Universiteit van Amsterdam (UvA)
Faculty of Science
Master School of Life and Earth Sciences
An Exploration of a Potential Expansion of the European
Emissions Trading Scheme
MSc Earth Sciences, Environmental Management Research Proposal (5264REPR6Y)
Student: Vera Catalano, 12047422
Supervisor, Examiner: prof. dr. Marc Davidson, Institute for Biodiversity and Ecosystem Dynamics Co-assessor: dr. ir. John van Boxel, Institute for Biodiversity and Ecosystem Dynamics
Length & Wordcount: 15 pages, 5819 words (including text; excluding first page, table of content, reference list)
Amsterdam, The Netherlands
3 December 2019
Table of Content
1. Introduction 4
1.1. Coverage: Sectors and Gases 5
1.2. Societal Relevance 5
2. Origins of EU ETS 6
2.1. Phase 1 (2005-2007) 6
2.2. Phase 2 (2008-2012) 7
2.3. Phase 3 (2013-2020) 7
2.3.1. 2020 Climate and Energy Package 8
2.4. Phase 4 (2021-2030) 8
2.4.1. 2030 Climate and Energy Policy Framework 9
3. Effort Sharing Legislation 9
3.1. EU-wide Measures 10
3.1.1. Transport Sector 10
3.1.2. Building Sector 10
4. Current Achievements 11
5. Extension of the EU ETS 14
6. Research Aim 16 7. Research Questions 17 8. Methodology 17 9. Time Schedule 17 10. Funding 18 11. References 18
The proposed research project intends exploring a potential expansion of the European Emissions Trading Scheme for the inclusion of uncovered highly polluting sectors. The EU ETS, launched in 2005, is the major climate policy instrument in Europe that is efficiency delivering the emissions reductions necessary for addressing the climate action commitments under the Paris climate Agreement. The ETS works on a ‘cap and trade’ system where a maximum amount of emissions permitted is established as a cap and countries have to remain under this cap by purchasing and trading emission allowances for the sectors covered by the system. This formed the first and largest carbon trading market ever developed in the world. The system accounts for 45% of the total EU’s greenhouse gas emissions and covers power generation, industrial manufacturing and aviation sectors. Whereas, non-ETS sectors include road transport, heating of buildings, agriculture and waste. Together, these account for the remaining 55% of the EU’s greenhouse gas emissions. Due to the current efficiency of the ETS in delivering emission reductions from the sectors covered, it has been subject of long-lasting discussion whether to expand the system’s coverage so as to develop a more inclusive and far-reaching climate tool. This research aims at investigating first, the motives behind the exclusion of certain sectors and second, potential approaches and measures that can pave the way for their inclusion. Literature review and interviews will contribute to address the aim. The project will be conducted over the course of five months at the University of Amsterdam (UvA).
1. Introduction
Every decade following the 1980s was warmer than the precedent. The World Meteorological Organisation (WMO) estimates the 2019 year to reach another warmest record, making the 2015-2019 period the warmest ever recorded. In 2018, greenhouse gases (GHGs) concentrations reached new record highs(1) and in 2019 the sole carbon dioxide
(CO2) emissions may be 0.6 higher than 2018 marking the new highest record(2). CO2
pollution has now reached its highest levels. Globally, emissions have risen for three consecutive years marking a regress away from the important decreases required in global climate action. In order to adhere to the 1.5°C goal in limiting warming as compared with pre-industrial levels, worldwide emissions should fall by 8% every year throughout the future decade. If emissions are decreased yearly by 3% instead, the 2°C goal will be attained, nevertheless, with an extent of warming sufficient to eradicate almost entirely coral reefs and undermine the ice caps of Greenland and Antarctica. Currently, global temperatures have already risen to 1.1°C since the late 19th century(2). In the EU, GHGs emissions decreased by 22% in 2017 compared with 1990 levels, thus, currently keeping the EU on track in meeting its targets and in giving its contribution (Figure 1)(3).
Figure 1. European greenhouse gas emissions (international aviation, indirect CO2, exclusion of land use, land use change
and forestry LULUCF) from 1990 to 2017(3).
The European Emissions Trading Scheme (EU ETS) represents the first international carbon market in the world and the biggest ever developed, accounting for ¾ of international carbon trading(4). With the ETS, the EU contributes to the Paris Agreement(5), with 2020 and 2030 targets part of the EU’s nationally determined contribution (NDC). All 28 EU Member States are involved in the ETS together with Iceland, Liechtenstein and Norway. The entities of the sectors covered are around 11000(4). The system comprises innovative strategies to
reduce GHG emissions cost-effectively and has inspired worldwide countries to develop a similar carbon trading scheme.
The ETS works on the principle of ‘cap and trade’. A cap is set on the maximum amount of GHGs that can be emitted by sectors. The cap decreases over time in order to deliver an overall reduction in emissions. Within the cap, companies are assigned or have to purchase emission allowances which they can then trade freely. In addition, companies can earn international credits by investing in emission-saving projects worldwide. The limit imposed on the total number of available allowances establishes their value. Each allowance corresponds to the right to emit one CO2 tonne, or the equivalent amount (CO2e) of, nitrous
oxide (N2O) and perfluorocarbons (PFCs), the two more potent GHGs after CO2(6).
Yearly, each company should declare a balance between its allowances and emissions, or else, it incurs into heavy fines. When a company achieves a reduction in emissions, it can save the unused allowances for future needs or it can sell them to other companies(6). This flexibility gives the possibility to avoid emissions where achievable at the
lowest cost. The setting of a carbon price encourages investment in clean, low-carbon alternatives(7).
1.1. Coverage: Sectors and Gases
The sectors and gases included in the ETS are those from which emissions can be accurately measured, reported and verified. The sectors are power generation, industrial manufacturing and aviation. CO2 is accounted from emitters in the power and heat sectors,
commercial aviation and energy-intensive industry sectors such as oil refineries, iron and steel works and production of metals, aluminium, cement, lime, glass, ceramics, bricks, pulp, paper, cardboard, acids, and bulk organic chemicals. N2O is considered from sectors that
produce nitric, adipic and glyoxylic acids and glyoxal. Lastly, PFCs are included from the production of aluminium(8).
Companies in these sectors are obligated to participate in the ETS. Exceptions are for: plants if smaller than a certain size; small installations if other fiscal or similar measures from the government trigger equivalent emissions cuts; only flights between airports in the European Economic Area (EEA) are covered until 31 December 2023(8).
1.2. Societal Relevance
The ETS commits with the 2030 Agenda for Sustainable Development, developed at the UN Sustainable Development Summit in 2015. It makes its contribution first to the Sustainable Development Goal (SDG) 13 of climate action, and second more broadly to the SDGs: 7 affordable and clean energy, 9 industry, innovation and infrastructure, 11 sustainable cities and communities, 12 responsible consumption and production, 15 life on land, and 17 partnerships for the goals(9). ETS mitigation and adaptation strategies stretch throughout and outside Europe, with efforts in emissions reductions, greater renewable
energy share, enhanced energy efficiency and progress in low-carbon and clean technologies and in related new job opportunities(6,10).
2. Origins of EU ETS
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 GHGs(11).
With the Kyoto Protocol, legally-binding emissions reduction targets were established for the first time for 37 industrialised countries. This required the deliberation of policy instruments capable of addressing the targets. The Kyoto Protocol introduced two key principles which set the basis for the ETS. The first, demanding absolute quantitative emission targets for industrialised countries and the second, introducing the concept of flexible mechanisms. This allowed for the contemplation of an exchange in emission units among countries through an international carbon trading system(12).
In 2000, the European Commission (EC) produced a preliminary green paper of the ETS which was then refined by diverse stakeholders. In 2003, the ETS Directive was adopted and in 2005 launched(11). The emissions reduction target or cap was translated in a cap on allowances at 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 EU-wide cap from which to allocate allowances to installations(12). Thereafter, the ETS developed in four phases.
2.1. 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. Nearly all the available
allowances were disposed free of charge based on the grandfathering principle. Non-compliance was assessed with a penalty of 40 euros per tonne(13).
This first phase determined the successful allocation of a price to carbon, the foundation of an emission allowances trading system, and the generation of an infrastructure capable of monitor, report and verify (MRV) emissions from sectors. When reliable data was unretrievable, estimates set the caps(14). This resulted in a surplus of allowances that exceeded actual emissions, making the price of allowances falling to zero in 2007. Also, these were unavailable for use in phase 2(13).
2.2. Phase 2 (2008-2012)
In this phase ETS countries finalised their emissions reduction targets marking the launch of the first commitment period of the Kyoto Protocol(15).
The cap on allowances was reduced by 6.5% compared to 2005, thanks to the pilot phase that retrieved verified emissions data. The proportion of free allocation went down by 90%. The non-compliance penalty was set to 100 euros per tonne(13).
Emissions of nitrous oxide from nitric acid production started to be covered by some countries. The ETS was joined by Iceland, Liechtenstein and Norway. Some countries began to hold auctions on emission allowances. Following a proposal, the aviation sector started to be covered from 1 January 2012 with no account for flights outside Europe(13).
National registries were replaced by Union registry, an online database that monitors all allowances issued and their ownerships, accounting for installations and aircraft operators. To insure 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(16). Lastly, despite the reduced cap on allowances, the 2008 economic crisis
provoked an unexpected reduction in emissions, leading to excessive allowances and credits and affecting the carbon price throughout phase 2(17).
2.3. Phase 3 (2013-2020)
Phase 3 began with shifting from the national caps system to a unique EU-wide cap on emissions. The cap in 2013 started with 2,084,301,856 allowances. This is reduced by 1.74% yearly to uphold with the EU-wide 2020 target(18,19). The 2020 target aims at decreasing emissions by 20% compared to 1990 to commit to the second commitment period of the Kyoto Protocol(3). The 2020 Climate and Energy Package, described below, provides
legislations to assist the EU in meeting its targets(20). In 2018, the EC developed a long-term strategy for achieving climate neutrality by 2050, through investments into clean technologies and actions in research, industrial policies, and financial sector(21).
The default method for assigning emission allowances to businesses was changed from free allocation to auctioning. Nonetheless, of the total emissions allowances, 57% are auctioned while the remaining is allocated for free. In this way the EU can shield industries from carbon leakage while preserving its emissions reduction efforts. Carbon leakage occurs when companies are or may be negatively affected by climate policies and translocate their production to countries with weaker constraints, with a subsequent perpetuation or increase in their emissions. Consequently, in this phase, sectors and sub-sectors at high risk of exposure to such scenario, are given a greater number of allowances for free compared to other businesses(18,19).
Lastly, 300 million allowances, from the New Entrants Reserve set up in this phase, were preserved for the funding of the NER 300 programme. This is an initiative to grant a demonstration program of the most environmentally safe renewable energy technologies (RES) and carbon capture and storage (CCS) projects. The NER 300 secured 2 billion euros and involved all Member States(19).
The CCS technologies encompassed include pre- and post-combustion, oxyfuel and industrial applications, while the RES technologies are bioenergy, geothermal, wind, ocean, hydropower, concentrated solar power, photovoltaics and smart grids. The creation of the NER 300 programme was also meant to influence private investment along with national co-funding across the EU, advance the implementation of low-carbon technologies and trigger the institution of new jobs opportunities related to such technologies. The funds were allocated to the chosen projects to support their implementation processes, in 2012 and 2014, and their entering into operation by 2019 and 2021(18,19,22,).
2.3.1. 2020 Climate and Energy Package
The 2020 target is set for reducing EU’s emissions by 20% compared to the 1990 levels with specific associated targets concluded by the Climate and Energy Package. Firstly, to reach 20% share of renewables, secondly, to increase energy efficiency by 20%. ETS sectors have to decrease emissions by 21% compared to 2005. The targets were enacted into legislation from 2009(20,23). Non-ETS sectors also have their targets for contributing to the 2020 goal (see Section 3.)
2.4. Phase 4 (2021-2030)
In 2018, the legislative framework for the fourth phase was amended for the ambitious 2030 target described below in the 2030 Climate and Energy Policy Framework. The 2030 target was set by the European Union itself to establish its further contributions to the Paris Agreement(3). In this phase, the reduction in allowances was set to an annual
decrease of 2.2% in line with the 2030 targets(24).
Also, efforts focused on reinforcing the Market Stability Reserve that was a process set up in 2015 to stabilise the European carbon market in the midterm, to eliminate exceeding amount of emission allowances and to increase preparedness to future shocks. This sought a breakthrough for leveling heavier investments(24).
Moreover, it was agreed to continue with the free allocation of allowances to shield those installations at risk of carbon leakage with the added consideration and objective of technological progress. Finally, efforts were devoted to facilitating the transition of industry and power sectors towards low-carbon innovation by disposing numerous low-carbon funding mechanisms(24).
2.4.1. 2030 Climate and Energy Policy Framework
The 2030 target aims for a 40% reduction in GHGs emissions compared to 1990 levels, a minimum of 32% share for renewable energy, and a 32.5% increment in energy efficiency. In order to meet the objective, the sectors covered will need to cut emissions by 43% compared to 2005. While, sectors not covered under the ETS will have to achieve a 30% emissions reduction compared to 2005 as part of the Effort Sharing Legislation (ESL)(10).
The framework is advantageous for both providing regular certainties on future investments and harmonizing countries’ contributions. Moreover, it facilitates the transition towards a low-carbon economy and an energy system capable of providing affordable energy, improved security of EU’s energy supplies, lower dependency on energy imports, new growth and job opportunities as well as critical health and environmental benefits(10).
3. Effort Sharing Legislation
In 2013, the ESL was launched to address non-ETS sectors and their emissions reductions through the establishment of binding national targets for Member States for 2020 and 2030. ESL sectors include transport (excluding aviation), buildings, agriculture and waste. The ESL was established in the third and fourth phases. Different targets apply depending on the wealth of countries: 20% emissions reduction for the richest countries, maximum 20% increase in emissions for the least wealthy to allow their internal development and economic transition(23,25). Similarly, renewables energy targets vary per country in respect to levels of renewable production in place and to the investment capacity (e.g. from 10% in Malta to 49% in Sweden)(23).
The 2020 targets are set by the Effort Sharing Decision (ESD) whilst, the 2030 targets by the Effort Sharing Regulation (ESR) both in comparison with 2005 levels(26). If Member States fail to comply to the obligations, the decrease in emissions is increased by a factor of 1.08 for the successive year(27).
The effort sharing targets are aimed at reaching an overall 10% reduction in the total EU emissions from ESL sectors by 2020 and 30% by 2030 in comparison to 2005 levels. These together with a reduction in emissions from ETS-sectors of 21% and 43% by 2020 and 2030 respectively, the EU will achieve its targets. Since the progress of these sectors is not regulated at the EU level, it is the responsibility of Member States to stipulate policies and measures capable of delivering the emission reductions goals(25,28). If the planned policies are enforced, emissions from ESL sectors could be curbed of approximately 27-28% by 2030 relative to 2005 levels. This abatement would already be an important gain compared to the 20% decrease in emissions that present policies could achieve by 2030. Nevertheless, to reach the national binding target of 30%, more ambitious measures will have to be developed independently by countries(26).
Areas of intervention in the transportation sector include decreasing transport needs, encouraging public transport, and diverging from fossil fuel based transportation to low-emission alternatives and zero-low-emission vehicles(29). The building sector could be assisted with retrofitting projects to increase the energy efficiency of heating and cooling systems and enhance durability and resilience of buildings. Agriculture could endorse climate-friendly techniques and transform livestock manure into biogas(25). Finally the waste sector could
focus on diminishing landfilling(30).
The gases covered are CO2, methane (CH4), N2O, hydrofluorocarbons (HFCs), PFCs,
sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3). GHGs emissions are considered
from energy, agriculture, waste, industrial processes and product use. Countries report their emissions yearly for the EC to monitor the progress(28).
3.1. EU-wide Measures
Member States are assisted in their individual efforts through specific EU-wide measures. Examples are given in the following sections for transport and building sectors.
3.1.1. Transport Sector
The transport sector accounts for 1/4 of all EU GHGs emissions, 1/3 of all the effort sharing emissions. By 2050, there should be at least a 60% emissions reduction in transport compared to 1990(31). The EU’s focuses in transitioning towards low-emission mobility through the European Strategy for Low-Emission Mobility. The plan calls for: first, improving the transport system efficiency, second, encouraging quicker deployment of alternative fuels (biofuels, hydrogen, electricity etc.), third, expediting the progression to low- and zero-emission vehicles(31). EU-wide measures set CO2 emissions standards for new cars
and vans, and request labels for cars on fuel efficiency and CO2 emissions to help consumers’
choice towards low fuel consumption(32). Finally, the Fuel Quality Directive entails decreasing gas intensity of vehicle fuels by 6% (2020 vs. 2010), for the corresponding different emissions(26,33).
3.1.2. Building Sector
Buildings are the single biggest energy consumer in the EU, accounting for around 36% of the total EU emissions in terms of CO2(34). In Europe, about 35% of buildings are >50
years old and 75% of buildings are energy inefficient. Of these, only 0.4% to 1.2% are renovated yearly. The renovation is critical in the clean energy transition and in the reduction of energy consumption. Specifically, it could save 5-6% of the total EU energy consumption and lead to an emissions cut of 5%(35). EU-wide measures include requirements of enhanced energy performance, eco-design in energy-related products, and energy labelling for energy and cost savings.
In the process of highthening the buildings energy performance and moving towards a decarbonised building stock within 2050, the legislative framework stipulated two directives, that are the major legislative instruments providing energy efficiency requirements and building codes to assist national governments(34,36). Following the directive entering into force, already in 2015 buildings consumed only 50% of what they consumed in the 1980s(37). The two directives commend setting stronger long-term renovation strategies for 2030, 2040 and 2050 and having all new buildings to be nearly zero-energy (NZEB) by the end of 2020. NZEBs have high energy performance and retrieve the energy needed from renewable resources. Also, European countries have to renovate for energy efficiency 3% of the floor area of central government buildings(35,38).
4. Current Achievements
The ETS is on track in meeting the 2020 target as in 2018 there was already a reduction of 23% compared with 1990 levels (Figure 2)(26).
Figure 2. Total EU’s GHGs emissions including international aviation (historical emissions 1990-2018, projected emissions with existing and with additional measures 2019-2030) and GHG reduction targets(26).
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(26). This accomplishment was mainly driven by the power sector thanks to 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 increasing the renewable share as part of the 2020 target, the European Environmental Agency (EEA) shows that it reached 18% therefore positioning
the EU again on track in meeting the 2020 target. Nevertheless, in terms of energy efficiency, the 2020 target may not be met due to increase in energy consumption in buildings and transport(39). Figure 3 shows the European progress for 2020 and 2030 climate and energy targets(40).
Figure 3. European trends and projections towards 2020 and 2030 climate and energy targets(40).
Notably, throughout the same years of accomplished emissions 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 (303 g CO2eq/EUR). Thus, the EU prides itself on having one of the
greatest economies while holding the lowest per capita emissions worldwide. The European Council entrenched the ETS as a key climate tool for addressing climate challenges(26).
Combined emissions from ESL sectors decreased from 2005 to 2014 to then increase until 2017 and then fell again by 0.9% in 2018. Overall, there was a 11% reduction in emissions between 2005 and 2018, thus, keeping the ESD on track in meeting its 2020 target(26,39). The GHGs trends and projections of the ESL are illustrated in Figure 4(40).
Figure 4. Effort Sharing Legislation progression and estimates of greenhouse gas emissions by sector. Solid lines: historical trend (1990-2018), dashed lines: estimate with existing measures, dotted lines: estimates with additional measures(40).
The major achievement was in the building sector where, despite the up and down trend given by fluctuations in weather and heating demand, there was a relevant decline for changes in energy consumption. Similarly, in the waste sector, there was a 33% reduction (2005-2018) thanks to reduced and better managed landfilling. Emissions from this sector are expected to decrease at a similar pace in the years to come(30). Industry and remaining sectors achieved a 12% reduction (2005-2017) and are estimated to decrease further. In the other sectors there were only negligent reductions if any. In the agriculture sector emissions differed only slightly from 2005 to 2018. The road transport showed a rising trend in the same years that remained significantly above the 1990 levels and is currently merely 3% lower than in 2005. International flights account for persisting rising emissions, which scaled up by 19% between 2004 and 2018(26). Furthermore, the renewable share for ESL sectors is
not in line with the 2020 goal. The energy consumption increased by 8.3% in buildings and by 5.8% in transport between 2014 and 2017 (Figure 3)(40). These trends are thought to prevent the EU in meeting the 2020 target for energy efficiency(39). Overall, in the ESD, the emissions decrease was only minor and slower compared to that under the ETS and some Member States are having difficulties in meeting the targets(30).
Future projections reveal challenges in meeting the 2030 target (Figure 2). It is estimated that overall there would be a reduction between 30% and 36% against the intended 40%. This is mostly due to expected insufficient reductions in the ESL sectors: EEA predicts a 21-23% reduction compared to 2005 levels that falls short the ESR 30% target by 2030. The renewable energy share has not risen sufficiently to meet the 2030 target: a 0.7% average
yearly increase as opposed to a 1.1% required. Already in the threat of not meeting the 2020 energy efficiency target, the decrease in energy consumption should double to meet the 2030 target(39).
5. Extension of the EU ETS
Given the efficiency of the ETS demonstrated in the probable achievement of the 2020 target and given, on the contrary, the negligent outcome of the non-ETS sectors likely to further compromise future achievements, it is subject of ongoing debate whether to expand the scheme so as to develop a more inclusive and far-reaching climate tool. The discussion started in 2005 with the proposal of including the aviation sector in the ETS. This was accepted and CO2 emissions from European flights were regulated since 2012 with a separate
trading system associated with the ETS(41). In 2006, the ETS expansion was raised by the EU Commission in the communication “Building a Global Market”. Road transport was then proposed to be included in Phase 3. However, the EC started to acknowledge that an expansion would have required a combination of numerous new coherent policies(42). Also,
due to high administrative costs the EC concluded that road transport would remain excluded(43). In fact, non-ETS sectors are characterised by many small emitters and the ETS covers and is efficient with large emitters. Embracing small emitters in the ETS would result in a number of intricate administrative challenges. Specifically, it would be arduous to effectively monitor emissions at the source and it highly costly for the associated administrative and transactions costs(44).
Thus, an extension of the ETS requires establishing an equilibrium between potential cost savings and increase in administrative costs(44). This challenge is rooted in the current ETS downstream approach, whereby, business operators have to hold allowances for their GHGs emissions, whereas, the opposite is true for producers, suppliers and distributors of oil, gas and coal that are at the top of the supply chain(45). The EC first alluded to an upstream approach with special regards to transport and heating of buildings(46). Such an approach, where the supplier/distributor level is also subject to compliance obligations and bearing allowances, seems pivotal for addressing the challenge of including more sectors as it would facilitate and disentangle the complex administrative burden.
With an upstream approach, the number of entities obliged to hold allowances would significantly decrease, offering the possibility to include sectors like transport and buildings. This would also diminishes administrative costs rendering the system more cost-efficient(47,48). The monitoring of GHGs emissions would be based on the total amount of fossil fuel sold by fuel suppliers for combustion, which is again desirable in terms of cost efficiency. The rationale behind obligating refineries and importers of mineral oil (the major fuel in the transport sector sold in the form of crude oil such as diesel, petrol, kerosene etc.) to hold allowances is that crude oil companies cannot precisely predict neither the exact use of the sold crude oil nor the exact quantity of CO2 that would be released from the
those of crude oil(47). Notably, an upstream system can translate in a wider and extended coverage of fossil fuels and emissions. Specifically, with the obligation of allowances, the companies will try to diminish the allowance costs through the fuel price. From the top of the supply chain, the allowance price will stretch on to the end user. Consequently, all stakeholders within the supply chain are pushed to reduce fossil fuel consumption, thus, CO2
emissions(49). With an upstream approach, more emissions and emitters could be captured.
The consequent straightforward appeal would be to embrace the highest number of sectors in the ETS.
Being the ETS well established and successful as the instrument to achieve climate targets, it is unlikely that it will undergo significant changes or transformations in the short-term. Consequently, in order to embrace an upstream approach, a hybrid system could be created whereby the downstream approach is kept for the sectors already covered by the ETS, whilst, new sectors are accounted for through the upstream approach(50). When translocating the ETS compliance obligation measures upstream, there are two possibilities: the compliance obligation would either have to be directed to upstream entities, either the entire sector or entities of small scale sources, or, alternatively, to business operators for large scale sources. An example of a hybrid system is represented by the California cap-and-trade scheme: large installations are obligated to hold allowances and road transport and building sectors are incorporated through encompassing suppliers of transport fuel and natural gas. The MRV from the fuel supplied outside California and to non-ETS sectors is not mandatory(46).
Nevertheless, a hybrid system would be affected by a double counting issue: both supplier and end user would pay for GHGs emissions that are only emitted once. This problem is in net contrast with the core aim of the ETS which is delivering emission reductions in the most cost-efficient way possible(47). A solution to this would be making producers and importers of fossil fuels in the upstream part of the chain to buy allowances solely for the amount of fossil fuels sold to recipients involved in the upstream system(50). Fossil fuels sales would then need to be more extensively tracked, increasing administrative costs(49). This should not be problematic since refineries and importers of mineral oil already have to declare the expected GHGs emissions from the fuel they supply(51). More generally, another solution to overcome double counting is that fuel suppliers are required to prove with evidence the fuel supplied to entities subject to compliance obligations(46). Thus, double counting, if addressed, should not obstruct the expansion with an upstream approach.
Despite a potential for further improvement in cost efficiency, also associated with the difference in the present excise taxes on fuels and fuel types across EU countries, adjustments in excise duties can affect government revenue(46). Also, when moving compliance obligations upstream, consideration should be given to whether the correspondent measures will also generate incentives complementary to current taxation and excise schemes. Moreover, emphasise should be given to the interaction between upstream measures and current policies that address CO2 emissions and energy consumption in non-ETS sectors.
Generally, including more economic sectors could trigger innovation thus developing a more cost-effective abatement solution. Additionally, including more sectors, will involve more stakeholders stimulating innovation further(44). Minimising the abatement cost can increase the cost-effectiveness of the scheme and this could be achieved via equalising abatement costs among all sectors. Currently, the allowance price in the ETS is equal for all businesses which translates in the same abatement costs for all companies involved. The decision of each installation of acquiring carbon allowances or investing in other avoidance measures is based on the allowance price, which allows to cut on emissions where more affordable. As not all sectors are covered, the abatement cost is not yet aligned for all sectors. With more sectors covered and an aligned abatement cost across sectors, the ETS could have higher efficiency gains with greater emissions avoidance possibilities embraced(52,47). The different EU-wide national measures and policies do not translate in an identical abatement cost for all emitters. When these measures produce higher abatement costs than if under the ETS, emissions avoidance would be more expensive than necessary and counterproductive. With the expansion of the ETS and the establishment of an equal abatement cost among sectors the scheme would benefit from higher cost-efficiency and greater inclusiveness.
In conclusion, it is acknowledged that the expansion of the ETS could achieve emissions reduction with improved cost efficiency in various aspects. For instance, with opportunities in the fewer entities obliged to hold allowances decreasing administrative costs, in the monitoring of GHGs emissions based solely on fuel sold by entities at the top of the supply chain, as well as in strengthening and amplifying innovation in developing cost-effective abatement solutions.
Revealed challenges are that accounting for small emission sources, typical of transport and building sectors, increase costs in MRV of emissions as well as administrative burden of regulators. This however can be addressed with an upstream approach, which, if embraced in the ETS together with the present downstream approach a hybrid trading system could present the condition for the ETS expansion in the short-term. Other challenges concern, the interaction between ETS and today’s policies regulating the non-ETS emissions, whether upstream measures will introduce incentives complementary to current taxation and excise schemes, and that when currently different excise duties are amended, the government revenue may be affected. The proposed research will further explore the circumstances, measures and policy instrument form with which the ETS can be shaped and expanded so as to include highly polluting sectors.
6. Research Aim
The aim of this research is investigating the motives behind the exclusion of some sectors from the ETS and the approaches that could be pivotal for their inclusion. Researching on this is deemed important as certain excluded sectors are some of the biggest polluters in Europe, have lower emissions targets, and have until now shown minor and slower emissions reductions. The project intends to exploring approaches and measures that
and far-reaching climate tool if this can better support the transition towards a lower carbon future and a more extensive tackling of climate change.
7. Research Questions
Main research question:
- Why are some sectors excluded from the EU ETS? How can they be included? Sub-questions:
1. What challenges limit the inclusion of sectors?
2. What approaches have been suggested for the ETS expansion? 3. Is the ETS expansion a current objective of the EC?
4. What measures could be pivotal in covering more sectors?
5. What is the opinion and scientific understanding of literature authors and interviewees: is a potential expansion considered beneficial or detrimental for the scope of the ETS?
8. Methodology
The research questions will be answered through a combination of literature review and interviews. The literature review will serve to understand the motives behind the exclusion of sectors and potential theories proposed for the inclusion of more sectors in the ETS. Through literature review, specific and in-depth questions for interviews will be drawn. Interviews are intended for policy makers, university professors, environmental agency experts as well as literature authors. Interviews will allow to analyse expert knowledge on the motivations that have excluded sectors from the system, challenges for their inclusion, measures for their inclusion, and their opinion on the issue. The research may focus on either one or more non-ETS sectors and experts interviewed may be from different EU countries. Based on the data collected from literature data and interviews, a summary of the current knowledge on possible approaches is aimed to be delivered with perceived recommendations for the ETS expansion. The data will be managed based on the FAIR data principles (findable, accessible, interoperable, reusable)(53) and stored on the dutch data archive SURFsara for long-term open accessibility(54).
9. Time Schedule
Figure 5. Timeline of the research project
10. Funding
The herein research does not involve travelling, thus, it excludes expenditures for travelling, accommodation, food or vaccinations. Similarly, fieldwork or labwork are not required. Therefore, apart from supervisor/examiner and co-assessor`s salaries, already accounted for by the UvA, performing this research will not demand any additional financial costs.
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