European Policy Development
23 January 2008

On 23 January 2008, the European Commission presented their proposals for implementing the decisions taken in spring 2007 on 20% CO₂ reductions and 20% renewables in 2020 including a 10% biofuels target. The presented energy package will have large implications on both the EU ETS and the CDM.

• The total allowances in the ETS will be reduced lineary to 21% below reported emissions in 2005 in 2020.
• The allocations to industrial installations will be handled by the commission itself and not by the member countries to ensure harmonisation
• New gases and sectors are included in the ETS while small power plants can opt out.
• There will not be any allocation of free allowances to power producers
• The use of CERs for compliance in the EU ETS will only be allowed if there will be a new international agreement adopted in Copenhagen in 2009, where other large emitters take similar commitments. In this event companiies can use credits up to half of the additional burden due to the new 30% target that will apply in EU.
• The member states will conduct the auctioning with a distribution amongst the member countries by 90% according to the share of allowances in the ETS and 10% redistributed from richer to poorer countries. The revenue shall be used for renewable energy.

The ETS proposals will have large impacts on the ETS and CDM. Naturally the smaller amount of allowances will result in higher prices on the ETS. This together with longer time horisons up to 2020 should result in better incentives for reducing CO₂ emissions. This should increase the investments in renewable energy capacity within companies included in the ETS.

The use of the CDM-ETS link as both stick and carrot in the negotiation process towards 2009 put some uncertainty into the CER market resulting in lower prices for a period.

The largest host countries for CDM projects are also the developing countries with largest emisions that EU and the US wants to include in a new climate commitment protokol, so the decision could be designed to put political pressure on these countries to accept emission caps in their countries. This would in return open up for technology transfer and investments from EU companies. The problem though is that a commitment from China and India in a new international agreement is likely to be settled in late 2009 – nearly two years from now, so the proposal may slow down the market for the coming two years.

The 20% renewable energy target is distributed along the member states with a common 5.5 contribution for all contries and the remaining distributed according to the GDP per capita. The national share does thus not reflect the renewable resources but the ability to pay. A system of Guarantee of Origin (green certificate) will be used to ensure that the investments in new renewable capacity can be made where the resources can be exploited most cost effective.

It is expected that the energy package will be finally settled in april-may 2009. The documents in the EU Energy Package can be found on the Europa Website:

• EU Energy Package

Source: Europa Website Press Release - Ref: IP/08/80 Date: 23/01/2008