Opinion of the European Economic and Social Committee on the Proposal for a directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community COM(2008) 16 final — 2008/0013 (COD)
Date: 2008-07-09
Institutions: European Economic and Social Committee
Subjects: ESC opinion, EU environmental policy, greenhouse gas, pollution control measures, reduction of gas emissions, tradeable emission permit

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Official Journal of the European Union

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Opinion of the European Economic and Social Committee on the ‘Proposal for a directive of the
European Parliament and of the Council amending Directive 2003/87/EC so as to improve and
extend the greenhouse gas emission allowance trading system of the Community’

COM(2008) 16 final — 2008/0013 (COD)

(2009/C 27/15)

On 13 February 2008 the Council of the European Union decided to consult the European Economic and
Social Committee, under Article 175 of the Treaty establishing the European Community, on the

Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to
improve and extend the greenhouse gas emission allowance trading system of the Community.

The Section for Agriculture, Rural Development and the Environment, which was responsible for preparing
the Committee's work on the subject, adopted its opinion on 4 June 2008. The rapporteur was Mr Adams.

At its 446th plenary session, held on 9 and 10 July 2008 (meeting of 9 July), the European Economic and
Social Committee adopted the following opinion by 124 votes to 2 with 8 abstentions.

1. Conclusions and Recommendations

— Maritime transport should be included in the ETS if effective
proposals are not urgently presented by the International
Maritime Organisation.

1.1
The value of the Emission Trading System (ETS) will be
measured by its impact on European GHG emissions and its
relevance and example in stimulating global action and/or evol-
ving into a comprehensive global scheme. In this context:

The ETS must be seen to stimulate a low-carbon
1.2
economy and encourage climate protection, adaptation and
mitigation.

— The move towards more auctioning of allowances

is
welcome as it is in line with the polluter-pays-principle,
avoids windfall profits,
incentivises and funds low carbon
installations and products and fosters innovation.

— Measures in order to protect specific energy-intensive sectors
and sub-sectors vulnerable to international competition
should be considered in the absence of an effective interna-
tional agreement on climate change which places emission
reduction obligations on all respective industries globally in
order to avoid ‘carbon leakage’. The EU ETS must not have a
negative impact on the competitiveness of EU industry.

— Regulation on auctioning should be prepared and adopted

as soon as possible to avoid unnecessary uncertainties.

— Proposals should be advanced by the Commission as to how
the commitment to move from a 20 % to a 30 % reduction
target will be achieved in the event of an international
agreement.

— If free allowances are provided, this should be done in the
context of rigorous benchmarking and performance-based
targets.

— At least 50 % of revenues from allowance auctioning should
in

the measures

to support

defined

be mandated
Article 10.3.a-f.

— Potential disincentives which may limit the contribution and
growth of co-generation (CHP — combined heat and power)
and efficient district heating schemes should be eliminated.

— The action on issues of forestry as a carbon sink, deforesta-
tion and land use must have greater emphasis than currently
allowed for in the Commissions package.

The ETS should seek to minimise bureaucratic obstacles

1.3
and achieve clarity and transparency.

— Those measures in the proposal whose development

is
currently left to the comitology process need urgent atten-
tion and clarification.

— Every effort should be made to influence and form a
common platform with emerging ‘cap and trade’ legislation
in the USA and other OECD countries.

— The Commission should consider raising — from 10 000 to
25 000 tonnes — the exclusion limit for small installations,
provided equivalent, compensatory measures are in place.

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1.4
The ETS should be seen as equitable within the EU whilst
recognising the pressing need of newly industrialising and less
developed countries to create sustainable growth and poverty
alleviation.

allowances. Such projects have to be recognised under Kyoto's
Joint
Implementation (JI) mechanism or Clean Development
Mechanism (CDM).

— A rebalancing of the burden between the sectors covered by

ETS and those outside of it is to be considered.

— The implications of restricting the use of Joint Implementa-
tion (JI)/Clean Development Mechanism (CDM) credits in the
absence of an international agreement should be reviewed.

— A solution must be found to potential difficulties which may
be caused in those Eastern European Member States whose
main grid electricity supply comes from Russia rather than
the EU.

2. Introduction

2.1
The ETS was established by Directive 2003/87/EC in
October 2003. It aims to control contributing factors to climate
change, specifically anthropogenic greenhouse gases (GHGs), by
providing economic incentives for lowering emissions. It is a
‘cap and trade’ system where a limit or cap has been set on the
amount of a pollutant (mainly CO2) that can be emitted. The
ETS is the EU's most significant mechanism for limiting GHGs,
preferred over direct taxation on carbon or direct regulation.

4. ETS trading periods

4.1 ETS first trading period 1.1.2005-31.12.2007

4.1.1
The first learning phase established the infrastructure
of emissions trading but was severely limited in effectiveness by
over-allocation of allowances by Member States (For the first
and second phase Member States have drawn up national alloca-
tion plans — NAPs — giving a total level of emissions and how
many allowances each installation receives.). There was a wide
variation in the allowance trading price during this period,
including a collapse of the carbon price by the end of the first
trading period.

Numerous

criticisms of

the ETS emerged which
4.1.2
focused on initial allocation methods and the use of proceeds;
the level of the cap; problems of equity, complexity, monitoring
and enforcement; the risk of encouraging relocation to unregu-
lated countries by major emitting industries; the value, cred-
ibility and reliability of JI/CDM credits and the future imposition
of disadvantageous production costs. It became clear that these
issues would have to be dealt with in revisions to the ETS for
the system to gain credibility with both industry and NGOs.

3. General Principles

the EU's GHGs.

3.1
The current ETS applies to over 10 000 installations in
the energy and industrial sectors, together responsible for 40 %
of
Installations are issued emission permits
ex ante and are required to surrender a number of allowances (or
credits) which represent the right to emit a specific amount
equivalent to their actual emissions. The total amount of allow-
ances and credits cannot exceed the cap, limiting total emissions
to that level. Companies that emit more GHGs than the number
of allowances they received must buy credits from those who
pollute less or at the auctions of any further allowances.

The transfer of allowances is referred to as a trade. In
3.2
effect, any emitter under the system is paying a charge for
polluting, while any installation will be rewarded for having
reduced emissions by more than was needed. Thus, in theory,
those that can easily reduce emissions most cheaply will do so,
achieving the pollution reduction at the lowest possible cost to
society. In the ETS an ‘allowance’ equates to the right to emit
one tonne of carbon dioxide equivalent for a specified period —
other GHGs being converted into CO2 equivalents.

4.2 ETS second trading period 1.1.2008-31.12.2012

4.2.1
This phase applies to all 27 MS and coincides with the
first commitment period of the Kyoto Protocol and the require-
ment to reduce GHGs. So far the allowance trading price has
been on a stable upward trend at levels that strongly encourage
reduction measures. The current (May 2008) trading price is
around EUR 25 per tonne. For this period the Commission has
carried out a systematic assessment of the caps proposed by
Member States based on verified emissions and as a result emis-
sions from ETS sectors have been capped at an average of 6.5 %
below 2005 levels. There has been little other scope for system
change or modification in the second trading period though
emitters actively continue to respond and adjust. Data verifica-
tion and trading experience continues to accumulate, which, for
the most part, confirms the schemes underlying concept.

4.3 ETS third trading period 2013-2020

3.3 Member States may also allow the use of credits from
emission-saving projects in third countries in the same way as

4.3.1
The Commission is now proposing significant changes
to the ETS which will take effect during this phase. This is the
purpose of amending Directive 2003/87/EC.

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5. Summary of the proposed amending Directive

auctions and be encouraged,
though not
income to invest in climate friendly policies.

required,

to use

5.1
Although the EU ETS has created the world's largest
single carbon market (1), the initial excessive allocation of (free)
allowances in NAPs was a setback and clearly not in line with
efficient reduction of emissions in the ETS sectors, EU-wide. In
the context of firm GHG reduction commitments the revised
ETS is seen as essential in providing a long-term carbon price
signal, enabling incentives for
low-carbon investments and
transforming Europe into a low GHG economy.

5.2

The amendments will:

— introduce one EU-wide cap on emission allowances instead

of 27 national caps — NAPs will cease to exist;

— greatly increase the proportion of allowances which are
auctioned and harmonise rules on free allocation to
promote carbon-efficient technologies;

— establish part of the rights to auction as based on per capita

income;

— streamline key definitions and improve legal and technical

clarity;

— include new sectors (petrochemicals, ammonia and alumi-
nium) and new GHGs (nitrous oxide and perfluorocarbons)
increasing coverage by 6 %;

— enable smaller installations to be excluded from the ETS,

subject to compensating measures;

— set out rules for the use of credits stemming from JI/CDM

projects.

Starting in 2013, allowances will decrease annually (2)
5.3
leading to a 21 % reduction of GHGs in the EU ETS sector by
2020, compared with 2005. This reduction process will be
continued into the fourth phase (2021-2028) at the same rate.
Concurrently, the proportion of allowances being auctioned will
be increased, starting at 60 % in 2013. It is proposed that the
power generation sector should not receive any free allocation
and would thus be required to purchase all allowances at
auction or at the secondary market from 2013, with a general
phasing out of free allowances in other sectors by 2020. The
exceptions will be sectors judged to be at significant risk of
‘carbon leakage’ — relocation to countries without comparable
emission constraints and therefore increasing emissions globally.
Such sectors may have a free allowance of up to 100 %. This
decision will be taken in 2011. Member States will carry out the

5.4
Certainty is given that JI/CDM credits (from third coun-
tries) which can now be purchased by EU operators can be used
in the period until 2020. The total number to be used in this
period is equal to the total quantity that has been allowed for
use in the 2nd trading period, i.e. 1.4 billion allowances, which
corresponds to one third of the overall reduction effort. When
the EU steps up its reduction effort in the context of an interna-
tional climate pact, 50 % of the additional effort can be achieved
by JI/CDM credits.

like
Although credits from land use (carbon ‘sinks’
5.5
forests) will not be allowed, domestic credits from emission
saving schemes not covered by the ETS could be allowed,
provided straightforward rules can be devised.

5.6
Provision has been made for the EU ETS to link with
other trading systems to encourage the development of a world-
wide system.

5.7
Contingent on the conclusion of an international agree-
ment, the amount of allowances under the ETS will be reduced
in line with this agreement, while the scope for recurring to
CDMs will be increased.

5.8
A 5 % provision of allocations for new installations that
enter the system after 2013 will be made. It is probable that
aircraft emissions will become part of the ETS towards the end
of
is covered by a separate
this
proposal (3).

the second period but

There are no provisions for including maritime transport

5.9
into the ETS.

6. General Comments

6.1
The EU ETS is not an academic exercise nor a type of
‘green’ taxation. It combines elements of a free market approach
with regulation and general direction mediated and adjusted
through a political process. Individual companies are free to
choose how or if they will reduce their emissions and should
select the least-cost way to comply with the pollution regu-
lation. The ETS's main role is therefore to create incentives
which reduce the cost of achieving a pollution reduction goal.
The EESC endorses and supports this approach.

(1) The World Bank, State and Trends of the Carbon Market, May 2007.
(2) From 1.974 million tonnes of CO2 to 1.720 million tonnes.

(3) EESC opinion: OJ C 175 of 27.7.2007, p. 47.

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6.2
The existing pollution reduction goal — to stabilise
GHGs in the atmosphere at 450-550 ppm by 2050 — is esti-
mated to cost around 1 % of global GDP. Failure to act effec-
tively could reduce global GDP by 20 % (4). However, the conti-
nuing flow of evidence and research (5) indicates accelerating
GHG production, a reduction in the planet's absorption capacity
and seriously questions whether reduction targets are adequate.

outside the EU. Such countries argue, with some justification,
that two centuries of Western industrialisation and contributory
GHG emissions must be taken into account, as must their drive
to lift substantial sectors of their population out of poverty. A
global agreement resolving such issues will need to be confident
that it has greater support and understanding of these factors by
consumers and industry in OECD countries.

6.3
The ETS is effectively aiming at definitive leadership in
what must become a global effort. This process is taking place
the global
in a global setting as the atmosphere is part of
commons. Therefore evaluation of the system cannot exclude its
interaction and impact on global polluters.

7. Specific Comments

6.4
It should be noted that outline legislation in the US,
likely to come into effect in the new administration, is based on
a cap-and trade system with similar features. The possibility of a
joint US/EU programme would be a highly significant step
towards a global scheme, as would links with other proposed
schemes in OECD countries.

6.5
The EESC has therefore paid particular attention to the
role of the ETS in delivering equitable and sustainable impact
on global GHG reduction. Does it demonstrate that European
action is both credible and effective? In this context it has to be
stated that the EU target of a 20 % reduction in GHG emissions
by 2020 compared to 1990 levels (which underlies the ETS and
the burden sharing proposals) is lower than the 25-40 % reduc-
tion range for industrialised nations which was supported by
the EU at the Bali Climate Change Conference in December
2007. The Commission starts from the targets as agreed in the
European Spring Council 2007 leaving undiscussed whether
this level of reduction is really sufficient to achieve global objec-
tives or whether it is just the maximum reduction that may
conceivably be accepted, given the balance of short-term poli-
tical and economically motivated interests of Member States.
The EESC concludes that accumulating evidence on climate
change demands the re-setting of targets to achieve greater GHG
emission reductions.

6.6
The EESC supports the move towards more auctioning
of allowances. Auctioning is in line with the polluter-pays-prin-
ciple, avoids windfall profits, gives incentives and generates
funds to invest in low carbon installations and products and
thus fosters innovation.

There are, at present, many unresolved issues which
6.7
concern European business in general. These centre around a
revised ETS imposing competitive disadvantages on industry,
to newly industrialising countries
particularly with respect

If

the EU ETS is to become the global standard for
7.1
carbon trading then it is essential that the scheme is as robust
and effective as possible. The EESC therefore recommends:

7.1.1
The free allocation of allowances to specific large
energy-intensive sectors and sub-sectors vulnerable to interna-
tional competition should only be considered in the absence of
an effective international agreement on climate change which
places emission reduction obligations on all respective industries
globally. The EU ETS must not have a negative impact on the
competitiveness of EU industry.

7.1.2
If possible, an earlier decision should be made as
regards the sectors which will, due to the risk of carbon leakage,
receive free allowances. These sectors will be identified by June
2010 but a decision should be made earlier, in connection with
the directives, so as to avoid uncertainty in the investment
climate and so that the sectors concerned can make necessary
long-term plans.

Although auctioning is to be the major allowance allo-
7.1.3
cation method,
there is almost no indication of how such
auctioning would be organised. Reference to introduce a regu-
lation on auctioning only by 31 December 2010 brings addi-
tional uncertainty for all of the EU ETS participants in view of
the necessary pending massive investments in the energy sector.

A rebalancing of

7.1.4
the burden between the sectors
covered by ETS and those outside of it is to be considered. The
EESC questions if the distribution of the reduction obligations
between sectors covered by ETS (– 21 % compared to
2005 levels) and the others (– 10 % compared to 2005 levels) is
justified. Research (6) shows that in some sectors which are not
covered by ETS, especially in the two biggest ones, buildings
and transport, there is a potential to reduce emissions at zero or
even at negative costs. These are moreover sectors where the
risk of carbon leakage is relatively small or nonexistent. The
buildings sector in addition has a large potential for job creation
within the EU.

(4) The Stern Review 2006.
(5) According to the Mauna Loa observatory in Hawaii, CO2 levels in the
atmosphere are already at 387 ppm, the highest for at least the last
650 000 years.

(6) Vattenfall/McKinsey, The Climate Map

http://www.vattenfall.com/www/ccc/ccc/Gemeinsame_Inhalte/DOCU-
MENT/567263vattenfall/P0271636.pdf.

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The Commission should consider

7.1.9
raising — from
10 000 to 25 000 tonnes — the exclusion limit for small
installations, provided equivalent, compensatory measures are in
place.

7.1.10
A clearer indication should be given in the proposal
of how, once an international agreement has been reached, the
EU will fulfil
its commitment to make a further increase in
CO2 reduction from 20 % to 30 %.

7.1.11
To prevent an adverse effect on the growth and
contribution of co-generation (CHP) schemes MS are urged to
review their ‘feed-in’ tariffs.

7.1.12
Regarding district heating, measures should be taken
to avoid disincentivising efficient examples of such programmes.

7.1.13
A solution must be found to potential difficulties
which may be caused in those Eastern European Member States
whose main grid electricity supply comes from Russia rather
than the EU.

7.1.14
The current proposal to limit the possibility to use
JI/CDM credits pending an international agreement should be
kept under review, particularly in the light of the adverse effects
on the developing international capital funding market for such
programmes.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS

7.1.5
the scheme are to be auctioned (7).

All allowances allocated to air transport when it joins

In view of the growing GHGs emissions from shipping
7.1.6
(1.12 billion tonnes globally — twice as much as emissions
from aviation (8))
the Commission should bring forward
measures to include shipping in the ETS if effective proposals
are not urgently presented by the International Maritime Organi-
sation.

research

7.1.7
The revenue generated through the auctioning of allow-
ances, currently estimated at EUR 50 billion per annum
by 2020, should be, to a much greater degree, mandated to
fund climate protection, mitigation and adaptation measures —
with a specific focus on vulnerable, less-developed countries and
towards
proposal
(Article 10 paragraph 3) suggesting a 20 % allocation is insuffi-
cient and misses an opportunity to greatly stimulate the move
to a low-carbon economy. The EESC recommends this is
increased to at least 50 % of revenues. Attention should be paid
to supporting the role of
reafforestation and the
prevention of deforestation in the EU and elsewhere where this
is demonstrated to provide an effective carbon sink.

development.

forestry,

and

the

In

7.1.8
Greater clarity and transparency should be apparent in
those measures in the proposal whose development is currently
left to the comitology procedure.

Brussels, 9 July 2008.

(7) Consistent with the Committee's previous recommendation, OJ C 175,

27.7.2007, p. 47.

(8) IMO report February 2008.