Universiteit van Amsterdam (UvA) Faculty of Science
School of Life and Earth Sciences
Inclusion of the Road Transport Sector in the EU Emission Trading Scheme
MSc Earth Sciences, Environmental Management Master Thesis Research Earth Sciences (52641MTR0Y) Master Student: Vera Catalano, 12047422
Supervisor & Examiner: Dr. Marc Davidson, Institute for Biodiversity and Ecosystem Dynamics (IBED)
Co-assessor: Dr. ir. John van Boxel, Institute for Biodiversity and Ecosystem Dynamics (IBED)
Amsterdam, The Netherlands 31st July 2020
2 ACKNOWLEDGEMENTS
I would like to thank my supervisors prof. dr. Marc Davidson and dr. ir. John van Boxel for the opportunity to write a thesis on such an interesting and timely topic. Thank you for your precious teachings on the science and politics of climate change which inspired me to conduct my own research on this topic. I would like to thank my supervisor Marc Davidson for his teaching methods and feedbacks that I found instructive and rewarding. I would like to express my appreciation to all the experts consulted that contributed to this project, thank you for your time and for having shared with me your thoughts, insights and experiences with passion and enthusiasm. I would like to thank my parents Chiara and Settimo and my grandparents because with their immense caring support I could make sure of taking great care of myself and make the most of my studying journey. A big thank to my siblings Elisa, Gabriele and Marta for your affection and the shared positive energy. I want to thank my boyfriend Gabriele for keeping up my daily motivation with love and being always enthusiastic about my research. Thank you friends for the enjoyable and productive studying sessions, for your feedbacks and for the fun times after work.
DISCLAIMER
The findings, interpretations, and conclusions expressed in this thesis do not necessarily reflect the views of the organizations and institutions consulted.
3 Table of Content Abstract 5 1. Introduction 5 1.2. Problem Statement 7 1.3. Research Aim 8 1.4. Methodology 8 1.5. Thesis Outline 9
2. Emission Trading Scheme (EU ETS) and Effort Sharing Legislation 10
2.1. Introduction 10
2.2. Emission Trading Scheme (EU ETS) 10
2.2.1. Origins and Development 10
2.2.2. Phase 1 (2005-2007) 11
2.2.3. Phase 2 (2008-2012) 12
2.2.4. Phase 3 (2013-2020) 12
2.2.5. Phase 4 (2021-2030) 13
2.2.6. Achievements 14
2.3. Effort Sharing Legislation (ESL) 15
2.3.1. The Road Transport Sector 16
2.3.2. Achievements 18
3. Approaches for the Integration of Road Transport in the EU ETS 20
3.1. Introduction 20
3.2. Potential Pathways to Integration 20
3.2.1. Closed Emission Trading 20
3.2.2. Semi-open system 20
3.2.3. Integral Inclusion in the EU ETS 21
3.3. Identifying the Responsible Entity 21
3.3.1. Hybrid System 24 3.3.2. Fuel Suppliers 25 3.3.3. Refineries 27 3.3.4. Wholesalers 27 3.3.5. Importers 28 3.3.6. Liable Entities 28
3.4. Greenhouse Gases Covered 29
4
3.6. Allowances 30
3.6.1. Allocation 30
3.6.2. Price Corridor 30
3.7. Monitoring, Reporting and Verification 31
3.8. Ensuring Competitiveness 31
3.9. Functioning of an Inclusion 32
3.9.1. Emission Abatement 32
3.9.2. Interaction with Existing Measures 32
4. The Role of the EU ETS within EU Policies for the Road Transport Sector 34
4.1. Introduction 34
4.2. Central or Complementary? 34
4.3. Complementary Measures 34
4.4. Decarbonisation of Road Transport 36
4.4.1. Electric Mobility 36
4.4.2. Incentivising Different Transport Modes 38
4.5. EU ETS Revenue Usage 38
5. Discussion 39 6. Conclusion 43 References 45 Appendix 55 Annex A 55 Annex B 56 Annex C 57
5
Abstract
The European Union Emissions Trading Scheme (EU ETS) is a climate policy instrument that has put a price on carbon and established a cap-and-trade mechanism: a maximum amount of greenhouse gas emissions is set as a ‘cap’; covered sectors must purchase allowances to cover their emissions, and they can trade permits as needed. This enables a reduction of emissions where most affordable. The system accounts for 45% of the total EU’s greenhouse gas emissions, covering sectors of power generation, industrial manufacturing and civil aviation. The remaining 55% of emissions derives from the transport sector, energy consumption in buildings, agriculture and waste management. The transport sector is the most polluting among the excluded sectors, and road transport alone accounts for three-fourths of the transport emissions. One proposed measure to deal and decrease emissions from road transport emissions is that of including the sector in the EU ETS. This proposal is however controversial. The aim of this thesis is first, to define the policy approaches that would facilitate an inclusion, and second, to identify the role that the extended ETS would need to have for an effective climate strategy. Experts from 23 different European institutions were interviewed to support the research findings.
It emerges that the point of regulation for road transport, characterised by many small emitters, should be set upstream at the level of the fuel suppliers. This would facilitate the administrative processes, ensure cost-efficiency, and incentivize abatement opportunities along the entire fuel supply chain. Fuel suppliers pass on the compliance cost to consumers by increasing fuel prices. However, the price signal is expected to be limited and insufficient for influencing a behavioural change on vehicle use. Accordingly, the ETS would still benefit from higher economic efficiency as the transport sector would pay for the emission reductions in other ETS sectors. Nevertheless, in regards to the emission reductions from road transport, the ETS alone would not bring substantial change and if it would replaces other sector-specific measures it could halt the sectoral decarbonisation progress. Therefore, it is concluded that the role of a potential inclusion must be complementary to the existing EU and national transport policies in order to effectively address the sectoral emission reductions and maintain the momentum in the road transport decarbonisation.
Keywords: European Union Emission Trading Scheme (EU ETS), climate change, carbon market, EU ETS expansion, road transport.
6
1. Introduction
The European Union developed a carbon market named the European Union Emissions Trading Scheme (EU ETS) as a climate instrument for its contribution to the mitigation of climate change. The system represents the first international carbon market in the world and the biggest ever developed, accounting for three-fourths of international carbon trading (EC, 2003). With the ETS, the EU contributes to the Paris Agreement with 2020, 2030 and 2050 targets as part of the EU’s Nationally Determined Contribution (NDC) (EC, 2015a). All 28 EU member states are involved in the ETS together with Iceland, Liechtenstein and Norway. The ETS works on the principle of ‘cap and trade’. A cap is set on the maximum amount of greenhouse gases (GHGs) that can be emitted by covered sectors. Within the cap, covered companies have to hold European Union allowances (EUAs) corresponding to their annual emissions. Covered sectors can trade allowances or permits freely among each others. Each allowance corresponds to the right to emit one CO2 tonne, or the equivalent amount (CO2e) of other greenhouse gases, including nitrous oxide (N2O), perfluorocarbons (PFCs), methane (CH4), hydrofluorocarbons (HFCs) and sulphur hexafluoride (SF6). The cap limits the total number of allowances establishing their value, and it decreases over time to deliver an overall reduction in emissions. The ETS provides a degree of flexibility in compliance by for example allowing countries to invest in emission-saving projects worldwide to cover for their emissions. The Clean Development Mechanism (CDM) is for investments in developing countries, while the Joint Implementation (JI) concerns projects in a country also compliant to the Kyoto Protocol. Therefore, a carbon price encourages investments in cleaner, low-carbon alternatives. Yearly, each company must have the number of its emissions covered in allowances, or else, it incurs into heavy fines. If a company reduces more than its target, it can save the unused allowances for future needs or sell them to other companies. This flexibility enables the avoidance of emissions where achievable at the lowest cost, which is the core principle of the EU ETS (EC, 2003).
The ETS include sectors of power generation, industrial manufacturing and commercial aviation (for flights within Europe) totalling 11.500 entities. In total, these sectors account for 45% of the EU’s GHGs emissions; the remaining 55% is from sectors excluded from the ETS, namely transport (excluding aviation), energy consumption in buildings, agriculture and waste management (EC, 2003). The transport sector accounts for around a quarter of all EU emissions and is the second largest polluting sector in Europe after the energy sector. It is the most polluting sector among the non-ETS sectors, particularly due to road transport emissions which account for three-fourths (72%) of transport emissions (EEA, 2019a). Road transport, as the other excluded sectors, is regulated at the EU level with legally-binding emission reduction targets, which every member state has to comply to with regulations at national level. However, despite some overall improvements, emissions are not declining substantially. The automotive sector is challenged with the requirement of suitable enabling conditions and available technology options. Additionally, the sector is confronted with having to reduce emissions with a simultaneous growing demand: passenger transport demand is expected to grow by 40% and that of freight transport by 60% in the 2010-2050
7 period (EC, 2016b). In order to reach a climate neutrality by 2050, road transport would have to reduce emissions by 90% (EC, 2019c). Due to the significant share of current emissions and the difficulty in sectoral decarbonisation, road transport alone could jeopardise the achievement of the long-term EU climate targets in compliance with the Paris Agreement. Thus, it was proposed to include the sector in the ETS in multiple occasions. The most recent one was in 2019 at the European Green Deal convention, which discussed strategies to reach carbon neutrality by 2050 (EC, 2019c). The effectiveness of an ETS inclusion of road transport depends on a variety of factors and conditions, which trigger the current debate among the scientific community. With this paper, our purpose is to contribute to the scientific debate by analysing the conditions that could enable an effective climate strategy. This brings us to the problem statement and aim of this study discussed in the following Sections.
1.2. Problem Statement
In the current debate about including road transport in the ETS, some argue that including more economic sectors could offer more cost-effective abatement solutions and trigger innovation also with the involvement of more stakeholders. The main hypothesis brought forth by the researchers who support an inclusion is that it is possible to minimise the abatement cost, increasing the cost-effectiveness of the scheme, by setting equal abatement costs among sectors. Currently, the abatement cost or the allowance price in the ETS is equal for all companies. The decision of each installation between buying allowances or investing in other avoidance measures is based on the allowance price, which allows to cut emissions where most affordable. As not all sectors are covered, the abatement cost is not yet aligned among sectors. With more sectors covered and an aligned abatement, the ETS could become more efficient with greater emission avoidance possibilities embraced. At the moment, different member states’ measures and policies do not provide an identical abatement cost for emitters. When these measures produce higher abatement costs than if under the ETS, emissions avoidance would be more expensive than necessary and thus counterproductive. All in all, with the inclusion of road transport in the ETS and the related harmonised abatement cost among sectors, the climate scheme would benefit from higher cost-efficiency (Bragadóttir et al., 2016; Hermann et al., 2014; Böhringer and Lange, 2012; Sven, 2011). Moreover, a broader system can sometimes lower the volatility risk of the market, therefore, shield from unpredictable price changes. In fact, individual trades should only be slightly impacted by changes in price in a system where there are numerous different trades (Achtnicht et al., 2015). However, others disagree arguing that an inclusion would lead to only minor sector-specific emission reductions due to an insufficient carbon price. An additional concern is that an expansion would halt the current road transport decarbonisation. This is because by regulating the sector at the EU level, member states could withdraw their existing national policies, which are driving the decarbonisation momentum (T&E, 2020; Mock et al., 2014; Kasten et al., 2015; Abrell, 2011; T&E, 2013a). Therefore, the conditions and agreements following a potential expanded ETS generate great concern over the future climate effectiveness.
8 Considering the contrasting views over the recent EU proposal, we come to the problem statement of my research. We would like to find out what approaches would most suitably favour an inclusion of road transport in the ETS and what role should be assigned to the scheme for road transport to ensure the effectiveness of the climate policy.
1.3. Research Aim
This research aims at defining what policy approaches could enable the ETS expansion in a way that increases the climate action efficiency and effectiveness and define what role to assign to the scheme for road transport for an effective sectoral climate strategy. In order to address this aim, the following research questions have been formulated:
Main research question:
Should the road transport sector be included in the EU ETS and if so, how?
Sub-questions:
What approaches would favour a technically feasible integration of road transport in the EU ETS?
What role should be assigned to the ETS for the road transport sector to ensure the effectiveness of the climate policy?
1.4. Methodology
In order to answer the research questions, experts in the field from different institutions were consulted. By contacting experts I gained insights on the practical repercussions directly from people working within the industry. This enabled me to retrieve a more pragmatic perspective on this topic. Although my results mainly stem from literature research, I consulted experts in the field in order to add a tri-dimensionality to my conclusion. To have a direct response at the initial phase of my research helped me to seep through the multitude of sources available and have a more efficient methodology during my research.
The institutes contacted included EU and governmental institutes, agencies and organisations for the environment, transport and energy, non-governmental organisations, universities, EU associations of the oil industry, and lastly institutes of research for consultation on statistical data. Some were interviewed with the questionnaire included in Annex A and others were only consulted on statistical data. Since the participants worked in different parts of Europe, I first contacted them by email and then conducted the interviews either by phone or email. Phone calls lasted around 30 minutes, during which a number of open questions were asked. Otherwise, based on the participants availability and ease, questions were sent by email. The open questions are included in Annex A. In total, I consulted 23 different institutes from 6 different European countries (Annex B). Based on the data collected from literature data and
9 interviews, a summary of the current knowledge on possible approaches is delivered with recommendations for an effective ETS inclusion of the road transport sector. The data is managed based on the FAIR data principles (findable, accessible, interoperable, reusable) (Wilkinson et al., 2016) and stored on the Dutch data archive SURFsara for long-term open access (SURFsara, 2019).
1.5. Thesis Outline
The paper is structured as follows: Section 2 presents a literature review of the specificies and progress of both the emission trading and road transport policies. Section 3 and 4 illustrate the findings divided in policies approaches for an ETS inclusion of transport and a discussion on the role of the inclusion for an effective climate strategy. Section 5 presents a discussion on the findings and Section 6 concludes with policy recommendations and need for further research.
10
2. Emission Trading Scheme (EU ETS) and Effort Sharing Legislation 2.1. Introduction
This Section is divided in two sub-sections: Section 2.2. describes the historical overview and development of the EU ETS with its current progress to date, while Section 2.3. looks into of the Effort Sharing Legislation, the EU climate agenda to support emission reductions from non-ETS sectors, covering features and achievements specifically for road transport. Section 2.4. concludes the literature review with the problem statement of the thesis on the basis of the considerations previously discussed.
2.2. Emission Trading Scheme (EU ETS) 2.2.1. Origins and Development
In 1992, the United Nations Framework Convention on Climate Change (UNFCCC) was signed by 180 countries that agreed on the urgency of avoiding unsafe levels of anthropogenic global warming. In 1997, the Kyoto Protocol, the international treaty that extended the UNFCCC, led countries to commit to the reduction of greenhouse gas emissions (EC, 2003).
With the Kyoto Protocol, legally-binding emission reduction targets were established for the first time in 37 industrialised countries. This required the deliberation of policy instruments capable of reaching the targets. The Kyoto Protocol introduced two key principles which set the basis for the development of the ETS: first, demanding absolute quantitative emission targets for industrialised countries and second, establishing flexible mechanisms. These allowed for the contemplation of an exchange in emission units among countries through three market-based flexible mechanisms: Emissions Trading (ET), Clean Development Mechanism (CDM) and Joint Implementation (JI). In 2003, the EU ETS Directive was adopted and launched in 2005 and since then it developed throughout four phases (EC, 2003). The ETS sectors include power generation, industrial manufacturing and commercial aviation (for flights within Europe) and totalise around 11,000 installations and 500 aircraft operators. Combustion plants of mineral oil refineries and coke ovens are included if their rated thermal input exceeds 20 MW. Industrial manufacturing is included for the production of iron, steel, metals, aluminium, cement, lime, glass, ceramics, porcelain, bricks, pulp, paper, cardboard, acids, and bulk organic chemicals. These have various threshold values. From the scheme are exempted small installations if other fiscal measures trigger equivalent emissions reductions. In total, the ETS sectors account for around 45% of the GHGs emissions in Europe, while 55% comes from non-ETS sectors: transport (excluding aviation), energy consumption in buildings, agriculture and waste management (EC, 2003). Figure 1 illustrates the GHGs emissions by each sector in the EU in 2017 (EEA, 2019a).
11
Figure 1
Greenhouse Gas Emissions by Sector in the European Union in 2017
Note. Adapted from Trends and projections in Europe 2019, by European Environment
Agency, 2019a.
2.2.2. Phase 1 (2005-2007)
Phase 1 served as a 3-years pilot where, through ‘learning by doing’, phase 2 could be prepared for the integral operation of the ETS. In this early stage, the system covered only CO2 emitted from energy-intensive industries and power generators. The emission reduction target or cap was set as a cap on allowances at the national level: each country determined the allocation of their emission allowances through national allocation plans (NAPs). The sum of the NAPs formed the overall cap sanctioning a bottom-up and decentralised approach, thus, creating the cap from which to allocate allowances to installations (EC, 2003).
Nearly all the available allowances were disposed of free of charge based on the
grandfathering principle, for which entities affected by a new system are safeguarded to grant
them the time to adapt to new policies. Non-compliance was assessed with a penalty of €40 per tonne (ICAP, 2020a).
This first phase determined the successful determination of a carbon price, the establishment of a carbon trading system and the generation of an infrastructure capable of monitoring, reporting and verifying (MRV) emissions from sectors. When reliable data was unretrievable, estimates set the cap (EC, 2007). However, this resulted in a surplus of allowances that exceeded actual emissions, making the price of allowances falling to zero in 2007 (ICAP, 2020a).
12
2.2.3. Phase 2 (2008-2012)
In this phase, the ETS emissions reduction targets were approved, marking the launch of the first commitment period of the Kyoto Protocol.
The cap was reduced by 6.5% compared to 2005 after retrieving verified emissions data. The free allowance allocation was decreased by 90%. The non-compliance penalty was set to €100 per tonne (ICAP, 2020a).
Iceland, Liechtenstein and Norway joined the ETS. Some countries started to deal with their emissions of nitrous oxide from nitric acid production and some began to hold auctions on allowances. The aviation sector was introduced in the ETS from January 2012 with a separate trading system linked to the ETS. This concerned flights within the European Economic Area (EEA) and the 2020 target was set to a 5% emission reduction compared with the average annual emission level of 2004-2006 (ICAP, 2020a).
National registries were replaced by the Union registry, an online database that monitors all allowances issued and their ownerships. To ensure that all transfers adhered to the ETS rules, the Community Independent Transaction Log (CITL) was replaced by the European Union Transaction Log (EUTL), through which all transactions in the Union registry could be automatically checked, recorded and authorised (EC, 2010a). Lastly, despite the reduced cap on allowances, the 2008 economic crisis led to an unexpected emission reduction. This generated a surplus of allowances which decreased carbon prices, thus, decreasing the incentive to cut on emissions. The surplus has relevant repercussions: in the short-term, it damages the planned systematic operation of the carbon market; in the long-term it reduces the ability to reach more ambitious targets cost-effectively (EC, 2010b).
2.2.4. Phase 3 (2013-2020)
In phase 3, a EU-wide emission cap replaced the previous national cap system. The 2020 target aims at an overall 20% emission drop compared to 1990 in compliance with the second commitment period of the Kyoto Protocol. This means that compared to 2005, ETS sectors have to decrease emissions by 21%. In order to achieve the target, the EU stipulated the 2020 Climate and Energy Package with additional specific targets: reaching 20% share of renewables and increase energy efficiency by 20%. These targets were enacted into legislation from 2009 (EC, 2008). In 2018, the EC developed a long-term strategy for achieving climate neutrality by 2050 with investments into clean technologies and actions in research, industrial policies and the financial sector (EC, 2018a).
The emission cap is reduced annually by a Linear Reduction Factor (LRF) of 1.74% of the average total allowances released per year between 2008 and 2012. This corresponds to 38 million allowances eliminated each year. The default method for assigning allowances was changed from free allocation to auctioning. In total, 57% were auctioned and the remaining allocated for free. Free allocation was maintained and this time to shield industries from
13 carbon leakage while preserving their emission reduction efforts. Carbon leakage occurs when companies are negatively affected by local climate policies in a way that forces them to translocate their production in countries with looser constraints, with a consequent equal or higher release of emissions (EC, 2009b).
Due to the 2008 economic crisis, energy consumption fell, reducing the demand for allowances and the carbon price. Hence, unused allowances started accumulating and in 2013 the surplus counted 2.1 billion allowances. To address this issue, the EC introduced short- and long-term measures. In 2014, as a short-term strategy the back-loading of auction postponed 900 million allowances until 2019-2020. This regulated supply and demand of allowances, reducing price volatility. The surplus went down to 1.78 billion in 2015, eliminating the risk of having a 40% higher surplus by the end of 2015. As a long-term strategy, the Market Stability Reserve (MSR) was introduced in 2018. The 900 million allowances were saved in the MSR back-loaded in 2014-2016 - therefore not auctioned in 2019-2020 - and all the unallocated allowances. The reserve aims to stabilise the carbon market and increase preparedness to future shocks. This is also sought to incentivise heavier investments (EC, 2015b).
Lastly, the EU set up the New Entrants Reserve (NER) which preserved 300 million allowances to fund the ‘NER300’ programme. This initiative involves all member states and was set to grant a demonstration program of the most environmentally safe renewable energy technologies (RES) and carbon capture and storage (CCS) projects. The NER300 secured 2 billion euros. CCS included pre- and post-combustion, oxyfuel and industrial applications, while RES comprised bioenergy, geothermal, wind, ocean, hydropower, concentrated solar power, photovoltaics and smart grids. The NER300 was also meant to influence private investments with national co-funding across the EU, influence the implementation of low-carbon technologies and create new job opportunities. The winning projects commence their operation by 2019 and 2021(EC, 2009a).
2.2.5. Phase 4 (2021-2030)
The ETS policy framework will be adjust to meet the 2030 target of reducing emissions by 40% vs. 1990 levels. Overall, covered sectors must cut emissions by 43% vs. 2005. The 2030 Climate and Energy Framework aims at reaching a 32% share in renewable energy and 32.5% in energy efficiency. The reduction of the cap per year will change to a LRF of 2.2% from 2021. Free allowance allocation will continue for carbon leakage reasons. Efforts will focus on low-carbon innovation in industry and power sectors with funding mechanisms such as the Innovation Fund and the Modernisation Fund (EC, 2015b). The former supports the research and development of innovation technologies to decarbonise industries, while the latter aims at modernising energy systems, improving energy efficiency, supporting a socially just clean transition (e.g. capacity building) for lower-income member states (ICAP, 2020a). The framework should support regular certainties on future investments and harmonise countries’ contributions. Moreover, it is designed to facilitate the transition towards a
low-14 carbon economy and an energy system of affordable energy, improved security of EU’s energy supplies, lower dependency on imports and new job opportunities (EC, 2014a).
2.2.6. Achievements
The ETS is on track in meeting its 20% emission reduction target by 2020 target as in 2018 there was already a reduction of 23% compared with 1990 levels. Whereas, future projections reveal challenges in meeting the 2030 target. It is estimated that overall there would be a reduction between 30% and 36% against the intended 40% (EEA, 2019a).
The stationary installations of the ETS-sectors showed significant reductions in emissions between 2005 and 2018, with a drop by 4.1% from 2017 to 2018. This accomplishment was mainly driven by the power sector through a reduction in the use of coal in favour of alternative fuels for heat and electricity generation and to an increased use in renewables. On the contrary, the industry sector demonstrated only minor decreases in emissions, while the aviation sector showed constant increases in emissions with a 4% rise between 2017 and 2018. In terms of renewable share, the European Environment Agency (EEA) shows that in 2018 it reached 18% therefore positioning the EU on track in meeting the 2020 target. In terms of energy efficiency, the 2020 target may not be met due to the increase in energy consumption in buildings and transport. Figure 2 shows the progress for reaching the 2020 and 2030 climate and energy targets (EEA, 2019a).
Figure 2
European Trends and Projections Towards 2020 and 2030 Climate and Energy Targets
Note. From Trends and projections in Europe 2019, by European Environment Agency,
15 Notably, throughout the same years of accomplished emission reductions (1990-2018), the European GDP grew by 61%. Also, the ratio between emissions and GDP, termed the GHGs emission intensity of the economy, dropped dramatically by more than 50% compared to 1990 levels (303g CO2eq/EUR) (EC, 2019a).
2.3. Effort Sharing Legislation (ESL)
In 2013, the EU introduced the Effort Sharing Legislation (ESL) to address the emission reductions from excluded with binding national targets for member states. As already anticipated, the non-ETS (or ESL) sectors include transport (excluding aviation), energy consumption in buildings, agriculture, smaller industrial installations, smaller energy generation facilities and waste management.
The Effort Sharing Decision (ESD) sets the 2020 target of a 10% reduction in emissions, whilst the Effort Sharing Regulation (ESR) establishes the 2030 target of a 30% reduction in comparison with 2005 levels (EC, 2019a). Different targets apply depending on the wealth of the countries: the richest should achieve a 20% emission reduction, while the least wealthy should increase emissions by no more than 20% as to facilitate their internal development and economic progress. The renewable energy targets vary in respect to levels of renewable production already in place and to the investment capacity (e.g. from 10% in Malta to 49% in Sweden) (EC, 2009a). If a member state does not succeed in complying, the excessive amount of emissions is multiplied by a factor of 1.08 and has to reduce in the successive year (EC, 2018b).
The ESL provides some flexibility with borrowing, banking and transfer of annual emission allocations (AEAs) among countries and the elimination of ETS allowances in some cases. The flexibility increases the cost-effectiveness of reaching the targets. Member states have control over their own AEAs and can transfer them among each other. If by the end of the year, a member state exceeds its AEAs, it can save a 5% of them for use in the following year (borrowing); alternatively, a country can either purchase AEAs from another member state or use international project credits to cover their emissions. Contrarily, if there is an overachievement of targets in a given year, the country country can save the AEAs surplus or transfer it to others (EC, 2016c).
These emission reductions should enable the EU to complete the achievement of its climate targets. Since the progress of these sectors is however not regulated at EU level, it is the responsibility of each member state to stipulate policies and measures capable of delivering the targets in the ESL sectors. With the planned national policies emissions for the ESL, emissions could be curbed by approximately 27-28% by 2030 (vs. 2005 levels). Nevertheless, to reach the national binding target of 30%, more ambitious measures have to be designed (EC, 2019a).
Looking at areas of intervention in the ESL sectors, road transport could decrease transport needs, encourage public transport, and diverge from fossil fuels and conventional vehicles to
16 low-carbon fuels and zero-emission vehicles (EC, 2016a). The residential sector could focus on retrofitting projects to increase the energy efficiency of heating and cooling systems and heighten the durability and resilience of buildings. Agriculture could embrace more climate-friendly practices and transform livestock manure into biogas. Finally, the waste sector could decrease landfilling (EEA, 2018b).
Greenhouse gases covered are CO2, methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorinated compounds (PFCs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3). Emissions are considered from energy, agriculture, waste, industrial processes and product use. Countries report their emissions yearly to allow the EC to monitor their progress (EC, 2009b).
2.3.1. The Road Transport Sector
The transport sector accounts for 20% of the total GHGs emissions in the EU (see Fig.1). Among the ESL sectors, it is the major cause of GHGs emissions (36%), followed by buildings (25%), agriculture (17%), small industries and others (17%), and waste (5%) (EEA, 2019a). In particular, the road transport sector is responsible for three-fourths (72%) of the transport emissions (Fig.3). Particularly, 44% comes from passenger cars, 19% from heavy-duty vehicles, 9% from light commercial vehicles and less than 1% from motorcycles (EEA, 2019b). Also, transport is by far the main consumer of petroleum products, with road transport being the key consumer (48%) (Fig.4, Eurostat, 2019).
Figure 3
Share of Transport Greenhouse Gas Emissions in the European Union in 2017
Note. Adapted from Greenhouse Gas Emissions from Transport in Europe, by European
17
Figure 4
Oil Consumption by Sector in the European Union in 2017
Note. Adapted from Consumption of oil in selected sectors, EU-28, 2017, by European
Statistical Office, 2019.
The EU set out the main overall target for transport in the 2011 White Paper for Transport (EC, 2011b). The aim is to reduce emissions from the transport sector (including international aviation, excluding international shipping) by 60% by 2050 compared to 1990 levels. The intermediate goal for 2030 is reducing emissions from transport by 20% against 2008 levels. Emissions from international shipping has to decrease by 40% from 2005 levels by 2050. While, specifically for road transport, the 2030 target is a reduction by 23% in emissions compared to 2005 levels. This target is designed to support member states in completing their national targets under the ESR for the overall reduction in the non-ETS sectors of 30% by 2030 (vs. 2005) (EC, 2019e; EC, 2011b). This equals an emission reduction of two thirds by 2050 (vs. 1990) specifically for road transport (EEA, 2019b). In road transport, the focus is reducing emissions through a transition towards a low-emission mobility. The European Strategy for Low-Emission Mobility, the EC plans to first, improve transport system efficiency, second, hasten deployment of alternative fuels (biofuels, hydrogen, electricity etc.), third, expedite the progression of low- and zero-emission vehicles (EC, 2016a). To achieve these objectives, the EC introduced emission standards, fuel quality criteria and car labels to inform consumers on fuel efficiency and CO2 emissions (EC, 2019b).
Emission standards were introduced to reduce vehicle emissions of new cars and vans. The targets are based on the amount of fuel combusted per kilometer and the fuel carbon content. In 2015, the target for new passenger cars was set to about 130g CO2/km (5.6 l/100km with gasoline or 4.9 l/100 km with diesel). The 2021 target shrinks to 95g CO2/km (4.1 l/100 km with gasoline or 3.6 l/100 km with diesel). The 2030 target requires reaching a 60g CO2/km. Manufacturers face different targets based on the average mass of the vehicles they sell: for
18 heavier vehicles are allowed more emissions. There are penalties for exceeding the average CO2 emissions level. Manufacturers can decide to join forces to achieve the targets together. Similar emission targets and innovation strategies are established for vans, trucks and buses. Overall, emission standards foster innovation and deployment of cleaner vehicles (EC, 2019b).
The Fuel Quality Directive was set to regulate and gradually decrease the fuel gas intensity. It regulates petrol, diesel and biofuels for road transport and gasoil for non-road-mobile machinery. It imposed a reduction by 6% between 2010 and 2020. To calculate the GHGs intensity of fuels, the life-cycle of the fuel is taken into account: emissions from extraction, processing and distribution. The 6% reduction target should be reached by increasing the use of biofuels, electricity, cleaner fossil fuels, e-fuels (renewable and non-biological), as well as with by cutting upstream emissions at the extraction of fossil fuels (EC, 2019a).
2.3.2. Achievements
The combined emissions from ESL sectors decreased by 11% between 2005 and 2018, therefore are on track in meeting the ESD 2020 target. The GHGs trends and projections are illustrated in Figure 5 (EEA, 2019a).
Figure 5
Effort Sharing Legislation Progression and Estimates of Greenhouse Gas Emissions by Sector
Note. Solid lines: historical trend (1990-2018), dashed lines: estimate with existing measures,
dotted lines: estimates with additional measures. From Trends and projections in Europe 2019, by European Environment Agency, 2019a.
19 Major achievements are shown in the buildings sector where, despite the ups and downs in trends given fluctuations in heating demand due to oscillating weather, there was a relevant decline in energy consumption. Similarly, in the waste sector, there was a 33% reduction (2005-2018) thanks to reduced and better managed landfills. Emissions from this sector are expected to decrease further at a similar pace (EEA, 2019a). In the other sectors there were only negligent reductions, if any. In agriculture, emissions differed only slightly from 2005 to 2018. In the same years, road transport and international aviation were unable to decrease emissions. With a substantial increase in passenger-kilometer and tonne-kilometer demand, emissions rose by 129% in international aviation, 32% in international shipping, and 23% in road transportation (compared to 1990 levels) (EEA, 2019b). Road transport showed a constant rising trend in emissions that remained significantly above the 1990 levels. As of 2018, CO2 emissions from road transport were still around 20% above 1990 levels and merely 3% lower than 2005 levels (Fig.5). Since the overall CO2 emissions from transport were still 28% above 1990 levels in 2017, to reach the -60% target emissions they need to decrease by two-thirds by 2050.
In road transport, contrarily to emission reductions, there have been some significant improvements in the average emission levels from new cars thanks to the CO2 emissions standards. Before their introduction, the average emissions were decreasing by 1.2% every year (ICCT, 2018). The reduction rate with standards grew to 2.9% a year (2007-2017). Manufacturers outperformed the reduction rates, meeting the 2015 target of 130 g/km two years in advance in 2013. In 2017, the average CO2 emissions from new passenger cars dropped to 119 g/km. The figures differ among member states, from the highest emission levels in Germany (126 g/km) to the lowest in France (110 g/km) and in The Netherlands (109 g/km) (EEA, 2019c). Until 2016, manufacturers were on track for the 2020/21 CO2 target of 95 g/km. However, as reductions flattened in 2017, average emissions will have to decrease by 5.5% annually to meet the 2021 target (ICCT, 2018).
Overall, the emission reductions in the ESD were more negligent and slower compared to those under the ETS and some member states have difficulties in meeting their targets. The majority of member states stays within their AEAs, however some fail every year to meet their annual targets. In 2017, these included Finland, Germany, Ireland, Lithuania, Poland, Malta, Austria, Bulgaria, Cyprus and Estonia (EEA, 2019a).
The expected difficulties in meeting the 2030 ETS target - 36% reduction against the intended 40% - is thought to be due to estimated insufficient reductions in the ESL sectors. The EEA predicts a 21-23% reduction by 2030 opposed to the 30% ESR 2030 target (vs. 2005). Also, the current rise in renewable energy share is not keeping pace with what is needed to achieve the 2030 target: +0.7% on average yearly against the +1.1% required. Lastly, the decrease in energy consumption should double to meet the 2030 target.
20
3. Approaches for the Integration of Road Transport in the EU ETS 3.1. Introduction
In the previous sections we have introduced the main features, structure and scope of the EU ETS and of the Effort Sharing Legislation. In this Section we will discuss the approaches and measures for an integration of road transport in the ETS. In order of appearance, we will cover potential pathways to integration, type of regulated entities, covered greenhouse gases, determination of the cap level, allocation of allowances, MRV, competitiveness, and, lastly, potential outcomes of an expanded system.
3.2. Potential Pathways to Integration
Different pathways can be selected to facilitate the integration of road transport in the EU ETS; a closed ETS system dedicated only to road transport and separated from the EU ETS, a semi-open system connected to the EU ETS, or a fully integration within the EU ETS. The first two approaches can be useful in the initial phase prior to a full integration in the current EU ETS.
3.2.1. Closed Emission Trading
In the first case, a closed system could lead to an emission reduction directly from the sector. A separate ETS, in comparison with emissions standards, would provide more flexibility more abatement opportunities becoming available. Also, a carbon price could lead to a reduction in the use of vehicles, a greater use of low-carbon fuels, and, eventually, an incentive to purchase of fuel efficient vehicles. Overall, a closed transport ETS would be less cost-efficient than a full integration as the specific abatement measures are more costly than those available in other ETS sectors. Since it would preclude the possibility of reducing emissions in a cheaper way, a separate ETS would increase the abatement costs for the economy and, thus, it would be counterproductive compared to a full ETS integration. Moreover, since a closed system has fewer different actors, the system could be put at risk through strategic planning. For instance, if car manufacturers were regulated - on the expected emissions from the vehicles they sell - some may induce an increase in the allowance price to their interest. This risk decreases with an increase in the number of different actors, providing another ground for expecting a higher overall performance in a fully integrated ETS (Achtnicht et al., 2019).
3.2.2. Semi-open system
A second approach is a semi-open system that regulates and connects road transport with the ETS through a gateway. The aviation sector is an example of this: since its emissions are at a level which is too high to be compliant with the reductions required by the Kyoto Protocol, aviation companies can trade allowances only among each other. They can also buy allowances from companies in ETS-compliant industries, however they cannot sell them back
21 (Alberola and Solier, 2012). This semi-open system serves two purposes: one the one hand, when the allowance price in the aviation sector is higher than the one in the ETS, aviation companies buy allowances from ETS-compliant sectors, reducing the overall tradable amount within the ETS and eventually leveling up the prices; on the other hand, in the case that the allowance price in the aviation sector excessively decreases, the ETS is not affected as the allowances can be bought only in one way. This promotes a similar abatement cost among the two systems, thus, it increases cost-efficiency compared to a closed system. In conclusion, a semi-open approach can be useful during the beginning stage of the process of a full ETS integration because it can shield against price shocks. In fact, an instant and complete integration creates high risks and uncertainties on the allowance price. By utilizing this phased approach, we can cushion these shocks and ensure a safe and successful transition (Achtnicht et al., 2019).
3.2.3. Integral Inclusion in the EU ETS
An integral ETS transport inclusion would have the following characteristics. First, in organisational terms, institutional arrangements are already in place and so are the reporting instruments and the trading approaches. In economic terms, the more abatement opportunities the higher the cost-efficiency of the climate tool (Flachsland et al., 2011). Moreover, a broader system may lower the volatility risk of the market, shielding from unpredictable price movements. This is because, individual trades should only have minor impacts on the price in a system where numerous different trades take place. An important drawback of including transport in the ETS is that, despite ensuring emissions to stay within a cap, it also means that emission reductions will not necessarily come from the transport sector. In fact, abatement opportunities are more expensive than in other sectors as the marginal abatement cost curve for transport is expected to be steeper (see Section 3.9.1.). The shift of emission reduction from transport to sectors like electricity and energy-intensive industries could bring some efficiency gains to the ETS as a whole, but it also increases compliance cost in other sectors compared to transport. This would heighten the risk of carbon leakage in current ETS sectors. Nonetheless, the change in the allowance price caused by the ETS extension depends on the new cap and the marginal abatement cost curve of the new scheme (Achtnicht et al., 2019).
3.3. Identifying the Responsible Entity
For an effective policy scheme, the choice of the responsible entities determines both the enforceability of the scheme and the administration burden. In road transport there are a number of actors that can be accountable for road emissions, namely oil producers (extraction), oil refineries (fuel processing), fuel distributors, vehicle manufacturers, gas stations and drivers. Theoretically, any of these entities could be selected (Flachsland et al., 2011). Looking at the current ETS approach, entities are regulated downstream for the emissions coming from the activity business operations (EC, 2003). However, transport is characterised by numerous small emitters, which if included through a downstream approach, the scheme would result in a number of intricate, time-consuming and expensive administrative and monitoring challenges (Sven, 2011). Therefore, another approach will
22 have to be considered. Generally, for a scheme to be enforceable legal entities have to be clearly identifiable. The fewer the regulated entities the lower the administrative burden and the transaction costs. Also, the most feasible point of regulation is one that obliges entities that are able to trigger abatement incentives along the entire fuel chain and that have a wide coverage of all the emissions. Finally, it is advantageous to enforce a system that already aligns with existing enforcement mechanisms (Flachsland et al., 2011).
The entities that meet most of the abovementioned criteria are those at the upstream level of the road fuel production, hence, who produce and/or sell fossil fuels - producers, refineries, distributors, importers and gas stations (Nader and Reichert, 2015; Achtnicht et al., 2019; Seppanen and Magnusson, 2015; Sorrel, 2010; Hermann et al., 2014; Paltsev et al., 2018). These would have to obtain permits corresponding to the CO2-intensity of the conventional road fuels (diesel and gasoline) that they introduce in the EU market. First, fuel suppliers are less numerous than car owners. Second, the option is feasible in terms of emissions monitoring, because fuel suppliers already have to inform on the GHGs emissions of the fuel they sell for energy taxes (EC, 1998). Third, oil producers are already experienced with the ETS for their production-related emissions. Finally, producers and suppliers are in the position to create abatement opportunities along the fuel chain, as they would pass on the allowance cost to consumers with an increase in fuel prices. This could, for example, lead to an incentive for car drivers to reduce their fuel consumption by adjusting their vehicle use or consider technological alternatives. Within fuel producers, oil companies only active in the crude oil extraction and not in the refining operations should be exempted because they cannot precisely predict neither the exact use of the crude oil they sell nor the exact quantity of CO2 that would be released from the combustion of a fixed amount of crude oil (Hermann et al., 2014). Additionally, based on these criteria, car manufacturers, end users and gas stations should be exempted. First, car manufacturers would need to estimate the lifetime emissions of all vehicles produced. These will never be accurately representative of the actual road emissions as these depend on vehicle use (Desbarats, 2009). Second, at the level of end users the impact of the measure on the vehicle use following purchase would be minimal (Raux and Marlot, 2005). Third, if gas stations or end users would be regulated the number of trading entities would increase significantly: there were more than 75,396 gas stations in 2018 (Table 1; Fuels Europe, 2019), and 283 million cars, 1.6 million buses, 134 million (light and heavy) goods vehicles and 35 million motorcycles and mopeds for a total of (Eurostat, 2020a). Also, experts suggested that in regulating end-users there would also be issues associated with privacy and the individual freedom of movement. The gas stations that are only active in retail operations and do not hold an inventory position in a fuel storage would be exempted from the ETS. Gas stations would still be indirectly affected by the ETS as companies at higher levels (refineries, wholesalers, importers) would pass on the allowance costs via increasing the price of the fuels they sell downstream.
23
Table 1
Number of Gas Stations in the European Union in 2018
Country Gas stations
Austria 2699 Belgium 3096 Bulgaria 3200 Croatia N.A. Cyprus 305 Czechia 3991 Denmark 2034 Estonia 514 Finland 1848* France 11068 Germany 14459 Greece 6100 Hungary 2068 Ireland 1789* Italy 20800 Latvia 610 Lithuania 822** Luxembourg 234* Malta 78 Netherlands 4142 Poland 7765 Portugal 3114 Romania 2100** Slovakia 962 Slovenia 553** Spain 11609 Sweden 2585 United Kingdom 8442 EU-28 Total 75396
24 Finally, if we observe worldwide examples of cap-and-trade systems, the ETS of California, Québec, and New Zealand cover road transport emissions by regulating fuel suppliers (see Box 1, CARB, 2012; Leining and Kerr, 2018; St-Gelais, 2018). Also, when the EC first alluded to an ETS expansion, it considered an upstream approach for the inclusion of road transport and heating of buildings (Seppanen and Magnusson, 2015). This choice would help to limit the number of covered entities, streamline GHG emission monitoring and limit the transaction costs of the inclusion. All in all, an upstream approach is the preferred point of regulation for being the most cost-effective and efficient option that facilitates and disentangles the administrative processes. The following paragraph we discuss the combination of an upstream approach within the current downstream approach of the ETS.
Box 1
Examples of Emission Trading Systems from California, Québec, and New Zealand
The California emission trading system (CA ETS) entered into force in 2013. It covers around 500 entities which account for 80% of the California’s GHG emissions: industrial facilities, electricity generation and imports, stationary combustion and suppliers of fuel and gas. The threshold is for entities producing equal or greater than 25,000 tCO2e/year. For fuel suppliers this translates in the same quantity as released from the fuel sold in a year. The point of regulation is mixed: fuel suppliers are regulated upstream while other entities downstream. The carbon price per tonne of CO2 was on average $16.84 in 2019. Fuel suppliers are not eligible to free allocation due to the low carbon leakage risk and have to purchase allowances through auctioning. Since the start of the program, the system raised $12.5 billion. The majority of the revenue funds the Greenhouse Gas Reduction Fund, where a portion (minimum 35%) is saved for the low-income and disadvantaged communities (CARB, 2012; ICAP, 2020b).
The Québec emission trading system (Québec ETS) was enacted in 2013. The system covers 126 entities, 82% of the country’s emissions from fossil fuel burning and industrial processes in power, industry, buildings, and transport. The inclusion threshold is also for entities emitting a quantity equal or greater than 25,000 tCO2e/year. The point of regulation is mixed. The carbon price was on average $16.48 (per t/CO2e) in 2019. Fuel suppliers have to purchase allowances through auctioning. The system raised $2.97 billion. The whole revenue from auctions funds the Québec Green Fund for combating climate change (St-Gelais, 2018; ICAP, 2020b).
The New Zealand ETS (NZ ETS) began in 2008. Sectors covered include forestry, industry, power generation, agriculture, waste, and liquid fossil fuels for a total of 2,409 entities. These account for 51% of the country emissions. There are various thresholds for each sector and the point of regulation is mostly upstream. The carbon price was on average $16.33 (per t/CO2e) in 2019. Fuel suppliers purchase allowances through auctioning. Revenues fund the system budget (Leining and Kerr, 2018; ICAP, 2020b).
25
3.3.1. Hybrid System
To make use of an upstream approach, for the point of regulation of road transport, a hybrid system can be selected for the extended ETS to maintain both approaches for the different sectors (Nader and Reichert, 2015). Examples of a mixed point of regulation are the California and the Quebec cap-and-trade systems (CARB, 2012; St-Gelais, 2018). Nevertheless, a double counting issue could arise, meaning that both supplier and end users pay for emissions that are emitted only once. For instance, aviation companies acquire allowances for the GHGs they actually emit (downstream), and with an upstream approach, suppliers of kerosene would also have to buy allowances for the fuel they sell to those airlines. A solution would be making fuel suppliers to buy allowances only for the fuel they sell to entities that are not subject to the downstream approach (Nader and Reichert, 2015). This requires extensive tracking of the transactions along the fuel supply chain and higher administrative costs (Sorrel, 2010). However, in the case of fuel suppliers, this should not be an issue as suppliers already have to declare the GHGs emissions of the fuel they sell. Fuel suppliers would report the fuels delivered to those entities not regulated under the ETS. In fact, it would be the regulated entity upstream that receives the fuel that would eventually report its fuel sales. Thus, double counting, if addressed, should not be a limiting factor to an additional upstream point of regulation in an extended ETS (Nader and Reichert, 2015).
3.3.2. Fuel Suppliers
As aforementioned, the fuel suppliers to be regulated under an extended ETS, are oil refineries, independent wholesalers and importers. The dynamics of the fuel supply chain of motor fuel, from refineries to consumers, are exemplified in Figure 6. First, the fuel supply chain is divided into 3 segments: upstream, midstream and downstream. Second, there are two main channels of sale: retail and wholesale. At the upstream level, we find the extraction and production industry: oil companies extract crude oil and refineries process it into refined products (e.g. motor fuel). These companies can be vertically active, meaning they have operation activities from extraction, to refining and to retail through their privately owned network of gas stations. If they are not active in retails, they sell their fuel products to retail networks of a third party via wholesalers. Wholesalers, or resellers, are companies that purchase fuel products from refineries or importers for distribution and sale to consumers. Wholesale companies may be independent or owned by oil refinery companies and can be regarded as being active at the midstream level of the fuel distribution with possible downstream activities. They deliver fuel to retailers like gas stations and to large consumers. The latter include power plants, airlines, ship owners or truck fleet operators like supermarkets and other large companies which require large amounts of fuel and therefore are not reliant on gas stations for their activities. These end users establish commercial contracts with either refineries’ affiliated wholesalers or independent wholesalers in order to receive fuel parcels at their establishment. At the downstream level we have the sale of fuel products from gas stations to end users, which are either owned by refineries, wholesalers or private gas retailers. Finally, importers deliver refined products to companies from any segment of the fuel supply chain (Fuels Europe, 2009).
26
Figure 6
Supply Chain of Motor Fuel in the European Union in 2018
Note. The fuel supply chain is divided into three segments: upstream, midstream and
downstream. Within these segments fuel suppliers sell their products to end users through two channels: wholesale and retail. Refineries may be vertically active in all three segments. Wholesalers may be active from midstream to downstream. Independent gas stations are only active downstream. In 2018, refineries introduce around 75% (261 billion litres fuel, 698 Mt CO2/y) of the fuel in the EU’s fuel market, while wholesalers and importers introduce around 25% of fuel (87 billion litres fuel, 233 Mt CO2/y).
In Figure 6 are also included some estimations of the emissions by each fuel supplier based on their fuel sales. In 2018, 77.4% (269 billion litres) of the motor fuel sold was diesel, and 22.6% was gasoline (79 billion litres) (both excluding the biofuel portion) (Eurostat, 2020c). Considering a release of 2.68kg of CO2 for litre of diesel and 2.31kg CO2e/l for gasoline, 347 billion litres of diesel and gasoline correspond to about 930 million tonnes of CO2 emissions. Refineries supply 75% of the motor fuel in the EU’s market annually (FuelsEurope, 2019). Wholesalers, importers and gas stations combined account approximately for the remaining 25%. Thus, out of the 347 billion litres of motor fuel sold in 2018, refineries accounted for the sale of 261 billion litres of fuel in the EU. Thus, their sales contributed to about 698 million tonnes of the CO2 emitted by road transport in a year. Wholesalers, importers and gas stations totalise the remaining 87 billion litres of EU’s motor fuel sales, thus, should be responsible for around 233 million tonnes of CO2 emitted by road transport. Specifically, wholesalers supply 30% of EU’s energy market share (UPEI, 2020), while importers supply around 16% of diesel (FuelsEurope, 2019). The following Sections describe the European picture of the three main entities of the fuel supply chain that could be regulated in the extended ETS.
27
3.3.3. Refineries
The refinery companies with operation facilities in the EU are represented by FuelsEurope, the former EUROPIA association established in 1989. Members of FuelsEurope are 40 refinery companies, which have a combined refining capacity of 665 Mt/yr (in terms of throughput). Of their total refinery production, 39.4% is diesel/gasoil and 18.5% is gasoline, making 57,9% share of their production destined to road transport fuels. Together the companies account for almost 100% of the existing petroleum refining capacity in the EU and around 75% of EU’s market share of motor fuel retail sales (FuelsEurope, 2019). The companies own and operate 90 different refineries spread across 22 member states, Norway and Switzerland. Countries without refining sites are Cyprus, Estonia, Latvia, Luxemburg, Malta and Slovenia. The 24 largest companies, with a refining capacity greater or equal to 12 Mt/a or 250 kbl/d, are: Shell (Netherlands), ExxonMobil (USA), Rosneft (Russia), ConocoPhillips (USA), BP (United Kingdom), PKN Orlen (Poland), Total (France), Lukoil (Russia), Saras (Italy), Cepsa (Spain), ENI (Italy), Repsol (Spain), OMV (Austria), Gunvor (Switzerland), MOL (Hungary), Statoil (Norwegian), Neste (Finland), Ineos (United Kingdom), Vitoil (Switzerland), Hellenic Petroleum (Greece), Galp Energia (Portugal), Preem (Sweden) and Tupras (Turkey) (McKinsey, 2020; see Annex C). The largest refinery companies both active vertically and owners of the biggest retail networks in the EU are 12: Shell, ExxonMobil, ConocoPhillips, BP, PKN Orlen, Total, Lukoil, ENI, Repsol, OMV, Statoil, Hellenic Petroleum. Together they own and operate around 57064 stations (Veraart, 2019; FuelsEurope, 2009; Total, 2020; Shell, 2020; Eni, 2020).
3.3.4. Wholesalers
Independent fuel wholesalers are entities active midstream in the storage, distribution and sometimes retail of fuel products. Their activities are independent from refineries. They own industrial facilities termed fuel terminal for the storage and distribution of refined fuel products. Wholesalers can purchase fuel from both refineries and importers. The fuel is then distributed by truck from the storage facility to gas stations or large consumers.
In Europe, the UPEI organisation represents around 2.000 European fuel wholesale/retail distributors of energy for the transport and heating sectors. UPEI accounts for 23 members including 11 national associations, 10 companies and 2 associates. Together they totalise 1.800 companies, owning 1.000 fuel terminals - with a combined storage capacity of 30.000.000 M3 - and 21.000 retail stations. All members are involved in gasoline and diesel sales. They supply 30% of EU’s energy market share, more than a third of the EU’s current energy demand. They are based in 20 European countries, Portugal, Spain, France, Belgium, Ireland, UK, Netherlands, Germany, Switzerland, Italy, Austria, Slovenia, Croatia, Czech Republic, Slovakia, Hungary, Bulgaria, Latvia, Estonia, Finland. Wholesalers supply fuel in the EU independently of the major fuel producers. Being at the midstream level, between producers and consumers, they can store, import and supply fuel on demand. Wholesalers create competition in the fuel market. They have the flexibility to quickly provide for changes in demand, contributing to security on a regional and national level. Most of the companies
28 represented by UPEI are small and medium sized and are active both midstream and downstream, selling their products through their privately owned gas stations. Others are only active downstream in retail as independent gas stations (UPEI, 2020). The largest wholesaler companies are Vitol and Glencore. However, starting as independent traders, they invested in refining and became vertically active, thus, they are referred in here as refineries (FuelsEurope, 2009). Besides these specific examples, wholesalers operating both fuel terminals and gas stations are Avia (Switzerland) with 3100 stations and the DCC Energy (Ireland) with 2165 stations, followed by smaller ones such as Olerex (Estonia) and Prio (Portugal) with 500 and 250 stations respectively (UPEI, 2020; Avia, 2017; DCC, 2020; Prio, 2020).
3.3.5. Importers
In the EU, the road fuel demand progressively increased for diesel and declined for gasoline over the past 20 years (Eurostat, 2020b). This is primarily due to higher taxes on gasoline compared with diesel. On the one hand, the EU production of gasoline surpasses the actual demand and, for instance, in 2017, around 55% of gasoline domestic production (43.8 Mt/y) was exported mainly to North America, Africa and Asia. On the other hand, the domestic demand of diesel was higher than the EU production, so in 2017, around 16% of diesel (47.4 Mt/y) was imported. The main EU import of diesel is from Russia, the Middle East and the USA. Due to the EU gasoline/diesel imbalance, the dependency on fuel imports is continuing throughout the years (FuelsEurope, 2019). There are eight main large import companies, namely Rosneft, Lukoil and Gazprom (Russia), ExxonMobil and Chevron (USA), Saudi Aramco (Saudi Arabia), National Oil Company (NOL) (Libya), and Sonatrach (Algeria) (T&E, 2016). The Chevron Corporation has 2076 gas stations in Europe under the name of Texaco and Gazprom counts 405 service stations (Texaco, 2020; Gazprom, 2020).
3.3.6. Liable Entities
As aforementioned, only companies up- and midstream, refineries, wholesalers and importers would be included in the ETS, while those only active in retailing (gas stations) will not be subject to direct compliance obligations. The EU ETS only includes and regulates plants above a certain size and excludes certain small installations. The setting of a minimum threshold reduces the number of covered entities, decreasing administrative burden and shielding smaller companies from overly high transaction costs. The coverage threshold for fuel suppliers could be established, on the example of the California ETS, for those entities producing, delivering or importing a fuel quantity that if combusted produce 25,000 metric tons or more of CO2e (CARB, 2012). Liable companies to be regulated under an extended ETS could include the 12 major vertically active refining companies and large wholesalers like Avia and DCC. These 14 companies would already account for the 83% of gas stations (62305) fuelling road transport in Europe (Veraart, 2019; Total, 2020; Shell, 2020; Eni, 2020). Among importers, the companies Chevron, Rosneft, Gazprom, Saudi Aramco, NOL and Sonatrach would also be regulated in the ETS. In this case, the fuel sold to refineries and wholesalers will not count towards the threshold calculation: the fuel will eventually be sold
29 by either the refiner or the wholesaler. Whereas, fuel products sold directly to privately owned gas stations would count towards the threshold calculation for importers. In fact, those entities are only active downstream and would not be subject to regulations under the ETS. In addition, companies would report the fuel sold through other means than gas stations, such as to large consumers (e.g. supermarkets) that operate truck fleets and take part of the road transport emissions.
To avoid double counting issues the regulated entities would report fuel sales as follows. Refiners would combine and report the total fuel delivered from all the terminals in which they operate, located both on and off-site of owned refineries. Since the ETS already regulates refineries for operational emissions, fuel sales would be reported and verified separately. Importers would be subject to ETS compliance when they sells refined products to a retailer located inside the EU. These would report the fuel quantities that they deliver directly to gas stations without first passing through neither refineries nor wholesalers. Contrarily, the fuel sales delivered to owners of fuel terminals (e.g. refiners, wholesalers) are not reported under the ETS, because it is the owner of the fuel terminal who eventually introduces the fuel into the EU’s market and becomes subject to ETS regulations. Fuel that is exported outside of the EU or destined exclusively to aviation or maritime transportation would be excluded.
3.4. Greenhouse Gases Covered
The greenhouse gas emissions that can be accounted for with the regulation of fuel suppliers are CO2, CH4, and N2O (in units of CO2e) released from the combustion of conventional road fuels such as gasoline and diesel. Historically, the majority of GHG emissions in road transport has derived from the combustion of diesel and gasoline while only insignificant proportion from compressed natural gas (CNG) and liquefied petroleum gas (LPG) (Afriat et al., 2015). However, for example the CA and Quebec ETSs cover LPG. Biofuels are excluded from all three mentioned ETSs. However biomass-derived fuels can be accounted if they are a blended component of a finished product containing fossil fuel (CARB, 2012; Leining and Kerr, 2018; St-Gelais, 2018).
3.5. Determination of a Cap Level
The cap is crucial for reaching the emission targets and conveying right signals to drive innovation and diffusion. In general, if the cap is too loose, the allowance price can drop drastically. Contrarily, if it is too tight it has a direct effect on industry competition (Achtnicht et al., 2019). The 2030 target requires reducing road transport emissions by 23% compared to 2005 levels. The GHG emissions from road transport in 2005 were 916 MtCO2e, thus, the cap level for the sector would be 705 MtCO2e for 2030. Since one allowance gives the right to emit one tonne of CO2e, the cap translates in 705 million allowances in 2030. The new cap for road transport would then be added to the 2030 ETS cap. By 2030 the ETS sectors aim at reduce emissions by 43% compared to 2005 levels. In 2005, ETS emissions amounted to 2,340 MtCO2e, thus, the ETS cap for 2030 will be 1,334 MtCO2e. The inclusion
