EU10 October 2008 46690 In Focus: Climate Change Agenda in the EU10: Between the Kyoto Protocol and the EU Package "3x20 by 2020" In early December 2008, Pozna, Poland will host the 14th Conference of the Parties (COP14) to the United Nations Framework Convention on Climate Change (UNFCCC). The COP14 will be a next step in the negotiations process on the new international climate change framework. It is supposed to deliver commitments to reduce greenhouse gases (GHG) emissions after 2012, when the first commitment period of the Kyoto Protocol ends. The new international agreement is to be approved during the COP15 starting in late November 2009 in Copenhagen, Denmark. All EU10 countries and Croatia have ratified the Kyoto Protocol, which came into force in 2005. In addition to the commitments to the Kyoto Protocol, however, the EU10 countries are subject to EU policies, especially the Climate Action and Renewable Energy Package, proposed by the European Commission (EC) in January 2008 in order to implement the major energy and climate decisions taken by the European Council in March 2007. During the Spring 2007 Summit, the Council committed: (a) to reduce the EU's GHG emissions by 20 percent below 1990 levels by 2020 (or 30 percent conditional on an international "post-Kyoto" agreement), (b) increase renewable energy sources (RES) to 20 percent of the EU's overall energy mix by 2020 (including a minimum of 10 percent biofuels in overall fuel consumption), (c) improve energy efficiency by 20 percent by 2020. The package of measures is referred to as "3x20 by 2020". The EU package extends and deepens the EU commitments to greenhouse gas emission reduction contained in the Kyoto Protocol. While the Kyoto targets are being exceeded by all EU10 countries except Slovenia (since the base year was around 1990), the new EU targets are more ambitious and will require more efforts and resources by the EU10 countries to achieve. The Kyoto Protocol8 The Kyoto Protocol sets binding targets for 37 industrialized countries (including EU10+1) and the European Community for reducing GHG emissions by an average of 5 percent against 1990 levels over the five-year period 2008-2012. The Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force in 2005. By mid-2008, 182 Parties of the Convention9 (Rio de Janeiro, 1992) have ratified its Protocol, which covers 63.7 percent of global emissions in 1990. The Protocol was not ratified by the U.S. Countries must meet their targets primarily through national measures, but the Protocol offers three (mitigating) mechanisms: · Emissions trading ("the carbon market"), · The clean development mechanism (CDM), · Joint implementation (JI), supporting sustainable development through technology transfer and investment, helping countries with Kyoto commitments to reduce emissions or removing CO2 in other countries, encouraging the private sector and developing countries (non-Annex 1 Parties) to contribute to emission reduction efforts. Countries with Kyoto commitments (Annex 1 Parties) accepted targets for reducing emissions, which are expressed as assigned amounts over the 2008-2012 period. The allowed emissions are divided into "assigned amount units" (AAUs). They are expressed in terms of tonnes of CO2-equivalent emissions. Emissions trading allows countries that have emissions permitted but not "used" to sell them to countries which have problems with meeting their targets. Because carbon dioxide is the principal greenhouse gas, the market is called "carbon market." Units other than those for actual emissions can be traded on the carbon market. These other units, each equal to one tonne of CO2, are: 8The write-up largely derives from UNFCCC website. 9UN Members, both Annex 1 Parties and non-Annex 1 Parties. 21 · A removal unit (RMU) on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation, · An emission reduction unit (ERU) generated by a joint implementation project10 · A certified emission reduction (CER) generated from a clean development mechanism11 project. The emissions trading systems (ETSs) may be established as climate policy instruments at the national or regional level. At present, the European Union ETS (EU ETS) is the largest in operation12. For most countries with Kyoto Table 4. Kyoto Targets and Actual Emissions of GHGs commitments, the base year is 1990, but (in millions of tonnes of CO2 equivalent) the EU10 could select another year. This option was granted for countries Reduction relative to undergoing the process of transition to a Base year Emissions, 2005 base 2005 market economy. Hence, the following (in percent) (in percent) choices: Bulgaria (1988), Hungary (1985- Bulgaria 132.6 70.0 -8.0 -47.2 1987 on average), Poland (1988), Romania (1989), and Slovenia (1986). Base-year Croatia 31.6 30.5 -5.0 -3.4 emissions are defined as the aggregate Czech Republic 196.2 145.6 -8.0 -25.8 anthropogenic CO2 equivalent emissions of Estonia 42.6 20.9 -8.0 -50.9 the GHGs. Moreover, if LULUCF activities Hungary 115.7 80.2 -6.0 -30.7 constitute a net source of greenhouse gas Latvia 26.4 10.9 -8.0 -58.9 emissions in the base year, then net Lithuania 49.4 22.7 -8.0 -54.1 emissions from the part relating to the Poland 586.9 399.0 -6.0 -32.0 deforestation are included in the total Romania 282.5 153.7 -8.0 -45.6 national emissions for that year. Slovakia 72.1 47.9 -8.0 -33.6 Recent available data show that most Slovenia 20.3 20.4 -8.0 0.4 EU10 countries and Croatia will easily fulfill the Kyoto targets with a large EU 15 4257.8 4192.6 -8.0 -1.5 margin. Table 4 shows that the exceptions Australia 418.3 525.4 8.0 25.6 in the regions are Croatia and Slovenia. Canada 596.0 746.9 -6.0 25.3 Worldwide, by 2005, emissions were also Japan 1272.0 1359.9 -6.0 6.9 significantly reduced in Ukraine and Russia New Zealand 61.9 77.2 0.0 24.7 as compared to the base year. However, Russian Federation 2989.8 2132.5 0.0 -28.7 the developed countries reduced emissions Ukraine 923.8 418.9 0.0 -54.7 by much less than targeted in Kyoto (EU15 United States 6229.0 7241.5 ... 16.3 en bloc) or considerably increased the emissions (other developed countries). Sources: Eurostat, UN and World Bank staff. Note: Without LULUCF in 2005 in selected Annex 1 Parties EU Climate Action and Renewable Energy Package13 The EU Package includes four main elements: 1. An expansion of the "cap and trade system"14 (EU ETS) in the Phase III (2013-2020) and new EU-wide rules to harmonize the allocation of emission allowances (AU) across the Member States (ETS sectors, mainly energy, account for about 40 percent of EU GHG emissions), 10A JI project must provide a reduction in emissions by sources, or an enhancement of removals by sinks, that is additional to what would otherwise have occurred. Projects starting as from the year 2000 may be eligible as JI projects, but ERUs may only be issued for a crediting period starting after the beginning of 2008. 11Since 2006, the mechanism has registered more than 1,000 projects and is anticipated to produce CERs amounting to more than 2.7 billion tonnes of CO2 equivalent in 2008­2012. Also, CO2 Capture and Storage (CCS) is treated as a CDM activity. 12In the summer of 2008, the UNFCCC secretariat and the EC successfully tested the linking of UNFCCC's International Transaction Log (ITL) and the Community Independent Transaction Log (CITL), together with the EU member States national registries and some registries of non-EU countries. The linking of EU's registries and CITL to UNFCCC's ITL can start in the first half of October 2008. 13Proposed by the EC on 23 January, 2008 14Recent WB paper discusses the design of CO2 taxes at the domestic and international level and the choice 22 2. Individual emission reduction targets, as compared to 2005 as a base year, at the Member State level for sectors not covered by the EU ETS, covering sectors such as: transport, construction, services, smaller industrial energy installations, agriculture, and waste (Non-ETS sectors). They account for about 60 percent of EU GHG emissions15, 3. Legally enforceable renewable energy targets for Member States, 4. New guidelines on carbon capture and storage (CCS) and environmental state aid. To meet the EU-wide target by 2020, a 14 percent reduction of CO2 emissions is required as compared to 2005 levels. Figure 42 demonstrates Figure 42. Illustration of EU's 2020 climate change and the breakdown of EU's 2020 targets, as proposed by the EC. The way to energy targets achieve a 21 percent emissions reduction in EU ETS sectors is presented in Table A1 in the Annex, while the breakdown of individual targets for non-ETS sectors, renewable energy, and biofuels is presented in Table 5, Columns 2-4. Moreover Table A2 in the Annex envisages the breakdown into ETS and non-ETS sectors. In the region, the fulfillment of the GHG reduction targets will be the most challenging for countries generating a vast majority of electricity production based on coal (Poland, Estonia, the Czech Republic, Bulgaria), especially if they cannot rely on diversified energy sources Source: A note by PEW Center on Global Climate Change, European Commission's Proposed "Climate Action and Renewable Energy Package" January 2008. including nuclear energy (see Table 5, Columns 7-8). If an enterprise (ETS installation) does not surrender enough allowances to cover its emission, it will have to pay a penalty of 40 per ton of CO2 emissions between 2005 and 2007 and 100 from 2008.16 The expansion of the EU ETS is a key element of the EU package. In line with the EC proposal, the EU ETS will include GHGs other than CO2 and all major industrial emitters. The power sector ­ contributing most to EU emissions ­ will face full auctioning from 2013. Other industrial ETS sectors and aviation will step up to full auctioning gradually, although an exception may be made for sectors particularly vulnerable to competition from producers in countries without comparable carbon constraints (carbon leakage). In addition, auctions will be open, thus any EU operator will be able to buy allowances in any member state. Revenues from the ETS will add to member states' revenues in proportion to the emissions traded through the national system, and should be used in part to help the environmental EU goals. Part of the revenues should also go towards helping developing countries adapt to climate change. The EC estimates that revenues from the auctions could amount to 50 billion a year by 2020. While the EU is committed to reducing emissions in non-ETS sectors by 10 percent between 2005 and 2020, the EU10 countries are allowed to increase their emissions by a range from 4 percent (Slovenia) to 20 percent (Bulgaria) (Table 6, Column 2). The EU10's shares of renewables in final energy demand are to increase from a current range of less than 4 percent in Hungary to 35 percent in Latvia to a range of 13 percent of taxes versus a cap-and-trade system. There is a strong case for taxes on uncertainty, fiscal, and distributional grounds, though this critically hinges on policy specifics and how revenues are used (see more in: Joseph E. Aldy, Eduardo Ley, and Ian Parry, A Tax-Based Approach to Slowing Global Climate Change, World Bank, PREMEconomics of Climate Change Discussion Paper No. 1, August 2008. 15The EC proposed individual targets for Member States based on incomes per capita. The targets range from +20% to -20% relative to 2005. All EU10 may increase their emissions. 16Some or all of these costs (or costs of allowances acquired through auctions, in particular in Phase III) may be shifted to consumers, leading to significant increase of electricity prices and overall inflation. 23 in Hungary to 42 percent in Latvia. The 10 percent biofuels target will require significant progress, as currently they account for less than 0.6 percent of overall fuel consumption (2005 data). Table 5. EU10 individual 2020 targets for Non-ETS Sectors and renewable energy and actual 2005 data for EU10 (in percent) 2020 target for Renewables Biofuels Share in 2005 of Share in 2005 of electricity from non EU ETS 2020 target 2020 target renewables biofuels coal nuclear 1 2 3 4 5 6 7 8 Bulgaria 20 16 10 9.4 0 40.6 42 Czech Rep. 9 13 10 6.1 0 59.2 29.9 Estonia 11 25 10 18 0 91.2 0 Hungary 10 13 10 4.3 0.1 19.6 38.7 Latvia 17 42 10 34.9 0.3 0 0 Lithuania 15 23 10 15 0.2 0 69.9 Poland 14 15 10 7.2 0.5 91.4 0 Romania 19 24 10 17.8 0 36.9 9.3 Slovakia 13 14 10 6.7 0.6 17.6 56.4 Slovenia 4 25 10 16 0 34.9 38.9 EU27 -10 20 10 8.7 ... 28.6 29.5 Source: World Bank staff based on Eurostat data and EC documents. Note: Targets are set as compared to 2005; targets for renewables refer to the share in the final energy demand, for biofuels to the overall fuel consumption. The first tensions between EC proposals and national commitments of some EU10 countries emerged in the context of allocation caps for EU ETS sectors in the II Phase (2008-2012) of the EU ETS implementation, as specified in the National Allocations Plans (NAPs). The period is consistent with the Kyoto protocol reporting period. The NAPs were submitted to the EC in late 2006 and then the EC provided its assessments and communicated decisions in 2006-2007. After the first assessment round, Latvia, Lithuania and Slovakia submitted amended proposals, which were only partially accepted in the EC's second decisions. Table 6, column 3, shows the final decisions by the EC from 2007. In general, the EC requested reducing the allocations proposed in the NAPs by one-quarter. The EC decisions are binding for the EU Member States, but the Acquis Communitaire foresees some "revoking procedures". Poland has filed to sue the EC in the European Court of Justice, but a verdict has not yet been taken. 24 Table 6. Annual allocations of emissions allowances for 2008-2012 (in million tonnes of CO2 equivalent) EC decision as ETS sectors NAP proposal of annual EC compared to the emissions, 2005 CO2 emissions, assessment, Difference NAP 2008-2012 2007 (in percent) 1 2 3 4=Col3 - Col2 5 Bulgaria 40.6 67.6 42.3 -25.4 -37.5 Czech Rep. 82.5 101.9 86.8 -15.1 -14.8 Estonia 12.6 24.4 12.7 -11.7 -47.8 Hungary 26.0 30.7 26.9 -3.8 -12.4 Latvia 2.9 6.3 3.4 -2.8 -45.2 Lithuania 6.6 11.0 8.9 -2.2 -19.7 Poland 203.1 284.6 208.5 -76.1 -26.7 Romania 70.8 95.7 75.9 -19.8 -20.6 Slovakia 25.2 34.9 32.6 -2.3 -6.5 Slovenia n.a. 8.3 8.3 0.0 0.0 Source: NAPs and the EC's assessments and decisions. The EU proposals discussed briefly in this note go beyond the Kyoto Protocol (Table 7). The EC proposal has significant and differentiated implications for all EU Member States, including the EU10. The EC proposal demonstrated its commitment to participate actively in the climate change agenda. It is an important step in negotiations on the "post-Kyoto" international agreement, which is to be adopted during the COP15 in Copenhagen in late 2009. Table 7. Main Differences between the Kyoto Protocol and the EU Package Kyoto Protocol EU Package "3x20 by 2020" Commitment Period 2008-2012 average 2005-2020, II Phase of EU ETS implementation is consistent with the Kyoto period Base Year for 1990, with some 1990 at political level, and 2005 for specific abatement exceptions commitments on ETS volume, share of RES, emission commitments changes of non-ETS sectors, and biofuels Sector Specification of No, only overall country- Yes, major breakdown into ETS (in particular, energy) Emission Allowances wide targets and non-ETS sectors. 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ETS Breakdown. 2 A1 A2 CO d ble ge red fors Allowance ve of sit ches ble Ta co Cap e n rv Ta 27UE 2005 ins bran/ x: covere covera on ns ors issi tioac cred se in on economy of e Anne Years GHGs Sect Em Auctio Allo Us reSTE x: ors e th Anne Share emissi Sect in