Changes to the EU ETS Directive will take effect from 2012 and 2013 and should make the emission trading scheme more effective at cutting emissions. It will also make life more difficult for operators of installations in the scheme.
Over the next few weeks this blog will describe the changes to the scheme in digestible chunks.
The main differences between Phases I and II on the one hand and Phase III on the other hand, are shown in the table below:
|Phase I and II||Phase III|
|National caps||EU-wide cap|
|Fixed cap||Fixed cap which decreases each year by 1.74%|
|3 and 5 years trading period||8 years trading period (2013 to 2020)|
|Limited auctioning (under 4%)||Substantial auctioning|
|Free allocation for industry and electricity generators||Much less free allocation.Transitional free allocation for industry and heat producers; limited, transitional free allocation for electricity producers in ten member states|
|Free allocation based on historical emissions of the installation||Free allocation based on benchmarks applied to historical production data|
|Only stationary installations||Aviation is included (already from 2012)|
The source of this comparison table is the European Commission with Ecofys, Entec and the Frauenhofer Institute.
The most important change for operators is that they will have to buy more allowances: the free allocation will be much smaller. They will also probably have to hedge more actively to preserve their operating margins. We will write about hedging and forward transactions more, later.
The tighter cap might put upward pressure on the price of EUAs. But this won’t necessarily mean higher prices because economic recession and implementation of green energy and energy efficiency measures could counteract the upward effect.