reduced to about 1,300 million in 2013 and 800 million in 2020.

“In addition, while there is transitional free allocation to installations included in the EU emissions trading system between 2008-12, it is justifiable for there to be harmonised community-wide rules for free allocation to installations which are included from 2012 onwards, and for installations which commence operations from 2013,” the document said.

The commission will propose that a certain per cent of the proceeds from the auctioning be used for various measures aimed at cutting emissions, such avoiding deforestation, funding for research for adapting to impacts of climate change or helping the region meet its commitment to using 20 per cent renewable energy by 2020.

Banking Kyoto credits

The commission is also expected to propose rules for how member states or companies can use carbon credits generated under the Kyoto protocol, such as certified emission reductions (CERs) or emission reduction units (ERUs), beyond the period 2008-2012.

“As introducing a requirement on member states to bank such CERs and ERUs would potentially increase the stringency of some member states’ commitments in community and international law by up to 5 per cent, this certainty should instead by given by requiring member states to exchange certain CERs and ERUs for allowances valid from 2013 onwards,” the draft document said.

“This should also apply to high quality CERs and ERUs issued in respect of emission reductions from 2013 onwards in countries which support the [EU] applying emissions trading to greenhouse gas emissions from aviation without discrimination on the basis of nationality."

“However, member states should not be obliged to accept CERs and ERUs which it is not certain they will be able to use towards their existing international commitments,” it said.

Climate border control

Meanwhile, the commission wants to ensure that greenhouse gas emissions occurring outside of the EU cap-and-trade scheme do not “undermine” member states’ efforts to cut emissions.

It will recommend member states adopt provisions to help reduce any distortion of competition and so-called ‘carbon leakage’ or companies relocating outside of the EU market to avoid reductions.

“Provisions to that effect (i.e. to avoid carbon leakage and distortion of competition) should be adopted and apply to the imports of goods which would otherwise undermine this action, and to the export of such goods,” the document said, adding that “these provisions should be neutral in their effect and should neither overcompensate nor under compensate.”

London