A recent report assessing the first two years of the ETS outlines the positive, compromises and problems, while recommending benchmarking to increase business predictability
Following the completion of the initial phase of the EU emission trading scheme (ETS), the Centre for European Policy Studies (CEPS) was commissioned to draft a report on the operation of the scheme in its first two years. The report highlights the impact the ETS has had on business, and analyses the cost-effectiveness of the Commission's approach to reducing greenhouse gases (GHGs). The report's key recommendation is a call for implementation of EU-wide benchmarking for future allocation rules, such as output measurements and activity rates, to promote predictability for investment purposes.
Created to complement the EU’s implementation of the 1997 Kyoto Protocol, the ETS is the world's first largest multi-sector emission-trading mechanism designed to cut GHG emissions. Launched in 2005, the scheme covers 10 500 installations responsible for around 50% of carbon dioxide emissions in Europe.
At its inception, the target for the programme was to enable the Union to fulfil its Kyoto commitments and reduce CO2 emissions by 8% in 2012 compared with 1990 levels. The ETS entered its second phase in 2008, which will run until 2012. For the post-2012 period the EU committed itself to reduce GHG emissions unilaterally by 20% for 2020, or by 30% in the case of an international agreement to replace the Kyoto protocol which expires in 2012.
CEPS highlighted the benefits of a cap-and-trade system, in contrast to taxation and voluntary agreements, to stimulate a cut in GHG emissions. The report states this will create incentives for the most cost-effective ways to reduce emissions to be factored into business strategies. It is believed that such a move would also minimise the distortions of competition between industries by imposing an EU-wide carbon price. The main environmental benefit of the system is that it caps overall emission levels from the installations concerned.
The report also outlines some of the shortcomings and problems of the first phase of the ETS. It particularly concerns the difficulties that resulted from the fact that the allocation of free allowances was decided by the Member States, even though Commission scrutiny ensured a high degree of harmonisation.
Constraining inflated projections of emissions and centralisation of distribution of emission allowances were two issues CEPS felt should be addressed. The report also highlighted the need to assess ETS effectiveness in encouraging installations to make significant long-term investments in low-carbon technologies.
CEPS also raised concerns in relation to the conduct of electricity producers that were passing on increased power prices, while at the same time benefiting from free allocations – a practice which had resulted in windfall profits. Equally, it noted the problem of non-EU producers gaining a competitive edge, particularly in electricity-intensive markets such as aluminium production.
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Reform of the EU climate change policies and of the ETS will increase the importance of the EU Environmental Technologies Action Plan (ETAP) in the coming years. The introduction of changes in the ETS, the tightening of an EU-wide cap on emissions, reduction targets for industries outside ETS, as well as new rules on carbon capture and storage and on environmental subsidies, will increase the need for the development and promotion of eco-innovations across all sectors. As EU Environment Commissioner Dimas has emphasised, the creation of a low-carbon economy will unleash a wave of innovation and create new jobs in clean technology; therefore ETAP's role in providing support to the development and uptake of such eco-innovation becomes all the more significant.