IETA | International Emissions Trading Association

An intensive process is underway in Brussels on changes to the EU ETS. Given the dramatic impacts of the economic crisis on emissions markets, EU policymakers are concerned that the ETS is sending a weak investment signal – particularly in light of Europe’s long--‐term commitment to limiting emissions commensurate with holding temperature increases to 2 degrees C.

This note reviews the main changes under consideration and assesses recent developments in the policy process. IETA’s full position on ETS reforms is available on our website www.ieta.org

The EU Emissions Trading Scheme is the leading edge of a global trend for governments to use cap--‐and--‐trade policies to address climate change. This trend reaches from Australia, California and the Northeastern US states to Alberta and Quebec in Canada. It is extending to the pilot systems emerging in 16 developing countries, where IETA’s Business Partnership for Market Readiness (B--‐PMR) is active.

The International Emissions Trading Association (IETA) is a non--‐profit business organisation created in June 1999 to establish a functional international framework for trading in greenhouse gas emission reductions. Our membership includes leading international companies from across the carbon trading cycle. IETA members seek to develop an emissions--‐trading regime that results in real and verifiable greenhouse gas emission reductions, while balancing economic efficiency with environmental integrity and social equity. IETA comprises over 140 international companies from OECD and non--‐OECD countries.

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April 11, 2012

I. Background

The price of an EU ETS allowance (EUA) is not bound by any price floor or ceiling but is based on price discovery regarding supply and demand in markets. The price fluctuates in line with market participants’ view of supply and demand. There is no tool foreseen for short-­term market intervention by the regulator under Directive 2003/87/EC (ETS Directive). The only form of addressing a divergence from underlying economic factors is by adjusting market supply, i.e. the emission reduction objective or the ‘cap’.

EU ETS & Aviation

Background

In 2005, European Union (EU) policy makers turned their attention on regulating emissions from the aviation sector. Although aviation only accounted for 3% of global carbon emissions in 2009, the industry’s carbon footprint has increased by 98% between 1990 and 2006.¹  Due to an emissions growth forecast of 667% from 2006 to 2050, the sector stands to become a more important source of GHG emissions in the future unless mitigation policies are being taken.

Why Emissions Trading is More Effective than Command and Control

Cap and trade systems and command and control regulation both involve the limiting of emissions in polluting sectors of the economy. However, cap-and-trade provides economic incentives for private sector actors to engage in mitigation, thereby making it the most efficient method of achieving an environmental target. Cap-and-trade is already the policy instrument of choice in many U.S States, the EU and Australia, and has proven to be effective in the U.S Acid Rain Program.

The principal advantages of emissions trading are:

Voluntary Markets For IETA

The voluntary carbon market includes any sectors and geographies not covered by mandatory cap-and-trade schemes or other regulation of greenhouse gas (GHG) emissions. Individuals, companies and governments purchase carbon offsets to mitigate their own greenhouse gas emissions, to cover some or all of their carbon footprint for particular activities or businesses, or just to display their concern for the environment.

In 2010, suppliers of offset services transacted a conservative estimate of 131 MtCO2e (1). In a period of economic recession and political uncertainty, this figure is a positive reflection of the growing interest in climate/carbon finance. The market grew by 34% ⁽²⁾ last year and is predicted to steadily increase post 2012.

The EU's Emissions Trading System

The European Union cap and trade system is the most developed in the world and will become progressively tighter and more comprehensive as the decade progresses.

The EU’s emission trading scheme (ETS) - kicked off in 2005 and, following an initial pilot phase, now in its second phase - is the most ambitious of its kind in the world. It covers about 12.000 installations in 30 countries(1) and 41% of the EU’s CO2 emissions. The ETS sector includes the power and heat generation sector, combustion plants, oil refineries, coke ovens, iron and steel plants and factories making a.o. cement, glass, lime, bricks, ceramics.

Why Emissions Trading is More Effective Than a Carbon Tax

A cap and trade system is the best means to establish a quantifiable, legally enforceable limit on emissions which will ensure that essential climate change targets are met at the lowest possible cost. Such a program, when combined with offsets, will accelerate global emissions reductions. In addition, cap and trade provides the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth. Cap-and-trade is already the policy instrument of choice in many US States, the EU, New Zealand and Australia, and has proven to be effective in the US Acid Rain Program.

Advantages of emissions trading are: