EU Policy Briefing │ October 2011

The Financial and Fiscal Dimension

Emissions trading (ETS) can be considered the cornerstone of the EU's legislative agenda on carbon. The scheme is being extended to additional sectors and the management of it tightened up, and changes are planned that are expected to raise the price of allowances. The Commission concluded from the cyber-thefts from the ETS registries in January 2011 that carbon market oversight is insufficient so it will now classify allowances as financial instruments to be regulated under the new Markets in Financial Instruments Directive (MiFID) and the revised Market Abuse Directive (MAD), both proposed this month.

In 2013 ETS will be extended to installations producing bulk organic chemicals, hydrogen, ammonia and aluminium, as foreseen in the 2009 revised ETS Directive (2009/29/EC). The annual 1.74% reduction in the emissions cap will continue to be applied each year. Allowance allocation will move from national schemes to an EU-harmonised approach with auctioning as the default method, and free allowances will decline to zero by 2020.

On the fiscal front, a revision of the Energy Products Taxation Directive is under way, with the aim of creating a framework that: a) treats users of energy more equitably for any given source; b) favours renewables, and c) compensates for biomass-based sources, which are considered renewable but are currently penalised relative to fossil fuels due to lower energy density.

The Power Sector and Industrial Emitters

In light of the 2050 target, the Commission identifies the largest carbon emitters as the low-hanging fruit for further emissions reductions. The Commission claims power producers and other industrial emitters could cut their emissions by as much as 90% by 2050. The power sector will come under additional pressure in 2020 when Commission intends to make its emissions cap more stringent – the precise form that action will take is not yet known but it is certainly foreseen.

On the other hand, concerned about "carbon leakage" – industries leaving the EU due to the stringency of carbon policy – the Commission is continually updating the list of industries at risk; inclusion in this list brings with it eased conditions such as an increased number of free allowances. The next update is expected before the end of this year, and a subsequent one in the second half of 2012.

The goal: reduce EU CO2 emissions to 20% of 1990 levels by 2050. That seems ambitious and yet today we're already down to 83%. Long-term, renewable energy is at the heart of the strategy, but over the coming years the focus will be on a mix of fiscal and financial tools, plus a series of initiatives targeting power producers, industrial emitters, and the transport sector. Emissions trading plays a key role, being used in various ways along with taxes, caps, and emissions limits. Carbon capture and storage gets lip service but no new legislative or financial force at EU level.

EU Issue Tracker • regulatory horizon-scanning and monitoring • www.euissuetracker.com

EU CARBON POLICY – A STRATEGIC LOOK-AHEADThe main strategic lines of the EU’s carbon policy for the next few years

Sticks and Carrots for the Transport Sector

Accounting for 20% of all CO2 emissions, transportation is another obvious target and the Commission is imposing rules where it can and otherwise offering incentives.

Having extended ETS to the aviation sector, the Commission is now taking a tough line in the face of Chinese-led international opposition. Moreover, the next move will be to extend it to shipping as well, barring an international agreement on CO2 emissions from maritime transport before the end of this year.

Vehicle emissions will be subject to both regulatory pressure and financial incentives for the foreseeable future. The current 120 g/km CO2 emission average for passenger cars will be reviewed in 2013, probably resulting in a proposal for stricter limits. Next year, new rules will be adopted on penalties to be paid by auto makers who exceed the limit. New legislation on CO2 labelling of cars will be proposed next year and could be law by 2013. And the provisions in the current legislation for incentives for innovative technologies are up for review in 2015 at the latest.

Expected in 2013

Proposals to Revise Regulations on

Passenger Cars and Commercial Vehicles

Expected in late 2012

Adoption into law of Markets in Fin-ancial Instruments Directive (MiFID)

EU Policy Briefing │ October 2011 EU Carbon Policy – a Strategic Look-Ahead │ page 2

EU Issue Tracker • regulatory horizon-scanning and monitoring • www.euissuetracker.com

2012 2013 2014

Timeline - Key Policy Initiatives and Measures:

Expected in Q3-Q4 2012

Commission Decision on Updated List of Sectors at Risk of Carbon Leakage

Expected in 2012

Proposal for a legislative measure on CO2 emissions

from shipping

Expected in late 2012

Adoption into law of Revision of the Energy Products

Taxation Directive

Expectedin 2013

Begin 3rd Phase of ETS - Inclusion of New

Installations; Broad Use of Auctioning

Possibly in 2020

Revision of Emissions Caps for the Power

Sector, Not Officially Confimred

Expected in 2014

Proposal for Legislation Limiting Heavy Duty Vehicle

Emissions

Expected in 2015

Proposals for Revised Incentives for In-

novative Technologies for Cars and Vans

2015