EU Emission Trading Directive (Directive 2003/87/EC)
Date of adoption: 13 October 2003
Entry into force: 25 October 2003 (O.J.L. 275/32 25.10.2003)
Deadline for transposition by Member States: 31 December 2003
Revised EU Emission Trading Directive (Directive 2009/29/EC)
Date of adoption: 23 April 2009
Entry into force: 25 June 2009 (O.J.L. 140/63 5.6.2009)
Deadline for transposition by Member States: 31 December 2012 (with some parts brought into force by 31 December 2009)
What are the aims and requirements of these Directives?
The 2003 EU ETS Directive establishes a legal framework for the creation of a European market in greenhouse gas allowances designed to 'promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner' (Article 1). The EU ETS started operating on 1 January 2005 and is divided into distinct phases. The first phase ran from 2005 to 2007, while the second began in 2008 and will end in 2012, so as to coincide with the Kyoto Protocol's first commitment period. A third phase will start in January 2013.
The provisions of the 2003 ETS Directive apply to the first and second phases, whereas the third will come under the revised Directive.
The 2003 Directive requires Member States to set a cap on the amount of greenhouse gases (GHGs) which can be emitted annually by activities that are covered by the scheme. Those activities are listed in Annex I of the Directive, and the gases involved are listed in Annex II. Installations are then allocated a total number of allowances, with one allowance representing a tonne of 'carbon dioxide equivalent' for a particular period. Where a company uses fewer allowances than those it has been granted, for example by making emissions reductions, they can trade their excess allowances on the open market. Companies whose emissions exceed what their allocation allows must purchase extra allowances on the market. The aim of the scheme is to allow each company to choose the most economic and cost-effective methods for them, for achieving overall emissions reductions.
Under the 2003 ETS Directive, each Member State is required to create a National Allocation Plan (NAP), which sets out the total number of allowances it intends to allocate during a given allocation period and how it proposes to allocate them. From 2013, Member States' NAPs will be replaced by a uniform, EU-wide cap.
The 2003 Directive does not include CCS among the activities covered by the scheme. However, Article 24 provides that, from the beginning of the second period, Member States are free to opt in additional activities, gases and installations not previously covered by the system, subject to Commission approval. However, no dedicated financial mechanism is provided to support this inclusion.
In contrast, the revised Directive recognises the role and value of CCS as a climate change mitigation technology and includes within the scope of the regime (Annex I) capture, transport and geological storage of greenhouse gases provided they are carried out in accordance with the framework established by the EU CCS Directive.
For further information about the specific requirements of the EU Emission Trading Scheme and the treatment of CCS activities, see overview and detailed analysis in the Emission Trading Section of this website.
What mechanisms are established to finance CCS under the revised EU ETS Scheme?
Auction revenue for CCS
The 2009 revised ETS Directive provides that, subject to certain exceptions, '[...] no free allocation shall be given to electricity generators, to installations for the capture of CO2, to pipelines for transport of CO2 or to CO2 storage sites' (Article 12, inserting Article 10a (3) into the original Directive). This means that, from 2013, operators will no longer receive CO2 emission allowances free of charge, but will need to purchase them at auction.
Under the revised Directive, Member States can decide how to spend the revenue generated by auctioning allowances. However, the Directive provides that Member States should devote at least 50% of this revenue to a series of specified activities, including 'the environmentally safe capture and geological storage of CO2, in particular from solid fossil fuel power stations and a range of industrial sectors and subsectors, including in third countries [...]' (Article 11 inserting a new Article 10 (3)(e)).
This mechanism is intended to provide a financial incentive to drive investment in CCS. The Directive specifies that, in order to comply with this provision, Member States must establish and implement fiscal or financial support policies, including ones directed to developing countries, or domestic regulatory policies which leverage financial support. The Commission must be informed about how this revenue is to be disbursed and what action Member States have undertaken to regulate the process.
No obligation to surrender allowances
The Directive clarifies that operators who undertake CCS are not required to surrender allowances where emissions have been 'verified as captured and transported for permanent storage to a facility for which a permit is in force' in accordance with the requirements of the CCS Directive (Article 15, inserting a new Article 12(3) (a)).
The Directive defines this mechanism as the 'main long-term incentive for the capture and storage of CO2'.
New Entrants Reserve mechanism
Under the revised ETS Directive, in the third phase, 5% of the total quantity of allowances will be set aside in the New Entrants Reserve (NER), which will be available for new installations joining the scheme after 2013 (Article 12, inserting a new Article 10 (a) 7).
The Directive provides that 300 million EU allowances (EUAs) from this reserve will be set aside until 31 December 2015, converted into funds and distributed by Member States, to co-finance up to 12 CCS demonstration projects, together with innovative renewable energy projects. Each project can be co-financed up to a maximum of 45 million allowances, with the award conditional upon the verified avoidance of CO2 emissions.
In February 2010, a Commission draft Decision, which establishes 'criteria and measures' for the financing of CCS demonstration projects under this provision, was adopted by the EU Commission Climate Change Committee.In November 2010, the Commission adopted a final Decision on this.
European Commission Decision on criteria and measures for the financing of commercial CCS demonstration projects under the EU ETS ('NER 300 Decision'): Analysis
The NER 300 Decision provides rules and procedures for:
selection of at least 8 CCS projects and 34 renewable energy projects ('RES projects') eligible for financing under the mechanism established under the revised ETS;
conversion of the allowances into funds; and
disbursement of those funds to project developers.
The actual number of projects co-funded under this mechanism will depend on the amount of money raised by the sale of allowances. What follows focuses on the CCS projects.
What can be funded by this scheme?
Funds awarded under this Decision will cover a maximum of 50% of the projects' requested public funding, defined as the 'relevant costs' net of any proposed contribution by the sponsor, 'Relevant costs' are defined as extra investment costs due to the application of CCS, including cost of investment for land, plant and equipment.
These costs are net of the net present value of the best estimate of operating benefits and costs arising due to the application of CCS during the first 10 years of operation, where the benefits include pre-existing national support schemes, such as tax incentives and feed-in-tariffs for renewable energy. If the applicant provides more than 50% of relevant costs, the NER 300 contribution will be reduced proportionally.
In addition, funding will need to be consistent with the European state aid legislation, but can be combined with other instruments, such as the European Energy Programme for Recovery (EEPR) (see EEPR section) and EU Structural and Cohesion Funds. However, any amount received from the EEPR funding will be deducted from the financing received under the NER 300 Decision.
Geographical balance
Each Member State is eligible for receiving funding for at least one but no more than three projects. If it has more than three candidate projects, it has to decide which ones to support for the selection process. Transboundary projects are not included in this calculation.
Eligibility criteria and other requirements
Funding under the NER 300 Decision will support 8 CCS projects in total which have a minimum size threshold of 250 MWe and a minimum capture efficiency of 85%. Eligible projects are full-chain CCS either for power generation in three categories (post-combustion, pre-combustion, or oxyfuel), or for industrial applications at refineries, cement kilns, iron and steel or aluminium production. Both saline aquifer storage and depleted hydrocarbon reservoir storage options qualify. (See Annex I. A. (I)).
The project application has to include 'the total projected amount of CO2 stored in the first ten years of operation'. Other eligibility criteria include the possession of all applicable national permits and conformity with EU legislation and permitting requirements. Project operators are required to share information (listed in Annex II) with other project developers, public authorities, research bodies, non-governmental organizations and the public.
Selection of eligible projects
The Member State: The selection will take place at EU level, but Member States are required to perform a preliminary selection, which includes an assessment of the eligibility requirements in order to decide which projects to support for funding.
Applications must refer to projects 'intended to take place on [the Member State] territory' (Article 5.2). However, the Decision highlights that, in the case of a transboundary project, 'the Member State receiving the funding application shall inform the other Member States concerned thereof and shall cooperate with the other Member States with a view to reaching a common decision on the submission of the project by the Member State receiving the funding application' (Article 5. 2). (More on the location of eligible CCS projects in the Key Issues concerning CCS section below.)
In particular, Member States are required to notify the Commission whether the project will involve any state aid financing, so that the selection process can be co-ordinated with an assessment of its conformity with EU state aid rules (see section on EU State Aid Legislation)
The European Investment Bank: Following a first screening, Member States must submit the proposal to the European Investment Bank (EIB), which will perform an assessment of the financial and technical viability of the project ('technical and financial due diligence') and submit recommendations to the Commission.
The European Commission: The Commission will make its decisions about the award of funding based upon the recommendation from the EIB and after re-consultation with the Member State and the Climate Change Committee. If total NER 300 funds prove not to be sufficient, the CCS and RES portfolios will be reduced, making sure that the proportionate shares of funding between the two portfolios (CCS and renewables) is maintained.
Conversion of allowances into funds
Following Commission approval for funding, allowances will be transferred to the EIB, which will convert them into monetary funds (by the selling the appropriate number of allowances before each round of award decisions) and manage the revenues. These revenues will be distributed by the EIB to Member States to finance individual projects (Article 11).
Member States are required to report back to the Commission by the 31 December each year and to submit a report concerning the implementation of supported projects.
Disbursement
The EU financial incentive will be paid on a yearly basis, as a function of the amount of CO2 stored. The disbursement will last for no more than ten years from the date of entry into operation of the project. No pre-financing is allowed, unless the Member State is able to guarantee that funds will be returned to the EIB in case of failure. There will be no financial penalty if the project is able to achieve at least 75% of projected total amount of CO2 stored. The Commission will set a disbursement schedule according to the availability of funds.
Calls for proposals
The available allowances will be awarded in two distinct rounds of calls for proposals from the Commission. In the first round, technologically and commercially mature projects could be awarded up to 200 million allowances in total, while in the second round, the remaining 100 million allowances will be disbursed. This two-phase disbursement is intended to give extra time to review any technical or geographical imbalance occurring during the first round.
Anticipated timeline for implementation of the NER300 Decision
3 November 2010: Commission adopts the NER 300 Decision
9 November 2010: Commission announces the first call for proposals for CCs and innovative renewable energy projects under the NER 300
9 February 2011: Closing date for project sponsors to submit application forms to their Member States
9 March 2011: Deadline for Member States to conclude the eligibility assessment and send the application and submission form to the EIB
June 2011: EIB to complete its 'technical and financial due diligence' assessment
31 December 2011: deadline for Commission final award decisions on the first call
31 December 2013: deadline for Commission final award decisions on the second call
31 December 2015: Deadline for all projects (CCS and RES) to enter into operation in order to receive funding from the first call for proposals.
Key issues concerning CCS
The Emission Trading Scheme is seen as the most effective long-term incentive for operators to invest in CCS. By considering CO2 stored as not emitted, operators are not required to surrender emission allowances and therefore obtain an economic benefit and financial reward from the abated carbon. However, the success of the scheme mainly depends on the price of emission allowances on the market and whilst their price remains at its current low level, there is insufficient financial incentive to invest in CCS. A recent study has argued that, 'assuming that CCS demonstration projects would cost between €60 and €90 per tonne of CO2 [in 2015] and projecting a median carbon price of €35 per tonne of CO2, there is an 'economic gap' of [€]25-55 per tonne CO2 for each project' (McKinsey & Company, 2008).
NER 300 is expected to provide a good incentive for operators to start investing in CCS in Europe. However, the limited amount of allowances (300 million) which are going to be monetised seems hardly enough to provide the certainty needed to drive long-term investment in CCS. Accelerating CCS deployment will require a stable and predictable economic and regulatory mechanism to finance CCS in the long-term rather than simply ad hoc funds.
In addition, funds under the NER 300 mechanism only cover 50% of eligible costs and they will only be received by the project developer when the project is operational. This is because pre-financing is not allowed under the Decision, unless the Member State guarantees that funds will be returned to the EIB if the project fails. This provision still places the initial financial burden of deploying CCS projects on the operator.
Only projects taking place within the EU (both those implemented within the territory of a single Member State and transboundary projects) are eligible for funding under the NER 300. This means that projects implemented outside the territory of EU Member States or involving partnership with non-EU countries are not eligible to receive financial assistance under the NER 300 mechanism.
Directive 2009/29/EC - Amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community ('Revised Emission Trading Directive')