European Union Says CO2 Rules After 2012 Approved Without `Major Changes'

Posted on 20 December 2010

European Union member states approved a regulatory proposal without 'major changes' for giving away about 100 billion euros ($132 billion) of carbon permits after 2012.


The EU's Climate Change Committee, with representatives from national governments, gave the green light on Dec. 15 to carbon-intensity benchmarks after the European Commission, regulator for the 27-member bloc, introduced revisions to the draft it presented on Oct. 22. The modified proposal includes 52 of the 53 originally proposed benchmarks. Five of them were changed, and one scrapped, said Peter Zapfel, head of policy coordination in the commission's climate department.


The EU, which has given away the majority of permits since it started the world's biggest carbon-trading system in 2005, will move toward auctioning in the eight-year phase through 2020. The allocation method was designed so that the most efficient installations in a given industry won't need to purchase more allowances, while those that emit more than the benchmarks will need to buy permits or reduce emissions.


'There were also some minor, very technical changes related to new plants that enter the emissions-trading system and to capacity extension,' Zapfel said. The EU is seeking to balance the goal of reducing allowances in its carbon-trading market with limiting cost increases for energy-intensive industries. Refiners and other companies that face higher costs tried to persuade the EU to put off plans until later this decade to scale back free allowances.


Hot Metal


The benchmark for hot metal was set at 1.328 permits per ton of product, in line with the commission proposal and below the 1.475 allowances sought by the European steel lobby.


The benchmark for oil refiners is 0.0295 allowances per unit of output, also unchanged from the commission draft. The benchmark is based on a methodology that allows for the creation of a single type of output from refineries, or the so-called CO2 Weighted Ton.


The CWT is calculated by multiplying the throughput of a refinery unit by one of the 57 factors included in the EU measure that reflect carbon intensity of processing.


The benchmarks, based on the average performance of installations in the top 10 percentile for carbon efficiency in 2007-2008, will be multiplied by historical production figures to determine the implied free allocations for industries.


EU nations agreed that the baseline period for calculating historical production levels may be from 2005 to 2008 or 2009 to 2010, whichever is higher. The vote yesterday set up a three- month scrutiny period in the EU council of ministers and the European parliament, after which the measure will be adopted by the commission.


Harmonizing the Rules


'Now it will be time for heavy technical work by member states to implement and harmonize the rules,' Zapfel said. 'By the end of September next year, we should get actual figures on allocation per installation from national authorities. If the number of permits sought exceeds the total cap for allowances to be allocated for free, a reduction factor will be applied to all industries.'


To prevent businesses from shifting production elsewhere because of emission restrictions -- a phenomenon known as 'carbon leakage' -- the EU agreed last year to grant 164 manufacturing industries a greater share than other companies of free CO2 permits after 2012. Those industries will receive 100 percent of benchmarked allowances for free. The list will be valid through 2014 and then revised based on unchanged criteria.


Manufacturers that aren't on the list will receive 80 percent of benchmarked allowances for free in 2013 and face an annual decline in that share to 30 percent in 2020, while most utilities will face 100 percent auctioning as of 2013.


As a result, the EU will auction around 60 percent of the total number of permits in 2013, according to the commission estimates, and the proportion will increase in coming years.


The cap for CO2 discharges for 2013 has been set at 2.04 billion tons, valued at about 30 billion euros at today's price. This limit includes aluminum and chemical makers that join the program in the third phase. An adjustment is also planned for airlines that will become part of the system from 2012.


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