15 suggestions for EU ETS

aligned with the 1.5 degree target

2020

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With today’s regulations, the EU ETS will reach zero in 2058. This is not enough. The Paris Agreement aims to make the world climate neutral by 2050, and according to the European Climate Law, EU member states should be climate neutral by 2050. The UN Climate Panel (IPCC) states in its special report Global Warming of 1.5⁰C that emissions need to reach zero significantly earlier than 2050. Since its inception in 2005, the EU ETS has been amplified several times, last time in 2018. The Swedish proposal cancels in the order of 3 billion tonnes of allow-ances in the market stability reserve, which corresponds to 50 times Sweden’s annual emissions.

In order for the EU ETS to continue to deliver and be the tool that enables the EU to reach the 1.5-degree target in the Paris Agreement, the Haga Initiative presents its position paper.

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Starting points

• The starting point of the Haga Initiative is that the transition must take place in all parts of society, and in all sectors. Tighter policy instruments and measures are required in both the trading and non-trading sectors.

• The Haga Initiative’s positions require increased ambitions in Swedish climate policy as well as in the EU. This applies, for example, to increased investments inCCSinfrastructure,securedbiogassupply,expandedelectrificationandin creased renewable energy production.

• The introduction of a carbon dioxide budget at EU level would clearer show how much greenhouse gases the Union can emit per year and could comple ment today’s linear reduction factor.

15 suggestions for EU ETS aligned with the 1.5-degree targetIn order to continue the positive trend with emissions reductions within the EU ETS, the Haga Initiative proposes the following measures for the fourth trading period starting in 2021:

The linear reduction factor should increase in accordance with the 1.5 degree targetThe Linear Reduction Factor (LRF) describes how quickly the number of allowanc-es should be reduced. Today the rate is 1.74 percent. From 2021 it will be 2.2 percent. An LRF of 2.2 percent will not contribute to the EU achieving set climate targets, and therefore needs to be further tightened. Unless the LRF is tightened from 2021, it will require an even sharper LRF in the next trading period, starting in 2026, to reach the 1.5-degree target.

The position of the Haga Initiative is that the LRF should be adjusted to at least 4.5 percent per year. Adjustments should be made in 2020 to be implemented in 2021.

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Strengthen the Market Stability ReserveThe Market Stability Reserve serves as a stabilizing mechanism to maintain a reason-able price for allowances. If an excess of emission rights occurs, these can be placed in the reserve, and then auctioned again if an undesirable deficit happens. Until 2023, 24% of the surplus is transferred annually to the reserve. After 2023, the factor will be reduced to 12%..

The position of the Haga Initiative is to at least maintain the intake rate of 24 percent annually. This becomes even more important if the linear reduction factor maintain below 4.5 percent.

The position of the Haga Initiative is that possibilities of further increasing the intake rate should be explored.

Member States should cancel allowances when phasing out oil and coalEmission allowances can be cancelled when a member country, through additional instruments, phases out fossil energy in operations within the EU ETS. Sweden does not do that today.

The position of the Haga Initiative is that all Member States should cancel emission allowances when it phases out fossil energy. Overlapping and national instruments need to be synchronized with EU ETS and emissions in the non-trading sector.

Investigate alternatives to the free allocation of allowancesDurable regulations that avoid carbon leakage and distorted competition are needed to continue to protect European industry. Since the start of ETS, carbon dioxide-inten-sive businesses have been granted free allocation of allowances from the EU Com-mission, the purpose of which is to avoid corporate escape to countries with less rig-orous climate legislation. At present, there are shortcomings in the free allocation and there is a need to review alternative regulations that better reflect the actual costs of emissions. An alternative to free allocation can be border carbon adjustments (BCA).

The position of the Haga Initiative is that the system of free allocation of allowancesshouldbeexaminedwiththepurposetofindalternatives.

A possible alternative to the free allocation of allowances could be border carbon adjustments.

Extending the scope of EU ETS

Road transports: Unless EU ETS is strengthened by other measures, inclusion will have very little effect on transport sector emissions. After 2030, a new analysis may be needed.

Position of the Haga Initiative: Not recommended.

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Aviation

Aviation: Flight operators flying within the EEA are included in the ETS. However, while emissions are decreasing in other sectors, aircraft emissions continue to increase. One reason to this is because there is a high willingness to pay in aviation, which means that the price of emission allowances does not create incentives for emission reductions. The International Civil Aviation Organization’s (ICAO) emission reduction scheme CORSIA is non-binding and is based on climate compensation rather than of emission reductions. New instruments are needed to fast create incentives for emissions reduc-tions in aviation. The Chicago Convention came into force in 1947, meaning that signa-tory states are not allowed to tax fuel already on board another country’s aircraft flying to or from a Contracting State or through its airspace. This puts a stop to taxation of today’s aviation fuel.

Position of the Haga Initiative: Should remain within the EU ETS, but have its own mechanism (perhaps through a closed trading scheme)

Position of the Haga Initiative: The EU should work for a change of the Chicago Convention to enable aviation fuel tax.

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WasteMaritime transport: This is a sector that is currently not covered by other climate legislation. International Maritime Organization’s (IMO) legislation is also lacking. An inclusion of shipping may therefore be interesting to investigate further.

Position of the Haga Initiative: There is some potential for inclusion in the EU ETS.

Building-specific heating and cooling:

operators, most of whom would buy surplus allowances from the stationary facilities covered by the EU ETS today.

Position of the Haga Initiative: Not recommended.

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Waste

Land Use (LULUCF):

Agriculture is decentralized within the Union. This complicates the assessment of which part of the value chain should be included in the ETS. The forest is a large car-bon sink and is needed for both bioeconomy and biodiversity. Both agriculture and forestry’s uptake and emissions in are affected partly by use and partly by natural processes that are difficult to measure and verify.tt mäta och verifiera.

Position of the Haga Initiative: not recommended.

Waste incineration plants

are covered by the EU ETS, but only in Sweden and Denmark. This distorts the condi-tions for trade in waste within the EU. The reason for this difference is that the Mem-ber States interpret the EU Directive differently.

Position of the Haga Initiative: Recommends EU harmonization, which means that either all waste incineration plants in the EU should be covered by the system, or none should be included.

Negative emissions require their own mechanism

More and more companies are working on negative emissions and it is therefore important to discuss whether an operator should be able to account for this.

Position of the Haga Initiative: Negative emissions should have their own mechanism, possibly an EU-harmonized reverse auction, as proposed by the national report The pathway to a climate positive future – strategy and action plan for achieving negative greenhouse gas emissions after 2045 (SOU 2020: 4). After 2030, there may be reasons to include negative emissions within the EU ETS.

Link EU ETS with other emissions trading systems

The EU ETS can be interconnected with other emission trading systems, provided the systems are compatible, mandatory and have absolute cap on emissions.

Position of the Haga Initiative: We are positive to linking emission trading systems provided that the counterparty’s trading system has mandatory, absolute cap on emissions and is compatible with the EU ETS.

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Skeppsbron 32 (3 tr) | 111 30 Stockholm | info@hagainitiativet.se | hagainitiativet.se

Companies included in Hagainitiativet: Axfood, Coca-Cola European Partners, Folksam,

Stockholm Exergi, JM, Lantmännen, Löfbergs, McDonalds, HK Scan, Preem, Stena Recycling och Sveaskog.