4/5/2007
Stavros DIMAS Member of European Commission, responsible for environment “Improving environmental quality through carbon trading”  Carbon Expo Conference, Cologne, 2 May 2007

Ladies and Gentlemen,

It is a pleasure to have the honour of addressing the participants of Carbon Expo, which is undeniably one of the main events of the carbon market worldwide. I would, of course, have preferred to attend the conference in person and thereby have the opportunity to exchange ideas and discuss your views on the carbon market and its evolution in the years to come directly. Regrettably, however, I have had to stay in Brussels today. Modern technology is, nonetheless, making it possible for me, through this video-link, to share my thoughts with you on the lessons that the European Commission can draw from the first few years of emission trading and, moreover, its proposals for the way in which the EU emission trading scheme can be strengthened further in order to achieve the EU’s set climate objectives.

As you know, the first period of EU emission trading will come to a historic close at the end of this year. It is therefore time to take stock and to identify both those aspects in which we have succeeded and those where we still need to improve. So doing will enable us to isolate those areas and elements upon which we need to focus to build a strong EU emission trading scheme for the future.

In all but a few respects, EU emission trading has been a resounding success. The EU has delivered an effective emission trading market in which millions of tonnes of CO2 are traded every day, and in which monitoring and control mechanisms have been proved to function to a high degree of satisfaction. By all standards, to have accomplished this in only two years is no meagre achievement.

EU emission trading can also be praised for having kick-started the international carbon market. Statistics show that European trading constitutes some 80% of the sales of CO2 worldwide, and provides the main incentive for companies to invest in clean development projects in emerging economies. It is largely because emission trading is working well within the European framework that we can begin to envisage the carbon market as a solid building block for any future international climate agreement post-2012.

Having said that, we have all been aware of the fact that this first three-year period in the scheme’s life was principally designed to be a learning period. Obviously, all of us – companies and regulators alike – have needed this experience in order to increase our understanding of how carbon markets function.

The first trading period has, as we are all aware, been marked by an over-allocation of CO2 quotas. As any functioning exchange, the EU carbon market has responded in a way that has led to a steep decline in prices. Since verified emissions were not yet available, Commission decisions were initially based on emission projections. Although there certainly were some Member States in which over-allocations were partly due to real emission reductions, in most cases it was overly generous allocations to companies that caused this decline in prices. This, in turn, was caused by some Member States basing their nation plans on exceedingly optimistic growth projections and excessively high emission forecasts.

The credibility of emission trading in Europe, but also worldwide, hinges on our capacity to rectify this situation for the second trading period. That is to say, we have to ensure a realistic level for the EU-wide cap on allowances. The Commission's decisions on the 19 allocation plans assessed so far are based on strict standards and a common methodology to ensure scarcity in phase 2. This is, of course, a defining element for the successful operation of a market. Crucially, the Commission decisions are based exclusively on verified emissions.

In cases where Member States have proposed caps in excess of these standards, the Commission has not hesitated to reduce allocations, regardless of how many millions of tonnes of CO2 need to be cut from Member States national plans for EU emission trading to function in its second phase. In this work I have received full support from President Barroso as well as all the other Commissioners.

The Commission’s decisions are also grounded in our Kyoto commitments and a fair contribution by the emission trading sector to comply with EU emission targets. This has led the Commission to assess the Member States’ overall climate strategy. When measures in sectors outside emission trading are not convincingly explained, the Commission has again reduced allocations accordingly. Proceeding along these lines, we will be able to ensure that emission trading actually lives up to its main raison d’être as a tool enabling us to achieve the EU’s Kyoto target.

A common methodology also ensures that all plans are assessed fairly. This is crucial for EU emission trading conceived as an EU wide project. In other words, no member state can expect a more favourable treatment or approach emission trading as if it were an opportunity for financial inflows. Importantly, then, one of the main aims of the Commission’s decisions is to avoid any form of unequal or discriminative treatment.

I believe that the Commission's approach to the assessment of national plans, and the full transparency we imposed with our first set of decisions last November, have together given the emission trading market the stability it needs for its second phase. I am delighted to see that the Commission's decisions have been interpreted by the market as a convincing signal to the effect that the next trading period will be characterised by sound market fundamentals.

Ladies and Gentlemen,

As we are making good headway in strengthening the EU emission trading for the second trading period, the political focus is shifting increasingly to the period after 2012. The review of the Emission Trading Directive that the Commission will put forward in the second half of this year provides us with an opportunity to both reinforce and broaden the system. This will re-affirm the role of emission trading as the flagship of EU climate policy, and enhance its capacity to deliver significant emission reductions.

The review of EU emission trading will of course be driven by the EU's new political objectives. At the spring summit held in March, EU leaders set the target of cutting EU greenhouse gas emissions to 30% below 1990 levels by 2020, provided other developed countries make similar efforts as part of a new global climate change agreement for the period after 2012. Our heads of state and government also made an independent commitment - even before negotiations on a global agreement have begun - that the EU will reduce its emissions by at least 20%. This independent target sets a clear framework for the EU ETS up to the year 2020 and will of course be taken into account in future decisions on the cap for 2013 onwards. In indicating the minimum level by which we will cut emissions, the EU gives a degree of predictability to market operators, even if we hope to increase the reduction to 30% in the context of a new global agreement.

In the review of EU emission trading, the Commission has to strike the right balance between ambition and stability. Emission trading should be brought forward as the cornerstone of a successful EU climate policy but we should refrain from any measures that risk undermining the integrity of the system.

As a first step, the Commission will look into the various possibilities for including more sectors and gases. As economic theory tells us, the wider the scope, the greater the potential for cost effective abatement. A first decision has already been taken to include aviation but there are many other sectors, notably in the industrial field, where inclusion into the emissions trading scheme would be the most cost-efficient way to cut emissions. This is also applicable to other greenhouse gases. For example, the Commission has already indicated that it will assess the potential of nitrous oxide to be part of emission trading. We will also have to consider the role of carbon dioxide capture and geological storage activities in EU emission trading, given this technology's potential to reduce emissions.

The EU Emission trading scheme needs to be more harmonised. This concerns above all cap setting, and the question of whether this should be done at EU level or national level. The final decision is still pending. It seems clear, however, that future decisions on allocations should to the highest degree possible remain independent from political interference. A single European emission trading market also calls for a common EU approach with regards to the way in which we set the number of tradable allocations.

Our experience so far tells us that a more harmonised approach on these issues will benefit all parties involved. Most importantly perhaps, it would ensure more transparency and a level playing field across the market. There are several other areas where we also need to streamline the way emission trading works, such as allocation rules at sector or installation level, the role of benchmarks, the treatment of new entrants, and the closure of installations.

Industry, in particular power generators, focus very often on the need for a stable regulatory framework when investing in new power capacity. Framed against this background, there is an understandable desire for increased predictability under EU emission trading, which is generally understood to mean longer periods for cap setting and allocation. Let me assure you that the Commission is looking into this possibility.

Linked with the power sector, the so-called windfall profits for power generators and in this context the debate about free allocation of allowances has been a frequent issue for discussion. The fact that power generators have benefited from windfall profits is a result of normal company decisions to factor in relevant costs, including opportunity costs, accruing from the fact that emission allowances have a market value. In order to address this situation, auctioning of allowances is a methodology that needs to be considered very seriously.

We should base ourselves on practical experience. The plans of several member states to make increased use of auctioning in the second trading period and the decisions on comprehensive auctioning taken in some states in the north-eastern US carbon market are particularly welcome developments that will feed into the review. They will provide us with a better understanding of how auctioning could work at EU level.

A final objective of the review is to develop emission trading as a key building block of the global carbon market. The world needs a global carbon market in order to achieve deep cuts in global emissions. EU emission trading should be attractive for third countries to link up with. These links would expand the range of abatement opportunities for EU countries and reduce overall compliance costs for Europe.
For those reasons, we must aim to gradually build up a liquid and truly global carbon market with a universal carbon price. We need to take advantage of the fact that the role of company-based emissions trading under a cap-and-trade system is increasingly acknowledged around the world, as demonstrated in the current development of such schemes in Australia, California and the north-eastern states of the US. It is very encouraging that the EU ETS is serving as a role model for several of these initiatives.

Ladies and Gentlemen,

Our ambition for the revised EU emission trading scheme that would take effect in 2013 can be summed up in simple terms: we want an emissions trading scheme that is effective in achieving emission reductions, straightforward and transparent for its participants, and attractive to the rest of the world.

Undoubtedly, EU emission trading is here to stay. With the European Council’s decisions in March this year, the EU’s climate strategy for the period until 2020 is now clear, and emission trading features as the main instrument to reduce greenhouse gases. This should provide all the necessary assurance to companies that investing in emission trading today is noting other than sound business strategy.

Events such as Carbon Expo are clear evidence of the economic importance of EU emission trading. You are all important actors on the carbon market. I therefore look forward to hearing your constructive debates which will no doubt help the Commission in its endeavours to make emission trading into a success for global climate policy.

Thank you.