EU Emissions Trading System EU ETS policy overview

EU Emissions Trading System (EU ETS): policy overview Presentation to Intellect Technology Trade Association

Outline – needs updating 1. Commitments to reduce emissions and the role of the EU ETS 2. What is the EU Emissions Trading System (EU ETS) and how trading works 3. EU ETS – Institutional Framework 4. GHG ETS Regulations 2012 5. GHG ETS Regulations 2012 - Activities covered in Phase III of the EU ETS 6. Phase III - top-down approach to cap-setting and harmonised allocation 7. Allocating EU ETS allowances for free in Phase III 8. Auctioning of EU ETS allowances in Phase III 9. Secondary Carbon Market 10. Small Emitters

UK commitments to reduce emissions and the role of the EU ETS • To meet our aim of limiting temperature rises to 2°C, action is needed from both developed and developing countries. Developed countries alone need to reduce emissions by 80% by 2050 • UK committed to delivering emissions reductions: - EU’s Kyoto Protocol target of reducing emissions to 8% below 1990 levels (2008 -2012) - EU target to reduce emissions to 20% below 1990 levels by 2020 • Sectors covered by the EU ETS will provide over 50% of the emissions reductions needed to meet UK targets between 2013 and 2020. • Phase III of the EU ETS started in 2013 and will run until 2020 delivering estimated EU emission savings of around 3, 100 Mt. CO 2 e relative to 2005 levels.

What is the EU ETS? • An EU-wide cap and trade system to incentivise reductions in greenhouse gases from industry and electricity generators at least cost • Cap is turned into EU Allowances (EUAs) where 1 tonne of CO 2 e = 1 EUA • EU Allowances are then either given out for free or sold to the market • Approximately 1, 000 installations in the UK including small emitters • UK emissions account for 13% of the EU cap Phase I (2005 -07): Learning by doing Phase II (2008 -12): Helping deliver EU’s Kyoto target Phase III (2013 -20): Helping deliver EU’s 2020 target

How trading works: a simplified example EU Carbon Market Union Registry Installation A Installation B Allocation: 200 allowances

How the ETS works in practice: The Annual Compliance Cycle End of Monitoring period 31 December Start monitoring period 1 January Jan Prepare annual emissions report December Fe b c De Receive allowances for coming year 28 February No v Mar Complete and submit verified annual emissions report to regulator 31 March Enter Verified emissions data into registry 1 April Oct Apr The Emission Trading Year p Se y Ma Surrender Allowances from Registry Account 30 April Jun Au Jul g Commence annual verification process August Submit Improvement report to regulators 30 June

EU ETS – Institutional Framework

Greenhouse Gas Emissions Trading System Regulations 2012 – The UK Regulators Responsibility for implementation and regulation of the UK Greenhouse Gas Emissions Trading System Regulations 2012 is largely geographically based: UK EU ETS Regulator Address for enquiries Environment Agency for England ethelp@environment-agency. gov. uk Scottish Environment Protection Agency emission. trading@sepa. org. uk Northern Ireland Environment Agency trading@doeni. gov. uk Natural Resources Wales GHGhelp@naturalresourceswales. gov. uk DECC Offshore (covering offshore installations) emt@decc. gsi. gov. uk

Greenhouse Gas Emissions Trading System Regulations 2012 • The revised EU ETS Directive is implemented in the UK by the Greenhouse Gas Emissions Trading Scheme Regulations 2012. The Regulations came into force on 1 January 2013. – A link to the Regulations can be found at www. gov. uk/eu-etslegislation-and-research-publications • The new Regulations for Phase III of the EU ETS: – simplify the legal requirements for UK participants by consolidating 13 sets of regulations into a single regulatory instrument – move to a more proportionate and consistent penalties system and improving the independence and efficiency of the appeals process – introduce a small emitters (<25 kt. CO 2 e a year) and hospitals opt out for the EU ETS for incumbent Phase III operators

Greenhouse Gas Emissions Trading System Regulations 2012 - Activities covered in Phase IIII • The Greenhouse Gas Emissions Trading System Regulations 2012 require all operators that carry out an activity covered by the EU ETS to hold a greenhouse gas emissions permit – in effect, a licence to operate and emit greenhouse gases covered by the EU ETS. Activities covered by the EU ETS are any of the activities listed in Annex I to the EU ETS Directive.

Annex I Activities of the revised EU ETS Directive 1 2 3 4 Combustion of fuels in installations with a total rated thermal input exceeding 20 MW (except in installations for the incineration of hazardous or municipal waste) Refining of mineral oil Production of coke Metal ore (including sulphide ore) roasting or sintering, including pelletisation CO 2 5 Production of pig iron or steel (primary or secondary fusion) including continuous casting, with a capacity exceeding 2, 5 tonnes per hour CO 2 6 Production or processing of ferrous metals (including ferro-alloys) where combustion units with a total rated thermal input exceeding 20 MW are operated. Processing includes, inter alia, rolling mills, re-heaters, annealing furnaces, smitheries, foundries, coating and pickling CO 2 7 Production of primary aluminium CO 2 & PFCs 8 Production of secondary aluminium where combustion units with a total rated thermal input exceeding 20 MW are operated CO 2 9 Production or processing of non-ferrous metals, including production of alloys, refining, foundry casting, etc. , where combustion units with a total rated thermal input (including fuels used as reducing agents) exceeding 20 MW are operated CO 2 10 Production of cement clinker in rotary kilns with a production capacity exceeding 500 tonnes per day or in other furnaces with a production capacity exceeding 50 tonnes per day CO 2 11 12 Production of lime or calcination of dolomite or magnesite in rotary kilns or in other furnaces with a production capacity exceeding 50 tonnes per day Manufacture of glass including glass fibre with a melting capacity exceeding 20 tonnes per day CO 2 13 Manufacture of ceramic products by firing, in particular roofing tiles, bricks, refractory bricks, tiles, stoneware or porcelain, with a production capacity exceeding 75 tonnes per day CO 2 14 Manufacture of mineral wool insulation material using glass, rock or slag with a melting capacity exceeding 20 tonnes per day CO 2 15 16 17 Drying or calcination of gypsum or production of plaster boards and other gypsum products, where combustion units with a total rated thermal input exceeding 20 MW are operated CO 2 18 19 20 21 22 Production of pulp from timber or other fibrous materials Production of paper or cardboard with a production capacity exceeding 20 tonnes per day Production of carbon black involving the carbonisation of organic substances such as oils, tars, cracker and distillation residues, where combustion units with a total rated thermal input exceeding 20 MW are operated Production of nitric acid Production of adipic acid Production of glyoxal and glyoxylic acid CO 2 & N 2 O Production of ammonia CO 2 & N 2 O CO 2 23 Production of bulk organic chemicals by cracking, reforming, partial or full oxidation or by similar processes, with a production capacity exceeding 100 tonnes per day CO 2 24 25 Production of hydrogen (H 2) and synthesis gas by reforming or partial oxidation with a production capacity exceeding 25 tonnes per day CO 2 26 27 28 Capture of greenhouse gases from installations covered by this Directive for the purpose of transport and geological storage in a storage site permitted under Directive 2009/. . . /EC Production of soda ash (Na 2 CO 3) and sodium bicarbonate (Na. HCO 3) Transport of greenhouse gases by pipelines for geological storage in a storage site permitted under Directive 2009/. . . /EC Geological storage of greenhouse gases in a storage site permitted under Directive 2009/. . . /EC CO 2

Combustion of fuels in installations with a total rated thermal input exceeding 20 MW • Any installation where fuel (other than 97% or more biomass) is burned in a combustion unit of 3 MW or above for whatever purpose and which when aggregated together exceeds 20 MWth input is caught by Phase III. • All types of boilers, burners, turbines, heaters, furnaces, calciners, kilns and in particular, ovens, fryers, dryers, engines, fuel cells, chemical looping combustion units, flares, thermal or catalytic post-combustion units etc are now captured. • Stand-by generation or boiler capacity should be included in the aggregation calculation provided that it is technically feasible for them to be run concurrently with the rest of the capacity.

Annex I Activities – Non-Power sector emissions in Phase II of the EU ETS

Annex I Activities – Non-Power sector emissions in Phase II of the EU ETS

Phase III of the EU ETS: top-down approach to cap-setting and harmonised allocation Project Credits EU centralised cap Auction pot NER Free allocation Member State

Declining EU ETS cap from 2013 Starting point: 1974 Mt in 2013 HEADING Gradient: -1. 74% Text 2083 Mt/yr -20% 1720 Mt 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 ØLinear factor to be reviewed by 2025

Allocating EU ETS allowances for free • Harmonised set of rules across the EU based on EU-wide benchmarks set at average of top 10% performers in each sector • Installations (excluding electricity generators) receive 80% free allocation in 2013, declining each year to 30% in 2020 and 0% in 2027 (i. e full auctioning). • Sectors at risk of carbon leakage receive 100% free allocation up to the benchmark. • National Implementation Measures (NIMs): • Draft preliminary UK free allocations submitted to Commission in December 2011 and updated in April 2012 • Commission scrutiny of Member State NIMs before finalisation • Possible application of cross-sectoral correction factor • New entrants, capacity extensions etc access New Entrants Reserve

Auctioning of EU ETS allowances • In addition to allowances given out for free, operators can also purchase allowances, one way to do this is through EUA auctions • At least 50% of allowances will be auctioned across the EU • Harmonised EU rules for how auctions are carried out. • UK opted out of EU-wide auction platform – ICE Futures Europe to manage Phase III auctions for UK • 10 successful UK auctions of Phase III allowances so far and fortnightly auctions will continue through to December 2020.

Participating in Auctions • The UK’s auctions are open to those that fulfil the criteria set out in the relevant EU legislation and ICE’s membership requirements. • Guidance on how to participate in ICE emissions auctions and a full schedule of Phase III EUA auction is available on ICE emissions auctions web pages: • www. theice. com/emissionsauctions. jhtml

Secondary carbon market • An EU ETS operator can also access the secondary carbon market to buy EU allowances or Kyoto Units through multiple routes: – trading directly with other companies covered by the System – buying or selling from intermediaries, e. g. banks and specialist traders – using the services of a broker – joining one of the several exchanges that list carbon allowance products

UK’s Small Emitters and Hospital Opt-out Scheme (Article 27) • Small emitters account for around 2% of UK emissions • UK’s Opt-out scheme acknowledges the disproportionate administrative costs of the EU ETS for small emitters • Opted-out installations must participate in the UK’s scheme, which aims to deliver emissions reductions equivalent to the EU ETS • The Opt-out scheme offers deregulatory savings through: – Replacement of requirement to surrender allowances with an emission reduction target – Simplified monitoring, reporting and verification requirements, including removal of requirement for third party verification – No requirement to hold a registry account – Less burdensome rules for target adjustment following changes in capacity

UK’s Small Emitters and Hospital Opt-out Scheme (Article 27) Eligible installations were those that meet the criteria for exclusion as a small emitter or hospital installation under Article 27 of the revised ETS Directive and the UK’s draft 2012 GHG regulations. Such installation must also have been carrying out an Annex I activity before 30 June 2011 (Phase III incumbents) • • • Small emitters – Annual emissions less than 25, 000 t. CO 2 in 2008, 2009 and 2010, and subsequent years, and • Net thermal capacity less than 35 MW in 2008, 2009 and 2010 Hospitals – Installation which primarily supplies a hospital – Association confirmed by Department of Health or Devolved Administration The application period for the opt-out scheme ran from 23 May to 18 July 2012. Operators of 248 installations were approved to participate in the opt-out scheme by the European Commission as excluded from the EU ETS.

Questions?

Useful information • DECC EU ETS web pages: https: //www. gov. uk/government/policies/reducing-the-uk-s-greenhousegas-emissions-by-80 -by-2050/supporting-pages/eu-emissions-tradingsystem-eu-ets • DECC EU ETS mailbox: eu. ets@decc. gsi. gov. uk • Environment Agency EU ETS web pages: http: //www. environmentagency. gov. uk/euets • Environment Agency helpdesk: ethelp@environment-agency. gov. uk

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