Linking domestic emissions trading
schemes to the EU ETS
Technology Transfer and Investment Risk in
International Emissions Trading
Work package 4
Brussels, 30 November 2006
Dr. Urs Springer, Ecoplan (Switzerland)
Dirk Forrister, Natsource (UK)
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Overview
1. Introduction
2. Switzerland
3. Norway
4. United States
5. Japan
6. Summary and conclusions
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1 Introduction
Objectives and approach

Objectives
– to describe the climate policy framework in Switzerland, Norway, Canada,
Japan, and the United States;
– to assess the potential and problems of linking these schemes to the EU
ETS

Assessment criteria:
1. System design (trading scheme, system boundaries, currency, use of Kyoto
mechanisms)
2. Target and allocation (Kyoto target, allocation, transparency)
3. Compliance (Monitoring, sanctions)
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2 Switzerland
Background
 Targets and emissions:
– Kyoto target: -8%
– Current GHG emissions: about 1990 level. Projected gap in 2010: 5%
 Instruments:
– CO2 tax on heating and process fuels. Rate (22 EUR / t CO2) still to be
approved by Parliament  Trading scheme not yet implemented.
– Companies that conclude voluntary agreements with the government are
excluded from CO2 tax and can participate in emissions trading scheme.
Targets of voluntary agreements are the basis for the (free) allocation of
tradable allowances for the period 2008-12.
– Climate cent: Levy on transport fuels (1 cent / liter). Revenues used for
mitigation projects in Switzerland and abroad.
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2 Switzerland
1) System design
EU ETS
• Energy activities
(including
refineries)
Swiss ETS
• Iron & steel
• Cement & ceramics
• Pulp & paper
• Aluminum
• Chemical industry
• Food & beverages
• Financial services
• Tourism
•…
• Swiss refineries not covered
• Use of Kyoto mechanisms: Only minor differences
• Currency: AAU in Switzerland, “hot air” not allowed
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2 Switzerland
2) Target and allocation
 Total allocation: In accordance with national target.
 Installation-level allocation
– Cement industry: Allocation 45% above current emissions: Over-allocation!
– Energy agency umbrella agreement: Ambitious target (11.5% below 1990)
– Other sectors: No signs of over-allocation.
 NAP criterion regarding allocation only partially fulfilled (“taking reduction
potential into account”).
 Allocation to new entrants (gas-fired power plants) not clear.
 Transparency:
– Swiss voluntary agreements confidential, but will be published.
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2 Switzerland
3) Compliance
 Monitoring – Less strict in Switzerland:
– EU: Annual reports for all installations, independent verification
– Switzerland: Annual reports by companies, first report in 2008 for groups.
No independent verification.
 Sanctions – Different approaches
– EU ETS: 40 EUR and 100 EUR plus surrendering of missing allowances.
– Switzerland: Repayment of CO2 tax since introduction plus interest.
Problem: EUA prices > CO2 tax (EUR 22)
 Ex-post adjustment:
– EU ETS: Ex-post adjustments incompatible with legal framework.
– Switzerland: Ex-post adjustments based on energy intensity (until 2010). 
 Major obstacle to linkage.
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3 Norway
Background

Targets and emissions:
– Kyoto target: +1%
– Booming petroleum industry, energy intensive industries.
– Current GHG emissions: +9.5%

Instruments:
– CO2 tax for offshore oil, domestic and transport sectors (23-40 EUR/t).
Reduced rate for pulp & paper industry.
– Voluntary agreement with energy intensive industries (target: -20% vs.
1990)
– Emissions trading scheme along the lines of EU ETS
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3 Norway
1) System design
ETS Norway
• District heating

Overlapping
coverage:
no problem

Petroleum and
pulp & paper
opted out

Use of Kyoto
mechanisms:
Same as EU
ETS
• Energy production
• Gas processing
• Other minerals
PIL VA
CO2 tax
• Steel
• Cement
• Aluminium
• Petrochem
• Ferrosilicon
• Refineries
(Pulp & paper)
• Pulp & paper
• Transport
• Carbides
• Offshore petroleum
• Other metals
• Domestic heating
• Mineral fertilizer
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3 Norway
2) Target and allocation

Allocation:
– Installation level: Overall allocation factor 90.6%.  stricter than many
European countries
– Uncertainty regarding new gas-fired power plants (CCS required or not?).
– No guarantee for reaching Kyoto target due to narrow scope of Norwegian
ETS (transport and petroleum activities not covered).

Ex post adjustment of targets
– Initial allocation can be changed for 2006/07 “if the conditions on which the
allocation was based are changed significantly”.
– Modifications can only result in a reduction of allowances, not an increase.
– Likely to be disapproved by the European Commission.
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3 Norway
3) Compliance

Monitoring
– Annual reporting of emissions required.
– Verification by independent party only in special cases
(EU ETS: mandatory).

Sanctions
– Fine (EUR 40) and obligation to surrender missing allowances in the
subsequent year. Same as EU ETS.

EU vs. EFTA law
– Norway, Liechtenstein and Iceland have to implement the Directive under
the rules of the European Free Trade Association EFTA. Norway accepted,
but Liechtenstein and Iceland have been reluctant to do so.  linkage not
yet established.
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4 United States
Proposed Trading Programs – Overview
Climate & Economy Insurance Act (Bingaman)
Climate Stewardship Act (McCain/Lieberman)
(Pending in Senate Energy Committee)
(Pending in Senate Environment Committee)

Absolute targets: cap at 2000 level by 2010-15

Coverage: 85% of national GHGs

– Devolves absolute targets to sectors/companies
– Program-wide 2010 target: 2.4% below 2009 (est)
– downstream large emitters
emissions intensity * forecasted 2010 GDP
– upstream suppliers of transport fuels

– 2011-19: 2.4% below previous year’s intensity target
Tradable units
– Allowances from another nation’s market
– Eligible domestic offsets including sequestration
* forecasted GDP

Financial penalty (3x market value), but no
payback of tons
Coverage: downstream process emissions + all
upstream sources
– Credit against future reductions

Relative targets – less stringent than CSA
– Auctioning = 9% in 2010, 13% in 2020

Tradable units: Allowances + foreign offsets
– geologic sequestration, use of covered fuels as
feedstocks, exports of covered fuels,
exports/destruction of HFCs, PFCs, SF6, N20,
eligible early reductions
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Price cap US$7/ton in 2010, increasing 5%/year

Financial penalty (3x safety valve), no payback tons
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4 United States
Proposed Trading Programs – Overview (cont’d)

North-eastern States’ Regional Greenhouse Gas Initiative
(RGGI) (8/06)
– 7 North-eastern / Mid-Atlantic States, plus Maryland in June 2007
– Cap and trade for electricity sector
– 3-year compliance periods, extendable to 4-year if $10 trigger price
reached (average during 1 year)
– Certified offsets anywhere in U.S. (limit of 3.3% of entity’s emissions): LFG,
afforestation, end-use efficiency for home heating, natural gas, agricultural
methane capture, oil and gas fugitive methane reductions, reduction in SF6
emissions
– Offset trigger: if average prices equal or exceed
 $7 over period of 1 year, offset limit increases to 5%
 $10 over period of 1 year, offset limit increases to 10%, and CERs and
ERUs become eligible
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4 United States
Proposed Trading Programs: Obstacles to Linking
with EU ETS

Formal linking requires amendment of Emissions Trading Directive
– Possible to informally link, but EU purchases of US allowances endanger
EU Kyoto compliance
– Gateway could be implemented, but reduces efficiency gains

Price cap (Bingaman)
– Creates arbitrage opportunities, which can be reduced by limiting cap use to
difference between US firms’ emissions and allocations
– Cap reduces economic efficiency benefits by segmenting market, preventing
efficient trades by US firms, potentially distorting pricing by US sellers

All 3 U.S. programs allow for types of reductions not eligible under EU ETS
– Allows for circumvention of EU restrictions
– Allows for greater purchases of EU-restricted instruments in the U.S. than
under no-linking scenario
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4 United States
Proposed Trading Programs: Obstacles to Linking
with EU ETS (cont’d)

Comparability of effort
– McCain-Lieberman, RGGI targets somewhat less stringent, Bingaman
targets much less stringent than EU ETS
– Implication: U.S. would become major seller to EU

Leakage under RGGI
– RGGI cap could be undermined by electricity imports into region
– Total U.S. emissions could increase while program goals met
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5 Japan
Background



Ambitious Kyoto target (-6%), given Japan’s low emissions
intensity
Significant Government purchases if no tax or mandatory cap
and trade imposed after policy review in 2007
Keidanren voluntary emission reduction targets are centerpiece
of KP compliance plan
– Reduce industry, energy emissions below 1990 levels by 2010
– Targets may be based on energy intensity, energy consumption, CO2
emissions intensity, or absolute CO2 emissions
– 35+ industries covered
– May purchase CERs, ERUs to meet targets
– Mandatory cap and trade could be considered, but strongly opposed by
industry, METI
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5 Japan
Climate Policies

Japan Voluntary Emissions Trading Scheme (JVETS)

Small program
– 34 companies taking on voluntary targets with subsidies for
energy conservation, switching from oil
– Reductions below ~ 2003 baseline of 1.3 Mt

Subsidies awarded based on cost-effectiveness, must be
returned if target not met

Can use traded allowances or CERs for compliance
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5 Japan
Compatibility with EU ETS

Environmental integrity
– No sanctions for non-compliance with Keidanren targets
– JVETS has no penalty, only withdrawal of subsidies

Both programs may allow CERs from large hydro and sinks projects
– Could circumvent EU prohibitions

Many Keidanren targets are not absolute, unlike EU ETS

Subsidies provide advantage to JVETS firms, also obscure marginal
costs, reduce efficiency

JVETS is small
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6 Summary and conclusions
Prospects and potential of linking

Linkage between EU ETS and domestic schemes
– Norway: Linkage likely and feasible. Legal issues to be resolved.
– Switzerland: Linkage feasible, only if CO2 tax implemented.
– North America: Great challenges of legal, economic and technical nature.
– Japan: Linkage unlikely given voluntary targets and subsidies.

Economic potential
– Significant benefits for Norway and Switzerland, but negligible efficiency
gains for the EU.
– Japan and North America: Linkage would greatly expand the market and
provide substantial benefits for all parties.
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6 Summary and conclusions
Conclusions

Main obstacles
– Price caps: Segment the market, reduce efficiency.
– Eligibility of tradable units: Probably impossible to maintain in practice.
– Ex-post adjustments
– Voluntary nature of trading schemes: Sanctions for non-compliance?

Lessons for policy development
– ETS should not be developed independently of each other
– Path dependence: Once an instrument (e.g. carbon tax) is implemented, it
is likely to remain in place even when new instruments are introduced

Outlook
– No global uniform carbon market in the near term
– In the long term, better prospects for linkage of major markets
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