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Print articleCarbon Capture and Storage and the EU Emissions Trading Scheme
May, 2008 - Graeme Moffett
The EU Emissions Trading Scheme (EU ETS) is one of a number of policies introduced across the European Union to help it meet its greenhouse gas emissions reduction target under the Kyoto Protocol.
The EU ETS is viewed by many as one of the ways that private sector investment in CCS (Carbon Capture and Storage) can be incentivised. However, CCS is currently not recognised by the relevant European legislation as an emission reducing measure and therefore presently does not have any impact on emission levels for the purposes of the EU ETS. Current proposals to amend legislation will specifically recognise the contribution of CCS in reducing emissions and, it is hoped, create an incentive for large-scale operators to invest in CCS technology. How this will work in practice is examined below.
The EU ETS is a "cap and trade" scheme that operates by means of allocating CO2 emissions allowances throughout the EU. At the beginning of each phase of the EU ETS, the EU requires member states to set a National Allocation Plan (NAP) listing the installations carbon allowances are to be distributed to and how many each installation will receive, expressed as a cap on their emissions. One allowance represents one tonne of CO2 equivalent. At the end of each year, the operators of these installations must ensure they have enough allowances to cover the total amount of CO2 their installations have emitted. They can trade allowances with other parties in order to buy extra allowances if they have emitted more than their allocation or sell any surplus allowances generated by reducing their emissions below their allocated level.
As part of a package of new legislation to create a framework for the implementation of CCS, on 1 January 2008 the Commission issued a proposal for a directive on the geological storage of CO2, which recommends amendments to Directive 96/61/EC (the EU ETS directive) with the intention that CO2 captured in a CCS facility will be recognised as a reduction in emissions for the purposes of the EU ETS.
If CO2 in a CCS facility is categorised under the EU ETS as not emitted, then the installation which generated that stored CO2 will be seen as having reduced the amount of CO2 emitted in the year and therefore reduce the number of allowances used, thus allowing for the surplus allowances to be traded. This should allow private sector companies investing in CCS technology at their installations to generate a profit through trading of their unused carbon allowances to offset against the cost of investing in the CCS technology.
Allowances are currently allocated free of charge, however in Phase III of the EU ETS which commences in 2013, there is an intention to begin auctioning allowances. It is estimated that this could raise £20 billion per year for the EU. The introduction of CCS as a recognised emission reducing activity within the EU ETS could help ease the burden on the operators of installations covered by the EU ETS.
If the Commission's proposal to include CCS as an emission reducing activity under the EU ETS is adopted then it is intended to have the directive on the geological storage of CO2 come into force by the end of 2008. CCS might then become a more economically viable project for CO2 emitters covered by the EU ETS.
The EU ETS is viewed by many as one of the ways that private sector investment in CCS (Carbon Capture and Storage) can be incentivised. However, CCS is currently not recognised by the relevant European legislation as an emission reducing measure and therefore presently does not have any impact on emission levels for the purposes of the EU ETS. Current proposals to amend legislation will specifically recognise the contribution of CCS in reducing emissions and, it is hoped, create an incentive for large-scale operators to invest in CCS technology. How this will work in practice is examined below.
The EU ETS is a "cap and trade" scheme that operates by means of allocating CO2 emissions allowances throughout the EU. At the beginning of each phase of the EU ETS, the EU requires member states to set a National Allocation Plan (NAP) listing the installations carbon allowances are to be distributed to and how many each installation will receive, expressed as a cap on their emissions. One allowance represents one tonne of CO2 equivalent. At the end of each year, the operators of these installations must ensure they have enough allowances to cover the total amount of CO2 their installations have emitted. They can trade allowances with other parties in order to buy extra allowances if they have emitted more than their allocation or sell any surplus allowances generated by reducing their emissions below their allocated level.
As part of a package of new legislation to create a framework for the implementation of CCS, on 1 January 2008 the Commission issued a proposal for a directive on the geological storage of CO2, which recommends amendments to Directive 96/61/EC (the EU ETS directive) with the intention that CO2 captured in a CCS facility will be recognised as a reduction in emissions for the purposes of the EU ETS.
If CO2 in a CCS facility is categorised under the EU ETS as not emitted, then the installation which generated that stored CO2 will be seen as having reduced the amount of CO2 emitted in the year and therefore reduce the number of allowances used, thus allowing for the surplus allowances to be traded. This should allow private sector companies investing in CCS technology at their installations to generate a profit through trading of their unused carbon allowances to offset against the cost of investing in the CCS technology.
Allowances are currently allocated free of charge, however in Phase III of the EU ETS which commences in 2013, there is an intention to begin auctioning allowances. It is estimated that this could raise £20 billion per year for the EU. The introduction of CCS as a recognised emission reducing activity within the EU ETS could help ease the burden on the operators of installations covered by the EU ETS.
If the Commission's proposal to include CCS as an emission reducing activity under the EU ETS is adopted then it is intended to have the directive on the geological storage of CO2 come into force by the end of 2008. CCS might then become a more economically viable project for CO2 emitters covered by the EU ETS.
