Amendments proposed for Phase 3 of EU ETS

Following the publication of the EU Commission's proposals to amend the EU Emissions Trading Scheme ('EU ETS') Directive ahead of Phase 3 of the EU ETS (expected to start in 2013), a draft report proposing further amendments to the Directive was recently presented to the European Parliament. This report will be of interest to companies currently subject to the EU ETS and other stakeholders involved in the carbon market. It will also be of interest to those areas expected to become subject to the EU ETS, such as the aviation sector.

Following on from the publication of the Commission's 'Climate Change and Renewable Energy Package' on 23 January 2008, the draft report seeks to expand, improve and strengthen Phase 3 of the EU ETS through the following proposed changes to Directive 2003/87/EC:

JI/CDM credits use

The report proposes that strict rules be applied to the kinds of credits/emission allowances given for investment in green and renewable energy projects.

Once countries have ratified a future international agreement on climate change, 'Gold Standard' type CERs and ERUs from those countries would be acceptable under the EU ETS. All operators using a lower percentage of ERUs and CERs compared to their emissions in Phase 2 of the EU ETS (2008 to 2012), and who do not carry over entitlements, would be allowed to use those credits up to a level equal to 5% of their emissions each year during the period from 2013 to 2020, as would new entrants and new sectors.

Carbon Capture and Storage

It is proposed that 60 million allowances in the new entrant reserve be reserved until 31 December 2015 to be allocated to the first 12 facilities, which are commercially capturing and storing carbon dioxide emissions prior to this date. The Commission shall determine these pilot projects before 1 January 2013.

High efficiency cogeneration

Auctioning should be the basic principle for allocation of allowances applicable in the power sector from 2013. Where producers of heating or cooling receive a free allocation of allowances in respect of heating or cooling through high efficiency co-generation, free allocations of allowances should also be extended to electricity generation in respect of auto-consumption of electricity, to ensure equal treatment.

Carbon Leakage

'Carbon Leakage' is the risk that high emitting industries are either delocalised to sites outside the EU or that competitors outside the EU take over the market share of EU based companies. The proposal to avoid Carbon Leakage is for the Commission to review the situation by 31 December 2010. The report proposes that sectors deemed at risk should receive 100% of allowances free of charge or that a system could be introduced to put those installations deemed to be at significant risk on an equal footing with those in third countries.

Deforestation

It is proposed that 50% (and not 20% as proposed by the Commission) of revenues from auctioning should be directed towards environmental and climate protection measures, such as combating deforestation and increasing sustainable afforestation.

Shipping

Shipping activities should be included in the scope of activities covered by the EU ETS by no later than 2015.

Next steps

MEPs in the Environment Committee will hold a vote on 7 October in respect of the report. A full plenary debate is likely to take place in December 2008.

To access the report, please click here.

To read our previous law-now on the EU Commission's climate change package proposals, please click here.

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