The EU Emission Trading Scheme: sectoral allocation and factors determining emission changes

Abstract

The European Union (EU) Emission Trading Scheme that covers 50% of EU greenhouse gas emissions is the biggest cap-and-trade scheme worldwide. In this article, for three emission-intensive sectors (‘power and heat’, ‘cement and lime’ and ‘pulp and paper’) allocation caps, emission developments and the main emission drivers are analysed. In order to assess what drives emissions and whether emission-saving actions were taken since 2005, a decomposition approach is applied. The analysis reveals pronounced sectoral disparities indicating some emission-reducing activities since 2005; for ‘electricity and heat’ and ‘pulp and paper’, these, however, do not deviate from the long-term trend prior to the introduction of the scheme. The occurrence of low CO₂ prices emphasises the need for adaptation towards a more effective system.

Keywords:

• EU Emission Trading Scheme
• sectoral emissions
• policy evaluation
• decomposition analysis

Acknowledgements

This work was supported by the Austrian ‘Klima- und Energiefonds’ under the research programmes ‘NEUE ENERGIEN 2020’ and ‘ACRP’.

Notes

1. In the context of the 2030 framework for climate and energy policies the contribution of the EU ETS to the medium-term greenhouse gas reductions is emphasised (EC 2013).

2. For the second trading period, some member states unilaterally also included installations emitting nitrous oxide (Capoor and Ambrosi 2008). Furthermore, aviation is included in the EU ETS from 2012 on EC (2009). While according to Directive 2009/29/EC the inclusion of EU and international flights was planned, international flights are derogated until 1 January 2014 (EC 2012).

3. The criteria included consistency with the member state's emission target and projected progress towards fulfilling the target, considerations regarding the activities’ (technical) potential for reducing emissions, consistency with other community legislation and policy instruments, avoidance of unduly favouring certain undertakings (related to State aid provisions), provisions for new entrants, and early action (Kettner et al. 2008).

4. The cap will be linearly decreased, so that in 2020 emissions from the ETS sectors are reduced by 21% compared to 2005.

5. Bulgaria is not included in the analysis as emissions data are not yet available for all years; Croatia is not included in the analysis as it was not a member of the EU before 2013.

6. The legal implications of the EC's interventions are summarised and discussed in Weishaar (2014).

7. The analysis differentiates between the sectors ‘power and heat’, ‘cement and lime’, ‘iron and steel’, ‘refineries’, ‘pulp and paper’, ‘glass’, ‘ceramics’ as well as ‘other’ sectors and ‘non-specified’ sectors. The category ‘other’ sectors comprise combustion installations from sectors other than specified, e.g. in the textiles or food industries; the category ‘non-specified’ includes all installations that could not be assigned to a particular sector because of the lack of specifications in the NAPs.

8. This implicitly shows the commission's considerations of the threat of carbon leakage or a loss in competitiveness.

9. We selected three sectors with distinctive characteristics: ‘Electricity and heat’ is the largest ETS sector and has the potential to pass on the cost of the certificates to the consumers; ‘cement and lime’ is characterised by a high share of process emissions, while paper and pulp production is only associated with energy-related emissions.

10. Other applications of the Laspeyeres index decomposition include Steenhof (2007, 2009); Liu and Ang (2007), Steenhof and Weber (2011) and Schipper, Saenger, and Sudardshan (2011).

11. The subscript f denotes effect.

12. The residuals have to be subtracted from both sides of the equation.

13. The dispatch or merit order defines the sequence at which different power plants are put in operation which, from the economic perspective, is strongly affected by the respective generation costs. This is especially relevant for the choice between coal and natural gas.

14. Transformation input for electricity and heat generation and output of electricity and heat are measured in TJ; a distinction between electricity and heat generation is not feasible as transformation input in combined heat and power (CHP) plants reported aggregately and hence cannot be separated into power or heat generation.

15. In the third trading phase, allocation for the sector will be based on benchmarks instead of auctioning as the sector has been identified to be at the risk of carbon leakage (EC 2010).

16. According to UNFCCC data the CO₂ intensity of clinker production, which is the basis for cement production, has been almost constant since 2005 (UNFCCC 2013).

17. In Phase 2, allowances allocated to the sector exceeded its emissions in all countries. Like cement and lime, pulp and paper is considered to be exposed to the risk of carbon leakage (EC 2010); competitiveness concerns might hence also have been a reason for surplus allocation in the first and second trading phase.