1. EU ETS in the UK - summary
Phase 1 of the ETS commenced in May 2005. It runs until Dec 2007. It caps CO2 emissions in energy intensive industries including:
- energy (power stations, oil refineries, coal coke processing);
- metal works (processing metal ores, such as for making iron and steel);
- mineral industries (including cement, lime and glass production using furnaces, and ceramics, including roofing tiles, bricks, stoneware or porcelain, using kilns); and
- pulp and paper production.
The EU ETS creates an incentive for companies in the regulated sectors to reduce emissions, so they can trade surplus GHG emission allowances (tonnes of CO2) with other regulated companies whose emissions are rising, and who therefore need to buy extra GHG emission allowances.
Phase 2 of the ETS commences in Jan 2008 to coincide with the Kyoto commitment period (2008 to 2012). The UK government has announced that there will be 3% fewer CO2 allowances available in Phase 2.
The reduction in allowances against business as usual will be borne entirely by the Large Electricity Producers (aka the Electricity Supply Industry). DEFRA estimates that the reduction in allowances from Phase 1 to Phase 2 will result in a one-off rise in industrial energy prices in the region of 1% and approximately 0.5% for domestic users.
The UK’s implementation of the EU ETS is expected to deliver a 16% reduction in UK emissions below 1990 levels by 2010. This is better than the UK’s Kyoto target of 12.5%, but worse than the UK’s domestic goal of a 20% reduction in CO2 emissions by 2010.
While the EU Emissions Trading Directive covers the basket of six greenhouse gases that are included in the Kyoto Protocol (i.e. carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrochlorofluorocarbons (HFCs), and perfluorocarbons (PFCs)), in the UK, the first and second phases of the EU ETS only cover carbon dioxide.
1.1 Link between EU ETS and Kyoto
Under the Kyoto Protocol, the EU is required to make an 8% reduction in emissions compared to 1990 levels by the first Kyoto Protocol commitment period (2008 to 2012). The EU ETS is one of the key policies introduced by the European Union to help meet this target. EU Member States are required to use emissions trading as a means to deliver their Kyoto Protocol commitments for 2008 to 2012.
1.2 What is the EU ETS?
The EU ETS is a cap and trade system. The EU cap is the 8% reduction in emissions required by Kyoto. Within that, each EU country’s cap is different.
The UK’s binding greenhouse gas emission reduction target under the Kyoto Protocol is a 12.5% reduction below 1990 levels by the commitment period (2008–12). The UK cap under the EU ETS is therefore 12.5%.
The main regulator enforcing the EU ETS in England is the Environment Agency.
1.3 National allowances
National allowances are distributed by Member States to the “installations” in the scheme.
Each country divides the emissions it’s allowed to make between the major industrial GHG emitters (i.e. Power, Steel, Mining, Pulp and paper companies). These companies are each given a greenhouse gas emission allowance (equivalent to a number of tonnes of CO2 that they can emit each year).
1.4 Regulated ‘installations’
Installations covered by the EU ETS are those that carry out activities listed in Schedule 1 of the UK Regulations (ETS Regulations 2005). These include:
Power, ie energy activities (e.g. boilers, electricity generations, CHP);
Steel, ie production and processing of ferrous metals;
Mining, ie mineral industries; and
Pulp and paper industries.
The scheme covers the main CO2 intensive industries - power stations, refineries and offshore, iron and steel, cement and lime, paper, food and drink, glass, ceramics, and engineering and vehicles. Overall, these account for around 50% of UK CO2 emissions.
(a) 1. Energy Activities
1.1 Activities of combustion installations* with a rated thermal input exceeding 20 megawatts* (excluding hazardous or municipal waste installations).
*combustion installations = power stations
1.2 Activities of mineral oil refineries*.
* Oil refineries distil crude oil into useful petroleum products, such as gasoline and diesel fuel. The fractionating column is cooler at the top than at the bottom so the vapours can condense more easily while moving up the column. (Diagrammatic Ref: Link)
1.3 Activities of coke ovens*.
* Coke is used in smelting iron ore in blast furnaces. A coke oven bakes coal to distil it. The volatile constituents of the coal, including water, coal-gas and coal-tar, are driven off by baking in an airless oven at temperatures as high as 1,000 degrees C so that the fixed carbon and residual ash are fused together.
(b) 2. Production and processing of ferrous metals
2.1 metal ore roasting* (including sulphide ore) and sintering** installations.
* Metal ores are roasted to extract the metal from the ore.
** Sintering is partial melting. Sintering involves heating powdered metal to below its melting point in order to fuse it.
2.2 Activities of installations for the production of pig iron* or steel (primary or secondary fusion), including continuous casting, with a capacity of more than 2.5 tonnes per hour.
* Pig iron is raw iron, the immediate product of smelting iron ore with coke and limestone in a blast furnace.
(c) 3. Mineral Industries
3.1 Activities of installations for the production of cement clinker in rotary kilns with a production capacity of more than 500 tonnes per day.
3.2 Activities of installations for the production of lime in rotary kilns or other furnaces with a production capacity of more than 50 tonnes per tonnes.
3.3 Activities of installations for the manufacture of glass including glass fibre where the melting capacity of the plant is more than 20 tonnes per day.
3.4 Activities of installations for the manufacture of ceramic products (including roofing tiles, bricks, refractory bricks, tiles, stoneware or porcelain) by firing in kilns where-
(i) the kiln production capacity is more than 75 tonnes per day; or
(ii) the kiln capacity is more than 4m3 and the setting density is more than 300 kg/m3.
(d) 4. Other activities
4.1 Activities of industrial plants for the production of pulp from timber or other fibrous materials.
4.2 Activities of industrial plants for the production of paper and board with a production capacity of more than 20 tonnes per day.
1.5 GHG Emissions Permit
The UK Regulations require all installations carrying out any activity listed in Schedule 1 to hold a greenhouse gas emissions permit.
The permit will specify the number of GHG emissions allowances for each installation (1 allowance = 1 tonne of CO2 equivalent).
(a) Monitoring and reporting
Conditions on the permit require monitoring and reporting of emissions by the installation company.
(b) Annual surrender of quota
At the end of each year installation companies are required to ensure they have enough allowances to account for their installation’s actual emissions.
They can buy additional allowances (beyond their original allocation), or sell any surplus allowances generated from reducing their emissions below their allocation.
The buying and selling of allowances takes place on an EU-wide market. All transfers and surrenders of allowances take place on electronic national registries.
(c) Verification
Each year, emissions data for the previous calendar year must be verified (by a verifier accredited by the UK Accreditation Service (UKAS)).
(d) Penalty
There is a penalty for producing excess emissions (e.g. EUR 40 per tonne of CO2 equivalent (in Phase I) and requirement to make up the surrender shortfall in the following year).
1.6 Phases
(a) Phase 1
The first phase of the EU ETS runs from 2005 – Dec 2007; Phase II runs from Jan 2008 – 2012.
Carbon dioxide is the only greenhouse gas covered by Phase I of the EU ETS.
It has not been agreed between EU member states whether other greenhouse gases or activities will be covered in Phase II (2008 to 2012).
In May 2005, the UK allocated 93.7% of its total national allowance to existing UK installations (for free). The remaining 6.3% were held as a new entrant reserve
Verified emissions for Phase I installations were 242.2 Mt CO2* per year.
*A tonne is a unit of mass equal to 1,000 kilograms. A Megatonne (Mt) (106) is a million tonnes, or 1,000,000,000 kg (1 billion kg). The UK Phase 1 CO2 emissions were therefore 242,200,000,000 kg of carbon dioxide (242 billion kilograms of carbon dioxide per year).
(b) Phase 2
The emissions cap for Phase 2 is 238 Mt CO2 per year.
Phase 2 coincides with the first Kyoto period (2008-12). In the UK, Phase 2 of the EU ETS only covers carbon dioxide.
The UK government will allocate 238 million allowances (tonnes of CO2 equivalent) per year during the second phase, which will run between 2008-2012, compared to 245 million allowances per year under the current phase of the scheme – a 3% reduction in the allowances available.
This represents a reduction of 8 million tonnes of Carbon per year below the business as usual scenario. The reduction in allowances against business as usual will be borne entirely by the Large Electricity Producers (aka the Electricity Supply Industry).
So that emission reductions occur within the EU, the UK Government has set a limit on the use of project credits* at an installation level. The limit is an 8% of an installation’s allowance.
*Project credits are Carbon Credits under the Kyoto Joint Implementation (‘JI’) or Clean Development Mechanism (‘CDM’), that are valid for use under the EU ETS because of the EU linking directive and the UK Regulations Transposing The Linking Directive into UK law.
Recognising the uncertainty as to final emissions in any one year, this limit will apply annually and operators may bank their permitted level of project credit use between years within the period.
It is predicted to put the UK on course to achieve a 16.2% reduction in carbon dioxide emissions by 2010. This is better than the UK’s Kyoto target of 12.5%, but worse than the UK’s domestic goal of a 20% reduction in CO2 emissions by 2010.
DEFRA estimates that the reduction in allowances from Phase 1 to Phase 2 will result in a one-off rise in industrial energy prices in the region of 1% and approximately 0.5% for domestic users.
2. UNFCCC – KYOTO JI and CDM mechanisms
2.1 Joint Implementation
JI allows companies in UNFCCC Annex 1 Parties (the industrialized countries) to undertake emission reduction projects in other Annex 1 Countries.
JI projects generate emission reductions units (ERUs).
2.2 Clean Development Mechanism
CDM allows companies in UNVCCC Annex 1 countries to implement emission reduction projects and contribute to sustainable development in countries without a Kyoto target (non-Annex I Parties, i.e. developing countries).
CDM projects are awarded certified emission reduction units (CERs).
2.3 Kyoto Project credits and the EU ETS
Project credits – which refer to credits generated in developing countries through the Clean Development Mechanism (CERs), or in other developed countries by Joint Implementation projects (ERUs) – may be used to help meet the caps set for operators under the EU ETS.
This was made possible by the EU Linking Directive, which amends the EU ETS Directive and provides for the use of credits from the Kyoto Protocol’s flexible mechanisms in the EU Emissions Trading Scheme. It was transposed into UK law via regulations which came into effect in the UK on 13 November 2005.
The use of these credits provides a driver for sustainable energy projects in the developing world and for technology transfer. However, member states need to ensure a balance between domestic and international effort.
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