In 2013, the 3rd phase of the EU Emission Trading system (EU ETS) will start, and thus bringing a number of significant changes. Phase three lasts from 2013 to 2020.
- Auctioning of EUAs becomes the rule instead of the exception.
- Today, at most 10% of EUAs can be auctioned
- No free allocation of EUAs to electricity production (for some Member States gradual transition until 2020 to allow for modernization of the electricity sector: Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Poland and Romania)
- Non electricity sectors: rule harmonization among EU member states and ex-ante benchmarks for free allocation to incentivize CO2 reduction efforts
- Free allocation will be reduced from 80% of eligible emissions in 2013 and to 30% in 2020, reaching 0% by 2027
- A new entrants reserve of 5% of phase 3 EUAs will be used to facilitate incorporation of additional polluters entering the system (e.g. as aviation since January 2012)
- From 2013 on, certain projects will not be eligible anymore for including credits into the ETS. These projects include CDM projects outside the least developed countries and projects that aim at reducing the emission of highly harmful greenhouse gases such as HFC-23 and N2O. Until now, both types of projects offer an easy opportunity for acquiring CERs (Certified Emission Reductions) and ERUs (Emission Reduction Units) in return for emission reductions that are disproportionately cheap to have.
But although the new regulation is a good move its implementation is not happening fast enough. It is expected that large amounts of emission allowances will enter the market before the new rule becomes effective in April 2013
- Technical changes, e.g. administration on European level and to avoid VAT tax fraud. Germany, the UK and Poland have opted not to participate in the common auctioning platform but to implement their respective country platforms (which will be compatible with common platform)
Criticism of TheCompensators*
- An amount of 300 million EUAs form the new entrants reserve is made available to the market in the beginning of phase 3. The revenue from these allocation will be used to finance Carbon Capture and Storage technologies (CCS)
- Yet, the positive impact of this step is uncertain. It is debatable whether CCS will make a major contribution to decarbonization in Europe, e.g. due to public resistance, as claimed in a recent report of the DIW
- Finally, by issuing 300 million allowances at once will lower the EUA prices. Eventually, cheap certificates also present a negative economic incentive to invest in and build CCS.
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