Sectoral expansion of the EU ETS

Sectoral expansion of the EU ETS
TemaNord 2015:574
Sectoral expansion of the EU ETS
TemaNord 2015:574
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Sectoral expansion of the EU ETS
- A Nordic perspective on barriers and solutions to include new sectors in the
EU ETS with special focus on road transport
The European Emissions trading Scheme (EU ETS) was launched
in 2005. The scheme started off with a limited scope, but has
gradually expanded, in terms of geographical, sectoral and
gas coverage. This report analyses the possibilities for further
sectoral expansion in the Nordic countries. The analysis is done
in terms of barriers and solutions for inclusion of four major
sectors currently outside the scope of the scheme: transport,
heating, agriculture and fisheries, and waste. Focus is on the
road transport sector, which is a major source of greenhouse gas
emissions in the Nordic countries. The main barriers identified for
inclusion of road transport are related to the overlap with existing
policy instruments, high administrative costs of downstream
inclusion, and potential loss of fiscal revenue. Experiences from
other trading schemes show that the barriers can be overcome.
TemaNord 2015:574
ISBN 978-92-893-4363-3 (PRINT)
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TN2015574 omslag.indd 1
09-12-2015 08:57:08
Sectoral expansion of the EU ETS ‐ A Nordic perspective on barriers and solutions to include new sectors in the EU ETS with special focus on road transport BragadóttirHrafnhildur,MagnussonRoland,SeppänenSampo,
SundénDavidandYliheljoEmilie
TemaNord2015:574
SectoralexpansionoftheEUETS
‐ANordicperspectiveonbarriersandsolutionstoincludenewsectorsintheEUETS
withspecialfocusonroadtransport
BragadóttirHrafnhildur,MagnussonRoland,SeppänenSampo,SundénDavidandYliheljoEmilie
ISBN978‐92‐893‐4363‐3(PRINT)
ISBN978‐92‐893‐4364‐0(PDF)
ISBN978‐92‐893‐4365‐7(EPUB)
http://dx.doi.org/10.6027/TN2015‐574
TemaNord2015:574
ISSN0908‐6692
©NordicCouncilofMinisters2015
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Contents
Foreword ....................................................................................................................................................... 7
Executive summary ................................................................................................................................... 9
Expanding the sectoral scope of the trading scheme .......................................................... 9
Conclusions .........................................................................................................................................11
Conclusions for the road transport sector .............................................................................12
1. Introduction........................................................................................................................................15
1.1
The EU perspective ............................................................................................................15
1.2
The Nordic perspective ....................................................................................................16
1.3
The purpose of this report ..............................................................................................18
2. Prospective candidates for inclusion .......................................................................................21
2.1
The EU perspective ............................................................................................................21
2.2
The Nordic perspective ....................................................................................................25
2.3
The sectoral perspective .................................................................................................37
2.4
Conclusions ...........................................................................................................................47
3. Inclusion of road transport in the EU ETS .............................................................................49
3.1
The EU perspective ............................................................................................................49
3.2
The Nordic perspective ....................................................................................................50
3.3
Main barriers to inclusion...............................................................................................58
3.4
Conclusions and extrapolation of the main barriers for road
transport to other sectors ...............................................................................................66
References...................................................................................................................................................69
Sammanfattning .......................................................................................................................................75
Foreword
With this report The Nordic Council of Ministers would like to contribute
to the ongoing discussions on how the EU ETS ought to develop in the future. While several models for how an improved system better can meet
its goals have been proposed, this report focuses on how the current
scope of emissions within the system can be extended. This would mean
including even more sectors to those already in the system. More specifically the report looks at the road transport sector, and analyses the opportunities for, and barriers to, its inclusion in the EU ETS.
The project has been commissioned by the working group Environment and Economy under the Nordic Council of Ministers (MEG).
The analysis carried out in this project is useful in several policy contexts, both with regards to domestic and EU-level policymaking. Moreover,
the interests for this type of analysis have recently increased due to the new
set of climate goals, 2030 framework for climate and energy policies, agreed
upon by EU leaders in 2014.
A group of consultants led by GreenStream Network Ltd was chosen
to write the report. Lakeville Economic Consulting and Environice assisted GreenStream. The authors of the report are responsible for the
content as well as the recommendations which do not necessarily reflect
the views and positions of the governments in the Nordic countries.
August 2015
Fredrik Granath
Chairman of the Working Group on Environment and Economy under
the Nordic Council of Ministers
Executive summary
The purpose of the EU ETS from its commencement in 2005 was to enable the EU to meet its emission reduction targets in a cost efficient manner. The aim was to prepare the EU for international emissions trading
in 2008 by learning-by-doing, creating a trading market with sufficient
liquidity, and with a strong foundation of monitoring, reporting and verification procedures.
Although the system initially had a limited scope covering a limited
number of sectors, the intention was to gradually extend the system. In
2008 Iceland, Liechtenstein and Norway chose to join the EU ETS. In
2012 aviation was included. Furthermore, in the beginning of the third
trading period industries such as aluminium and, in part, the chemical
industry were included, as well as nitrous oxide and perfluorocarbons.
Currently the EU ETS covers about 45% of the total CO2e emissions
both in the Nordic countries and in the EU. The emission reduction target within the trading system is 21% for the period 2005 to 2020. Most
of the remaining emissions are covered by the Effort Sharing Decision
(ESD) with binding emission reducing targets for each Member State.
For the EU as a whole the target is 10%. For EU ETS and ESD combined,
the target is 14% in the period 2005–2020, which is equivalent to 20%
in the period 1990–2020.
Expanding the sectoral scope of the trading scheme
The scope of the EU ETS can be extended in two ways. Either at the
community level, by amending the EU ETS Directive, or on Member State
level, by an individual opt-in after approval through the comitology procedure. The criteria used by the Commission for assessing suitable sectors to include in EU ETS for the third trading period included, among
others, significance of the emission source, the possibilities for monitoring, reporting and verification, and the proportionality of transaction
costs. Similar criteria are used when approving unilateral inclusion of
activities if individual Member States, installations and gases not listed
in the ETS Directive.
Opportunities in expanding the sectoral scope
Expanding the sectoral coverage of the EU ETS implies a unified carbon
price across sectors, which lays a foundation for increased cost efficiency. The potential of the cost efficiency increase in any given sector
is reflected by the difference between the EU ETS carbon price and the
carbon taxes of the given sector, assuming that inclusion entails a removal of the carbon tax. The average price in Sweden, Norway and Finland received by auctioning emissions allowances during 2013 was in
the range of EUR 4 per tCO2e. This can be compared to EUR 3 to 124
per tCO2e in carbon taxes. The level depends on the country and the
sector. The difference indicates significant possible cost efficiency
gains from inclusion.
Barriers for expanding the sectoral scope
The barriers for inclusion have different sources. Firstly, there are a
number of technical criteria that need to be fulfilled. These concern the
legal framework and current environmental instruments used. This is
especially important in the Nordic countries which have an extensive
instrument mix that serve a multitude of policy goals.
Secondly, the fiscal aspects are very important since some sectors
are subject to heavy taxation. Moving a sector into the EU ETS and
changing the taxation in the sector may impair the fiscal budget, which
in turn dictates an introduction of a revenue compensation mechanism
or at least a fiscal impact assessment of including a sector in the EU ETS.
Thirdly, increased cost efficiency may also come with behavioural
changes as relative prices change. This in turn may increase the toll on
other parts of the environment such as emissions of co-pollutants.
The purpose of this report is to discuss these barriers in the context
of four major sectors currently not included in the EU ETS: transport,
heating, agriculture and fisheries, and waste. The discussion is expanded
and deepened for the road transport sector, which is currently the largest emission source outside the EU ETS.
10
Sectoral expansion of the EU ETS
Conclusions
Size of emissions vary significantly between sectors
The heating, waste, and transport subsectors are relatively minor emitters of GHG, in the Nordic countries. Road transport and agriculture
stands for almost 70% of emissions not included in the EU ETS. Therefore, an inclusion of either of them implies moving a substantial part of
non-ETS emissions into the trading system.
Policy consistency is an issue in the transport and
heating sector
The Commission has previously assessed the consistency of existing instruments with the EU ETS to evaluate whether a sector is appropriate
for inclusion or not. Consistency with existing instruments is mainly a
question of whether existing policy pricing carbon emissions distort the
EU ETS price signal. Carbon pricing instruments are most prevalent in
the transport and heating sector in the Nordic countries but less so in
agriculture and fisheries, and the waste sector. For the transport sector,
the risk of distortions is significant, due to the multitude of both carbon
taxes and fiscally motivated tax instruments.
Source of emissions as the point of regulation is a legal barrier
for sectors with a large amount of small emission sources
Emissions from the sectors currently covered by the EU ETS are regulated
at the point of release to the atmosphere, pursuant to the principle of direct emissions. For transport or agriculture this implies that the individual
vehicle or farm should be the subject of regulation. The costs associated
with including a large amount small emission sources are significant, both
for sources as well as the regulators. To address this, the Commission has
considered an upstream regulation, where fuel distributors or vehicle
producers could be the subject for regulation and compliance.
Sectoral expansion of the EU ETS
11
Monitoring, reporting and verification is significant
challenge for agriculture
The MRV requirements are technically feasible both for transport and
heating sector. The agriculture and fisheries sectors still lack a sufficient level of MRV. The complexity of MRV for the waste sector remains
unsolved.
The fiscal barriers are relatively minor, except for
road transport
The fiscal revenues from environmental taxation are significant in the
Nordic countries, with the major part stemming from taxing the transport
sector. Besides road transport the fiscal impact of including any of the
other sectors in the EU ETS are minor.
Conclusions for the road transport sector
Risk for policy congestion in the road transport sector
The current policy space for reducing carbon dioxide emissions from
road transport is occupied by three sets of instruments. The first set is
mandatory EU fuel efficiency standards, the second set is individual
countries’ fixed vehicle taxation through registration fees and direct annual motor vehicle taxation, and the third set is national fuel taxation
systems, which typically include carbon tax component. Introducing the
EU ETS as a fourth set of instruments to this already crowded policy
space will increase instrument congestion. The major issue concerns the
Nordic countries’ current high fuel tax rates and significant carbon components within these tax rates. There is a risk that these taxes may distort the EU ETS carbon price signal, and consequently reduce the cost
efficiency of reducing GHG emissions.
Road transport MRV and up- or downstream regulation
Monitoring, reporting and verification (MRV) is not a direct barrier to
including road transport in the EU ETS. However, given the large amount
of small mobile emitters, the cost of imposing the EU ETS regulatory
framework on the emitting vehicles or owners is disqualifying. This calls
for necessary amendments to the EU ETS Directive for inclusion of upstream entities, i.e. entities higher up in the supply chain. Examples of
12
Sectoral expansion of the EU ETS
such upstream entities are fuel suppliers and vehicle producers. A national amendment allowing for an upstream point of regulation may be
necessary should a Member State opt-in the road transport sector in the
EU ETS. This is the approach of the Californian cap-and-trade system,
where some sectors are regulated downstream and other upstream, e.g.
chemical industry is regulated downstream, whereas in road transport is
regulated upstream.
The fiscal budget is a major obstacle for including
road transport
The inclusion of road transport in the EU ETS implies replacing carbon
taxes with the pricing mechanism of the trading system. This opens up
the possibility of higher cost efficiency in reaching the GHG emissions
targets by allowing for transport emissions to be priced at market rates.
Failure to remove the carbon taxes implies double carbon taxation and
reduces the possibilities of reaping any cost efficiency benefits.
Replacing current taxes with auctioning of emissions allowances
presents a serious fiscal problem. The total revenues collected from carbon taxes in the road transport sector are considerable in all Nordic
countries, with tax rates spanning from EUR 13 per tCO2e in Iceland to
EUR 124 in Sweden. The average auctioning price in the Nordic countries was EUR 4 per tCO2e in 2013.
There are at least three possibilities to alleviate the negative fiscal
impact. Firstly, by increasing the share of emissions allowances auctioned for all sectors, will increase fiscal revenue, which will to some degree compensate for the income loss. Secondly, parts of the carbon taxes
can be attributable to fiscal reasons and not to environmental concerns.
This suggests that the carbon tax rate component, e.g. of the fuel tax, is
set too high. Moving the fiscal part out of the carbon tax reduces the difference between the current EU ETS price and the effective carbon tax.
This fiscal part of the carbon tax can still be levied. However, estimating
the fiscal share of the carbon tax is not straightforward. Thirdly, a top up
carbon tax above the market carbon price is justifiable, as such mechanism could be designed as a price-floor which guarantees a minimum tax
rate irrespectively of the market price. By securing revenues from both
auctioning of allowances and from the price floor mechanism the fiscal
revenues can be upheld and guaranteed. The price floor can be applied
to the whole scheme or just in one sector.
Sectoral expansion of the EU ETS
13
1. Introduction
The EU ETS commenced in 2005 and its purpose has been to allow for the
EU to meet its international emission reduction targets in a cost efficient
way (EC, 2003). The Commission opted for a learning-by-doing approach
to prepare the Community for the start of international emissions trading
under the Kyoto Protocol in 2008 (CEC, 2000, p. 10). To start with, the aim
was to create the critical mass for a liquid trading market and establish
the necessary monitoring, reporting and verification infrastructure. For
this reason, the EU ETS Directive focused, like all successful applications of
cap-and-trade systems in various environmental domains have done,
mainly on large stationary sources and only on CO2 emitters, while in
principle the EU ETS Directive covers all greenhouse gases, see Annex II of
the Directive (CEC, 2008, p. 32). The limited scope covering power generation and energy-intensive industrial sectors meant starting off with a
small number of economic sectors but with significant emissions for
which monitoring and verification of emissions was feasible. The intention
was, however, for the system to be open for gradual geographical, sectoral
and gas coverage extension (CEC, 2000, p. 10).
1.1
The EU perspective
Since the start in 2005, the scope of the EU ETS has been extended several times, both by the Community and unilaterally by Member States,
through the so-called opt-in mechanism. Of the Nordic states, Finland
and Sweden opted-in small installations in the heating sector below the
set minimum threshold, already in the first trading period of the EU
ETS. 1 Norway included gas nitrous oxide (N20) associated with production of nitric acid in 2009.
1 In Finland district-heating plants with a capacity of 20 MW or less that operate in district-heating networks
where one or more installation fall under the EU ETS are under the scope of the Finnish Emissions Trading
Act. Sweden has opted-in installations having a rated thermal input below 20 MW but being connected to a
district heating network with a total rated thermal input above 20 MW. Both Finland and Sweden started by
opting-in separate installations in 2005 and 2004 respectively but the opt-in was extended to cover all installations fulfilling the criteria.
The first expansion of the coverage of the EU ETS took place during
the second trading period. The geographical scope was extended when
Iceland, Liechtenstein and Norway chose to join the EU ETS in 2008 and
the sectoral scope was extended through inclusion of aviation in 2012.
Aviation was seen as a large contributor to climate change, especially if
the emissions would continue to increase. International aviation is not
included in the scope of the Kyoto Protocol and the lack of legal implications from the growth of emissions from international aviation was seen
to require actions. Emissions trading was considered the most cost efficient way of curbing emissions (CEC; 2006). International aviation has,
however, as of 2013 been temporarily excluded from obligatory participation in the EU ETS following an agreement under the International
Civil Aviation Organization in 2013 regarding the development of an international scheme covering emissions from international aviation. Currently only flights within the EEA are subject to the EU ETS.
The scope of the EU ETS was further extended in the beginning of the
third trading period by inclusion of new industries, such as aluminium
and, in part, the chemical industry, as well as two new gases, nitrous oxide and perfluorocarbons. The included sectors and gases constitute significant emission sources, which motivated their inclusion. In addition
the monitoring, reporting and verification of the emissions from these
sectors and gases was feasible and sufficiently accurate for inclusion in
the ETS (EC, 2008b).
1.2
The Nordic perspective
In 2013, the EU ETS covered about 44% of total CO2 equivalent emissions in the Nordic countries, which is in line with the EU level of 45%.
The coverage varies between from 35% in Sweden to about 50% in Finland and Norway. Almost half of the Nordic emission allowances were
auctioned in 2013. However, there is significant variation. Iceland allocated all allowances for free, whereas Denmark auctioned 66% of the
allowances. In the EU, the measures for allocating free allowances were
harmonised in 2013, which leaves no national discretion with respect to
how many allowances to auction.
In Phase 3 of the EU ETS, which runs from 2013 to 2020, half of all
allowances will be auctioned. Power producers in most Member States
are required to acquire all of their emission allowances from auctions,
while industrial manufacturers continue to receive the majority of allowances for free (80% in 2013). However, the share of free allocation to
16
Sectoral expansion of the EU ETS
industrial manufactures will reduce sequentially to 30% by 2020, leaving free allocation only for sectors subject to international competition
(CEC, 2015a). According to the EC (2014a) free allocation will continue
after 2020 to prevent the risk of carbon leakage, as long as no comparable efforts are undertaken in other major economies.
Table 1: CO2e emissions and fiscal revenues from GHG emission reducing taxes and
EU-ETS-auctions 2013
EU-ETS sectors
Country
Denmark
Finland
Iceland
Norway
Sweden
Nordic countries
Non-EU-ETS sectors
Emissions
(2013)1
(MtCO2e)
Auctioning
(2013)1
(MtCO2e)
Auctioning
revenue
(2013)2
(EUR million)
Revenues per
tonne
(in EUR per
tCO2e)
Emissions
in (2012)3
(in MtCO2e)
Carbon tax
(EUR per
tCO2e)4
21.6
31.5
1.8
24.7
20.1
99.7
14.2
17.2
0
0
9.2
48.1
56.1
67.0
0
0
35.7
158.8
4.0
3.9
0
0
3.9
.
30.0
29.5
2.7
28.0
37.5
127.7
22
60
16
3–53
124
Note:
Because of technical delays in reporting greenhouse gas inventories to the UNFCCC, economy-wide GHG emissions data was not available for 2013 at the time of writing. Verified
emissions from the EU ETS were available for 2013 at the time of writing. This report relies
on a combination of 2012 and 2013 data. This is not optimal but using 2013 data for the EU
ETS is essential because of changes to the scope of the EU ETS at the start of Phase 3.
Source:
1
European Union Transaction Log (EUTL).
EC (2014c) and Norwegian Ministry of Climate and Environment.
3
European Environment Agency (2015b).
4
Danish Ministry of Climate, Energy and Building. (2013), Finnish Ministry of the Environment and Statistics Finland (2013), Icelandic Ministry for the Environment and Natural
Resources. (2014a), Norwegian Ministry of Climate and Environment. (2014), Swedish Ministry of the Environment. (2014).
2
In 2013 and 2014, the auctioning price varied between EUR 2.75–7.09 in
EU’s primary market auctions and the average auctioning revenue for
the Nordic countries was approximately EUR 4 per tCO2e; cf. Table 1
(EEX, 2015). The implementation of the Market Stability Reserve along
with the 40% reduction target in EU greenhouse gas emissions by 2030
is likely to drive up the market price in the future. Current estimates of
the price of allowances in 2020–2030 is in the range of EUR 17–53. 2
2
Based on estimates presented by the European Commission, Thomson Reuters and ICIS Tschach Solutions.
Sectoral expansion of the EU ETS
17
1.3
The purpose of this report
Expanding the sectoral coverage of the EU ETS poses both opportunities
and threats, both for Nordic governments as well as individual companies. The opportunities materialise through a single CO2 price, which is
the same for all economic agents. A comparison of the Nordic countries
shows that carbon taxes in the sectors outside the EU ETS varies between EUR 3 per tCO2e in Norway for (natural gas in the manufacturing
sector) to EUR 124 in Sweden. Replacing carbon taxes with the pricing
mechanism of the EU ETS thus poses a significant possibility for increasing the cost-efficiency of emission reductions in the sector, even with the
projected increase in allowance prices.
The threats are related to technical issues of inclusion in the existing
EU ETS, the effects of inclusion on state budgets the effect of inclusion on
the environment. This report discusses these issues in the context of
four major sectors currently outside the scope of the EU ETS: transport,
heating, agriculture and fisheries, and waste. The discussion is given
depth by a detailed analysis of road transport.
The technical aspects concern the current setup and legal framework
of how current policy instruments. For example, there are a number of
economic instruments in place such as cross sectoral CO2 taxes and annual vehicle taxes in the transport sector. In addition, the Nordic countries extensively use non-economic instruments, such as emission targets for new vehicles, reductions of GHG intensity of fuels, and life cycle
CO2 reduction targets in vehicle production. The technical aspects discussed herein involve the interaction of these instruments and their
possible collision with the EU ETS.
The fiscal aspects concern the impact on central government revenues. Some of the sectors, especially road-transport, are subject to
heavy taxation. The Nordic countries use different tax instruments, tax
bases and tax rates to achieve these goals and not all of them are cast
in terms of a direct CO2 tax to reduce emissions. Depending on the setup, fiscal revenues may be at risk if the taxes are only replaced by income from auctioning allowances. The scope of the discussion of fiscal
aspects is to analyse the effects of different combinations of taxation
and emissions trading, i.e. possible compensation mechanisms to guarantee fiscal revenues, and draw from best practice of how reasonable
fiscal neutrality can be achieved. There is no separate discussion on
cost-efficiency because the fiscal considerations ultimately determine
which taxes can or cannot be removed. The possible increase in cost
18
Sectoral expansion of the EU ETS
efficiency is thus dependent on the extent to which a sector can be exempted from current carbon taxes.
The environmental aspects go beyond the specific goal of the EU ETS
to regulate emission of greenhouse gases and limit global warming. Including a sector in the trading system may have other dynamic effects on
the environment and may intensify other environmental impacts e.g.
particulate emissions or noise.
The EU legislative framework and future intentions are the basis
for how individual Member States can opt-in, and add, new sectors to
the EU-ETS. The EU requirements and issues for doing so are discussed
in Section 2.1 for each of the four sectors. The Nordic countries all have
different backgrounds and frameworks for regulating the four sectors
within the EU regulatory framework. This implies different types of
barriers depending on the country level. In Section 2.2 the country
specific barriers are discussed. The technical, fiscal and environmental
barriers and possibilities to overcome them are discussed sector by
sector in Section 2.3.
The major part of emissions in the transport sector are from road
transport, which has several specific barriers that need to be overcome
before inclusion can be considered. The possibilities for including road
transport in the ETS are analysed and discussed in in Section 3.
Section 4 summaries and concludes the report.
Sectoral expansion of the EU ETS
19
2. Prospective candidates for
inclusion
This section explores the possibilities for expanding the Nordic coverage
of the EU ETS in the existing regulative framework, which is a combination of EU and national regulation. Subsection 2.1 discusses the EU perspective, specifically the process of expanding the EU ETS, the Effort
Sharing Decision (ESD) and the EU-wide policies targeted at the non-ETS
sectors. Subsection 2.2 discusses the Nordic perspective, specifically the
national circumstances relevant for GHG emissions and their regulation,
and the mix of instruments currently used to regulate the non-ETS sectors. Subsection 2.3 discusses barriers to inclusions of four major sectors
currently outside the EU ETS: transport, heating, agriculture and fisheries, and the waste sector.
2.1
The EU perspective
GHG emissions from activities included in the EU ETS are regulated by
a cap on aggregate emissions, while emissions from activities not included in the EU ETS are regulated by a mix of policy instruments, both
on the EU and the national level. The framework for the reduction efforts in the non-ETS sectors is set by the Efforts Sharing Decision,
which establishes binding GHG targets for Member States for the period 2013–2020. Norway and Iceland have not adapted specific targets
for the non-ETS sectors. However, EU and Iceland have signed an
agreement for the joint fulfilment of the second commitment period of
the Kyoto Protocol (CEC, 2015h).
Table 2: Coverage of the EU ETS per Nordic country in 2013
Country
Denmark
Finland
Iceland
Norway
Sweden
Emissions from
ETS sectors in 2013
in MtCC2e1
Emissions from non ETS
sectors in 2012
(in MtCO2) 2
Reduction target for the
non-ETS sectors based on the ESD
(between 2005 and 2020)
21.6
31.5
1.8
24.7
20.1
30.0
29.5
2.7
28.0
37.5
-20%
-16%
No separate target for the non-ETS sectors
No separate target for the non-ETS sectors
-17%
Note:
The ESD do not apply to the EEA-EFTA countries (i.e. Norway and Iceland). Iceland is expected to adopt a reduction target for non-ETS sectors in an agreement with the EU
Source:
1
2.1.1
2
European Union Transaction Log (EUTL), European Environment Agency (2015b).
Mechanisms for extending the scope of the EU ETS
There are two ways in which the scope of the EU ETS can be extended.
An amendment of the EU ETS Directive extends the scope in all countries
belonging to the EU ETS, while an application of the opt-in clause extends the scope within individual Member States.
Currently, all activities, installations and gases subject to compliance
obligations on a Community wide level are listed in Annex 1 of the EU
ETS Directive and an extension of the sectoral scope is achieved by
amending the Directive through inclusion of new activities in Annex 1.
The MRV rules lay the foundation for the selection of which sectors can
be included (CEC, 2008a, pp. 32–33). In connection with the revision of
the scope of the EU ETS for Phase 3, the Commission stated that the ETS
should cover emissions which can be monitored, reported and verified
with the same level of accuracy as the emissions covered by the Directive already included in the EU ETS (CEC, 2008b, p. 4). When assessing the suitability of a sector to be included into the EU ETS the
Commission assessed the effectiveness, efficiency and consistency of the
different policy options for the sector in question. The screening was
done using the following criteria:
•
•
22
Significance of the emission source (mainly the share of the source in
EU GHG emissions and trend of the sector in the EU i.e. is the sector
in question a fast growing source that risk becoming significant in
the future).
Feasibility to monitor the emissions (i.e. achievable level of
uncertainty, difficultness of data collection and difficultness of
Sectoral expansion of the EU ETS
•
•
•
defining installations boundaries to determine what belongs to
the scope).
Proportionality of transaction costs (e.g. number and size of
emitters, administrative costs under the EU ETS for emitters 3 and
complexity of MRV).
Interaction with existing policies and regulation.
Compliance costs (abatement availability) (CEC, 2008a, pp. 35–36).
The other mechanism for extending the coverage is for individual Member States to unilaterally opt-in specific activities, sectors and gases (per
and on initiative of Member States) under Article 24 of the ETS Directive.
Individual Member States can apply for unilateral inclusion of activities,
installations and gases not listed in Annex I of the ETS Directive and the
inclusion is approved through the comitology procedure. The opt-in
must fulfil similar criteria similar as those used by the Commission for
extension of the coverage of the EU ETS. The Member States have to take
into account relevant impacts of the inclusion of sectors or installations
such as effects on the internal market, potential distortions of competition, the environmental integrity of the Community scheme and the reliability of the planned monitoring and reporting system.
Several Member States have applied opt-in mechanism. Both Finland
and Sweden have a relatively large number of small installations with a
capacity below the minimum threshold of 20 MW and has chosen to optin part some of these installations. Finland chose to opt-in district heat
installations below the threshold to avoid a situation whereby the installation owners favour connecting several small installations to the district instead of large unit, in order to avoid compliance obligations under
the EU ETS. This would potentially have increased the emissions from
electricity and heating utilities (Government of Finland, 2004). In this
case, the opt-in of installations below the threshold of the EU ETS Directive was therefore motivated by country specific circumstances to
avoid distortions in the heating sector.
3 The administrative costs included costs incurred by operators and regulators for the establishment and
operation of the system. They do not include compliance costs, defined as costs incurred when buying and
selling allowances to surrender and fulfill compliance obligations.
Sectoral expansion of the EU ETS
23
2.1.2
The EU Effort Sharing Decision
The ESD establishes binding emission reduction targets for EU Member
States for activities not covered by the EU ETS. The targets are defined
as a percentage changes between 2005 and 2020. Cumulatively over
Member States, these national targets amount to a reduction of 10%.
Combined with the 21% reduction target for the EU ETS, the overall EU
emission reduction target adds to 14%, relative to 2005, which is equivalent to a reduction of 20%, relative to 1990 (EC, 2009).
The responsibility for introducing policies to reduce emissions from
the non-ETS sectors lies with the Member States (EC, 2009). However,
for most non-ETS sectors, there are EU-wide policies that Member States
are required to implement. A selection of EU-wide policies is presented
in Table 3.
Table 3: EU wide policies per non-ETS sector
EU wide policies per non-ETS sector
Cross-sectoral
The Energy Tax Directive Energy Tax Directive 2003/96/EC sets minimum for all energy products, including coal and coke, natural gas and electricity.
Transport
CO2 targets for new vehicles.
A legal framework to reduce CO2 emissions from new light-duty vehicles.
Fuel Quality Directive requires a 6% reduction in the greenhouse gas intensity of transport
fuels by 2020, relative to the EU-average of life cycle greenhouse gas emissions per unit of
energy from fossils fuels in 2010.
EU Member States are required to ensure that relevant information is provided to consumers, including a label showing a car's fuel efficiency and CO2 emissions, 10% share of renewable energy in the transport sector by 2020.
Heating
The Energy Efficiency Directive obligates energy distributors or retail energy sales companies
to achieve 1.5% energy savings per year through the implementation of energy efficiency
measures.
Under the Energy Performance Building Directive Member States are required to put together plans to increase the number of nearly zero-energy buildings.
Ecodesign Directive require manufacturers to decrease the energy consumption of their
products by establishing minimum energy efficiency standard.
Energy Label Directive help consumers choose energy efficient product.
The Renewable Energy Directive, which sets renewables targets for 2020 across the EU, is
also reducing the emissions in heating sector.
Agriculture
and fisheries
There are not so many EU wide policies in agriculture sector, which are specifically aimed to
reduce the greenhouse gas emissions. However, there are multiple policies that results at
climate mitigation actions, even the main purpose of the regulations actions is to deal with
concerns on other environmental issues. For example Nitrates Directive reduces both nitrogen input and emissions of GHGs.
Waste
There are also multiple policy measures that are cutting the greenhouse gas emissions in the
waste sector, even that the main purpose of the legislation is to deal with other environmental issues, e.g. Landfill Directive, which the Member States must fully implement by the end
of 2016, Directive on waste (Directive 2006/12/EC), Waste Management Framework Directive (2008/98/EC), Packaging and packaging waste Directive (2005/20/EC).
Source: AEA (2012), European Commission Taxation and Customs Union (2015), CEC (2015b, 2015c,
2015d, 2015e, 2015f, 2015g).
24
Sectoral expansion of the EU ETS
2.2
The Nordic perspective
The Nordic countries are to a large extent a homogenous group of countries, but they differ in some aspects due to geographical location, access
to and composition of natural resources. In addition, Nordic countries
differ in how they have set up their regulatory framework for mitigating
emissions. In this section, the country specific barriers for inclusion are
assessed, the environmental instruments used and the differences in environmental policies.
2.2.1
Denmark
In comparison to Sweden and Norway, Denmark has insignificant access
to hydro power. Until the 1980s Denmark’s energy supply was almost
entirely dependent on imports. Since 1997 Denmark has been selfsufficient with respect to energy supply due to extraction of oil and gas
in the North Sea production (Danish Ministry of Climate, Energy and
Building, 2013).
As in the other Nordic countries, except Iceland, the majority of GHG
emissions from the Danish economy originate from the combustion of
fossil fuels, which is responsible for approximately 76% of total emissions, excluding emissions from land use, land-use change and forestry
(LULUCF) from the total emissions. Denmark is an integral part of the
Nordic electricity market, with hydro power in Norway and Sweden as a
backbone. As a result, there is significant inter-annual variation in Denmark’s GHG emissions, with increased emissions in years with low precipitation in Norway and Sweden and vice versa (Danish Ministry of
Climate, Energy and Building, 2013).
The second largest source of emissions is agriculture, responsible for
19% of total emissions, mainly in the form of emissions of methane and
nitrous oxides. Denmark is relatively small and densely populated with a
large share of the population living in cities (Danish Ministry of Climate,
Energy and Building, 2013). Despite this, transport is responsible for
24% of total emissions, which is more than the 20% EU average. The
waste sector is responsible for 2% of total GHG emissions, which is expected to decrease as a result of the obligation to incinerate combustible
waste (Danish Ministry of Climate, Energy and Building, 2013).
Less than half, 42%, of total GHG emissions are included in the EU ETS.
Denmark’s target under the ESD is to reduce emissions in the non-ETS
sectors by 20% relative to the 2005 levels. The mix of non-economic and
economic instruments used to achieve this target is reported in Table 4.
Sectoral expansion of the EU ETS
25
Table 4: Main policy instruments in Denmark for reducing GHG emissions in the non-ETS sectors
Sector
Economic instruments
Non-economic instruments
Cross-sectoral
Energy tax on fuels and electricity,
including road transport fuels.
CO2 tax (on top of the energy tax).
Energy Efficiency Action Plan (as require by
the EU).
Campaigns targeted at increasing public
awareness about energy efficiency.
Transport
Motor vehicle registration tax.
Motor vehicle weight tax.
Duty on motor vehicle
compulsory insurance.
Labelling of passenger cars based on energy
consumption CO2 emissions.
Provision of better public transport (by
strengthening the railway system).
Heating
Feed-in-tariffs for onshore and
offshore wind power.
Heat Supply Act (a ban on electric heating in
buildings that are located within a district
heating or natural gas supply network).
Implementation of the EU Energy Performance of Buildings Directive (EPBD) which
contains a range of requirements (labelling,
certification, etc.).
Agriculture and fisheries
Action Plan for Joint Biogas Plants and subsequent follow-up programmes.
Measures that primarily target other environmental effects, e.g. reduction of nitrogen
run-off, but reduce GHG as a co-benefit.
Waste
Municipal obligation to assign combustible
waste to incineration, in force since 1997.
Source: Bragadóttir et al. (2014), Landis et al. (2012) and Danish Ministry of Climate, Energy and
Building (2013).
The most significant economic instruments are the energy tax introduced in 1977 and the CO2 tax introduced in 1992. Initially, the energy
tax was levied only on oil products but as of 1982 it has been levied also
on coal and as of 1996 on natural gas. The CO2 tax was levied in 1992 on
top of the existing energy taxes. Sectors included in the EU ETS are exempt from paying the CO2 tax. The tax base of both instruments is the
amount of fuel, in terms of weight, volume or energy content (Bragadóttir et al., 2014).
In the agriculture and fisheries and waste sector the policy objectives are driven by other environmental concerns than those related to
global warming. These objectives include reducing the nitrogen and
phosphorous losses from agriculture, and thus eutrophication and oxygen deficits in the coastal waters, and reducing the amount of waste
trough recycling, and thus negative environmental effects of landfills.
Denmark has not applied the opt-in provision, and has not like Finland and Sweden opted-in small installations within a single district
heating network. 80% of the district heat is co-produced with electricity,
26
Sectoral expansion of the EU ETS
making the Danish heat and electricity system the most extensive cogenerated one in the EU (Landis et al., 2012).
One challenge for Denmark for opting-in other sectors, especially the
transport sector, is the cross sectoral energy and CO2 tax. Not only is the
CO2 tax levied on top of the energy tax, but the energy and the CO2 tax
are based on the amount of fuel (in volume, weight or energy content)
and not on CO2 content. The political ambitions of this set up may be
hard to uphold, with targeted tax rates on different energy sources setting the relative price between different energy sources. Including a sector into the EU ETS with a goal of keeping the relative tax rates between
energy sources constant and guaranteeing the size of environmental tax
revenues would be a difficult task.
2.2.2
Finland
The ESD sets a 16% reduction target for Finland between 2005 and
2020. According to the baseline scenario of the National Energy and Climate Strategy, Finland will largely meet the target, set by the EU for
2020. However, achieving EU's low-carbon objective for 2050 requires a
switch to a more ambitious development path from the baseline scenario (Government of Finland, 2013).
National circumstances; cold climate, long distances and energyintensive industries, all contribute to the high emissions volumes of the
energy sector. The energy sector’s share (including transport) of the total greenhouse gas emissions has been around 80% in recent years.
However, the CO2 emissions per total primary energy unit are lower
than in many other European countries due to the high share of nonfossil energy sources in power and heat generation (Finnish Ministry of
the Environment and Statistics Finland, 2013). The transport sector
amounted to 20.8% of total greenhouse gas emissions in 2012, of which
road transport was 88.6%. The total number of freight tonne-kilometres
in Finland is almost double the EU average. The biggest source of CO2
emissions from households and the public and service sectors is indoor
heating. A significant share of indoor heating in Finland relies on district
heating, which is already included in the EU ETS. Emissions from the agricultural sector corresponded to 9.3% and emissions from waste sector
to 3.3% of the total greenhouse gas emissions in 2012 (Finnish Ministry
of the Environment and Statistics Finland, 2013).
The general objective of Finland’s energy policy is to ensure energy
security at competitive prices with the lowest possible environmental
impacts. The domestic measures to cut greenhouse gases in the non-
Sectoral expansion of the EU ETS
27
ETS sectors focus mainly on transport and heating and the policy tools
vary from economic instruments such as investment grants, taxation,
feed-in-tariffs to non-economic instruments such as energy efficiency
measures and quota obligations. In the waste and agriculture sectors
the policy instruments are driven by environmental concerns other
than global warming.
Table 5: Main policy instruments in Finland for reducing GHG emissions in the non-ETS sectors
Sector
Economic instruments
Non-economic instruments
Cross-sectoral
Excise taxes based on energy content
and CO2 emissions of the fuel.
Transport
Motor vehicles in Finland are charged
with both a one-time registration tax
and an annual tax based on CO2
emissions.
Finland has nationally increased its quota to 20% of
energy used in the transport sector to be from
renewable sources by 2020.
The energy efficiency agreements with operators
both of goods and public transport.
Providing information to consumers about the CO2
emissions of passenger cars.
Training in eco-driving has been provided to bus
and coach drivers.
Heating
Grants for investments in RES production facilities and research projects
related to it.
Grants for different research purposes and promote different energy
efficiency measures.
Feed-in tariffs for renewable energy
production.
The energy grants for residential
buildings cover up to 15–25% of the
costs of energy audits, energy consumption reducing repairs etc.
Interest subsidy system promoting
loans for renovations that improve
energy efficiency.
Energy efficiency agreements: a voluntary scheme
for industry and municipalities.
The Energy Audit Programme to analyse the energy
use of the facility being audited.
Building codes and regulations for new and existing
buildings.
Information provision and the campaigns to influence the behaviour of building users and owners.
Agriculture and
fisheries
Agri-environment payment program:
the long-term cultivation of grass on
organic soils.
The support for rural development to increase the
proportion of grass crops on organic soils is also
reducing the GHG-emissions.
Waste
The purpose of the Waste Tax Act is
to collect tax from those waste fractions that could be technically and
environmentally recovered but are
currently being disposed in landfill
sites.
Restrictions on the landfilling of biodegradable
municipal waste.
Legislation, which contributes to greenhouse gas
reductions as well are largely based on the EU’s
Landfill Directive, the Waste Directive and most
recently, the Waste Framework Directive Restrictions on the landfilling of biodegradable municipal waste.
Source: Finnish Ministry of the Environment and Statistics Finland. (2013), Government of Finland
(2013b), European Environment Agency. (2015a).
28
Sectoral expansion of the EU ETS
One of the major barriers for inclusion of the non-ETS sectors in the ETS
in Finland is the fiscal revenues generated by environment taxes, which
account for 6.5% of the tax revenue. The concern is of special importance
in the transport sector, which covers over 79% of the entire environmental tax revenues. The taxation of transport fuels (motor gasoline and diesel
oil) accounted altogether for EUR 2.3 billion in terms of revenues in 2013
and other vehicle related taxes for EUR 1.8 billion. Another important environmental based tax revenue source is the other energy products with
total tax revenue of EUR 1.6 billion. Part of that revenue comes from the
excise duties on heating fuels (Statistics Finland, 2013b).
Many of the activities in the non-ETS sector generate also have environmental effect not related to global warming, which unlike the global
CO2 emissions have local and regional scope. For example, the transport
sector accounted for nearly half of the nitrogen oxide emissions and onefourth of the carbon dioxide emissions in 2011. Another example is the
agriculture sector, wherein livestock farming accounts for about 40% of
the total methane emissions. In addition to greenhouse gas emissions,
the nitrogen and phosphorus emissions from the agriculture sector
cause eutrophication (Statistics Finland, 2013a). Possible changes in
current policy instruments and measures may increase local environmental damages.
2.2.3
Iceland
The abundance of renewable energy and the isolation of the Icelandic
energy network make the GHG emissions profile in Iceland unusual
compared to the other Nordic countries. Around 76% of the country’s
total energy consumption is based on renewable resources and nearly
all space heating utilizes geothermal hot water (Icelandic Ministry for
the Environment and Natural Resources, 2014a, p. 71). Domestic electricity production relies solely on renewable sources; 73% are generated
with hydroelectric power and 27% with geothermal energy (Icelandic
Ministry for the Environment and Natural Resources, 2014a, pp. 47). Unlike most countries, there is thus little need for mitigation efforts in the
heating and energy sector and, as a consequence, governmental actions
have almost entirely focused on other sectors (Icelandic Ministry for the
Environment and Natural Resources, 2010).
The largest share of GHG emission in Iceland comes from industrial
processes, accounting for approximately 42% of the total emissions (Environment Agency of Iceland, 2014, p. 30). All energy generated in Iceland is used domestically, and a substantial part of it, about 75%, is con-
Sectoral expansion of the EU ETS
29
sumed by a small number of heavy-industry installations (Environment
Agency of Iceland, 2014, p. 47). These installations, three large aluminium smelters and one ferrosilicon plant were included in the EU ETS in
2013 (Icelandic Ministry for the Environment and Natural Resources,
2014a, p. 69).
The remainder, i.e. emissions that fall outside the scope of the EU
ETS, are expected to be covered by an agreement between the EU and
Iceland on joint fulfilment in the second commitment period of the Kyoto Protocol (CEC, 2015g). Iceland is not bound by EU’s ESD but has instead agreed to an emission target for sectors outside the scope of the
EU ETS, based on criteria comparable to those that were used to calculate national targets under the ESD (Icelandic Ministry for the Environment and Natural Resources, 2014b).
In 2007 the Icelandic government defined a long-term aspirational
goal of reducing net emissions of greenhouse gases by 50–75% by 2050
compared to 1990 levels (Icelandic Ministry for the Environment and
Natural Resources, 2007). In order to reach that goal, as well as to keep
emission within the target defined by international obligations, the government adopted a Climate Change Action Plan in 2010. The Action Plan,
which is reviewed annually by a special committee, focuses on ten key
actions to reduce emissions from major sources. These actions include
carbon tax, changes in the tax system to encourage the use of low-carbon
fuels and cars that use such fuels, environmental procurement procedures, measures to strengthen public transportation, promotion of use
of biofuels in fisheries, electrification of fishmeal factories, increased afforestation and re-vegetation and restoration of drained wetlands (Icelandic Ministry for the Environment and Natural Resources, 2010).
As Icelandic heavy industry is now subject to the centralized control of the EU ETS, the main focus in terms of regulatory activities to
curb emissions has been on the second largest contributor, transportation, which accounts for about 19% of the total emissions (Environment Agency of Iceland, 2014). Economic incentives have increasingly
been adopted in recent years to promote the use of renewable energy
in transportation, such as excise duties and taxes based on CO2 emission and tax exemptions and reductions for climate-friendly vehicles
and fuels. In addition, legislation from 2013 requires at least 5% of
fuels for road transport to be of renewable origin from 1st January
2015 (Althingi, 2013).
Examples of instruments to control emissions outside the scope of
EU ETS are given in Table 6.
30
Sectoral expansion of the EU ETS
Table 6: Main policy instruments in Iceland for reducing GHG emissions outside the EU ETS
Sector
Economic instruments
Non-economic instruments
Cross-sectoral
Carbon tax.
Periodical revision of the government’s action plan.
Environmental assessment of public plans and
programs.
Legislation to control the use of fluorinated GHGs.
Transport
Excise duty on vehicles based on
CO2 emissions.
Car tax based on CO2 emissions.
Lowered excise duty and car tax
on methane vehicles.
No VAT on zero-emission vehicles
(with a cap).
Non-fossil fuels exempt from a
levy on fuels.
Requirement of 5.0% biofuels of fuel consumption
in road transport.
Official procurement of low-carbon and fuel efficient vehicles.
Increased share of public transport, walking and
bicycling.
Heating
Energy tax.
Agriculture and
fisheries
Measures to increase the use of electricity in the
fishmeal industry.
Research grants on energy-shift in shipping.
Waste
National plan for waste management.
Measures to reduce organic waste destined for
landfills.
Measures to collect and use landfill gases.
Source: Icelandic Ministry for the Environment and Natural Resources (2014a).
The possibility of opting-in new sectors in the EU ETS has not been publicly addressed by the Icelandic government. In addition to the more typical technical and fiscal barriers the main foreseeable problems of opting-in new sectors in Iceland are the limited resources of government
agencies and the small scope of the economy, which can lead to high
administrative costs per each participant in the system. Another important factor is that annual reports of the special committee which annually reviews the Climate Change Action Plan show that Iceland is well
on track to meet its current emission targets. Opting-in new sectors in
the EU ETS is thus unlikely to gain political support in the near future.
2.2.4
Norway
Norway’s climate and economy is to a large degree influenced by its position by the Atlantic Ocean, with a relatively warmer climate than the
latitude would otherwise dictate, and an abundant access to natural resources such as hydro-power, fish and off-shore oil. Harvesting these
resources has clear impacts on the Norwegian energy mix, exports, and
Sectoral expansion of the EU ETS
31
the environmental impact in the form of emissions, as well as on the use
of GHG emission reducing instruments.
The access to oil in the North Sea has led to a rapid increase of emissions in the petroleum sector, and the petroleum activities is the largest
source of emissions in Norway and responsible for almost one third of
the total GHG emissions. On the other hand, nearly all electricity production is from hydro-power. A large proportion of the generated electricity
is used for heating of buildings and water. The electricity intensive industries, consisting among others of metal, chemical and fertiliser producers, consume large amounts of electricity, part of which is used for
heating. The decentralised nature of Norway’s population centres and
long travel distances, in combination with large exports of goods and
extraction of natural resources, makes transport the second largest
emitting sector, with approximately 28% of total GHG emissions (Norwegian Ministry of Climate and Environment, 2014).
To reach the ambitious goal in 2020 of cutting emissions of GHG to
30% of the level in 1990, Norway relies heavily on two general instruments: the EU ETS and the CO2-tax. Almost 50% of emissions are covered by emissions trading as of 2013 when the system was extended to
cover new sectors and gases. In total more than 80% of Norway’s emissions are covered by emission allowances, a CO2 tax, or both (Norwegian
Ministry of Climate and Environment, 2014).
The carbon tax is an important measure to cost effectively reduce
emissions in Norway and is differentiated based on energy products and
usage. About 60% of all GHG emissions are subject to the tax and some
sectors, such as the petroleum sector, are covered by both the EU ETS
and the CO2 tax. In total the CO2 tax on mineral products and on petroleum activities represents about 10% of the total environmental fiscal
revenues in 2012, but only 0.5% of total fiscal revenues (Norwegian
Ministry of Climate and Environment, 2014).
In addition to the CO2 tax, emissions are regulated by the Pollution
Control Act. The Pollution Control Act is a general pollution prohibition
except for actors granted a permission to pollute. The Act also applies to
GHG emissions.
32
Sectoral expansion of the EU ETS
Table 7: Main policy instruments in Norway for reducing GHG emissions in non-ETS sectors
Sector
Economic instruments
Non-economic instruments
Cross-sectoral
Differentiated CO2 tax.
Tax and recycling schemes on HFCs.
Regulation by the pollution control act.
Transport
CO2-dependent registration tax for new
passenger cars.
Tax exemptions for electric and hybrid
cars and EU emission standards for
passenger cars.
Road usage tax on auto diesel and on
petrol.
Motor vehicle registration tax.
Annual tax on motor vehicles.
Annual weight-based tax on motor
vehicles.
Subsidised public transport.
Requirement of 3.5% bio fuels of fuel consumption in road transport.
Heating
Basic tax on mineral oil.
Electricity consumption tax.
Electricity certificates system.
Agriculture and
fisheries
Regional agri-environmental
programme.
Strategy for biogas.
Regional agri-environmental programme.
Waste
Basic tax on disposable packaging.
Product tax on beverage containers.
Tax on the final treatment of waste.
Requirement to collect landfill gas.
Prohibition of depositing waste.
Agreement with industry to minimise
waste.
Measures to increase waste recycling.
Source: Bragadóttir et al. (2014), Norwegian Ministry of Climate and Environment (2014).
To reduce emissions further the Norwegian government also applies
sector specific instruments, shown in Table 7. Economic measures in the
transport sector are prevalent, such as the motor vehicle registration
tax, which generates close to 30% of the tax revenue from environmental taxes. Other taxes that apply to the road transport sector are an annual tax on motor vehicles and a road usage tax on diesel.
Norway has a substantial number of economic instruments in place
in the transport sector, which generate more than 3% of total fiscal
revenue. Removing these taxes altogether by opting-in the transport
sector into the EU ETS constitutes a significant fiscal challenge. Even if
some of the taxes are kept, but with a lower rate, the many different
taxes with different tax bases may complicate matters and skew the
incentives away from promoting the politically set targets in the road
transport sector.
Sectoral expansion of the EU ETS
33
2.2.5
Sweden
The Swedish industry is characterized by an abundance of natural resources such as forests and iron ore. The processing of raw materials in
the forest, iron and steel industries demands access to a continuous and
high supply of energy. It follows that the processing and the energy use
in Swedish industry represents a large share of Sweden’s GHG emissions. Sweden’s geographical location and size also has an impact, and
transport of exported final goods as well as personal road transport
adds a significant share to total emissions.
Sweden’s energy supply is based on domestic biofuels and hydropower, complemented with imports of uranium, oil, natural gas, coal and
biofuels. The actual energy mix is dependent on winter weather conditions as well as the economic situation. As an example, district heating
accounts for more than 90% of the energy use for heating in multidwelling buildings. District heating is mainly based on biofuels, complemented by fossil fuels during winters, making district heating a major GHG
emitter, especially during cold winters (Swedish Ministry of the Environment, 2014).
Industrial processes in Sweden are almost entirely covered by the
EU ETS; approximately 80% of emissions within the trading system originate from industrial plants. The rest originates from power and district
heating installations. In 2013, the EU ETS covered around 36% of Sweden’s total GHG emissions. The remainder, based on activities falling
outside the scope of EU ETS, originates from the transport sector (approximately 50% of total CO2e emissions outside EU ETS), the agricultural sector (approx. 20%), and mobile machinery (approx. 10%). 4
To reduce emissions in sectors outside the EU ETS, Sweden has
adopted a more ambitious target than its commitment under the ESD,
calling for a 40% reduction in emissions by 2020 compared with 1990.
Other priorities are a fossil fuels independent vehicle fleet by 2030,
and a vision of no net emissions of GHG by 2050. To reach the targets
and reduce emissions Sweden relies on a taxation system, with a mix of
taxes, on e.g. energy, CO2, nuclear power and consumption of electricity, and a range of supplementary economic and non-economic instruments. Two of the main economic instruments are the energy tax and
the carbon tax.
4
Calculations based on Swedish Ministry of the Environment (2014).
34
Sectoral expansion of the EU ETS
The energy tax consists of a tax on fossil fuels and a tax on electricity
consumption. The tax levied on fossil fuels is differentiated by dividing
products into environmental classes, and by taking account of the use of
the fuel. The energy tax is an important source of fiscal revenues for the
Swedish Government, but is increasingly also used to reduce energy
consumption and increase energy efficiency. The fiscal revenues based
on the energy tax amounted to SEK 41 billion (EUR 4.7 billion) in 2013,
or just above 5% of total central government tax income (Swedish National Financial Management Authority, 2014).
The carbon tax is levied on energy use, and is basically set as a price
on emissions from fossil fuels, with some sectoral and fuel exemptions,
e.g. agriculture and forestry or peat. The objective is to achieve costeffective reductions of CO2 emissions. Industries within the EU ETS do
not pay any CO2 tax. The tax collected amounted to SEK 24 billion
(EUR 2.8 billion) in 2013, or just above 3% of total central government
income. Combined, the energy and carbon taxes represents a share of
more than 8% of total fiscal revenues in 2013, which shows their importance as source of income government.
There are a number of cross-sectoral instruments in use to supplement the energy and carbon taxes. Research and development is one major economic cross-sectional instrument aimed at improving the conditions for reduced emissions in the long term. Climate and energy advice
is used as an informational instrument to disseminate facts about climate issues, the problems and solutions, and on sharing Swedish experience internationally. The Planning and Building Act and the Environmental Code are the legal instruments in place with the purpose of promoting an ecological sustainable development of the society. Table 8
summarises the main policy instruments used in Sweden to reduce GHG
emissions outside the EU ETS.
Sectoral expansion of the EU ETS
35
Table 8: Main policy instruments in Sweden for reducing GHG emissions outside the EU ETS
Sector
Economic instruments
Non-economic instruments
Cross-sectoral
CO2 tax.
Energy tax.
Research and development.
Climate and energy advice.
Planning and building act.
Environmental code.
Transport
Support for research and demonstration.
CO2 based motor vehicle tax.
Incentives for green vehicles.
Increased energy tax on diesel.
Targeted instruments to promote introduction of renewable transport fuels.
Congestion taxes.
Subsidised public transport.
Emission standards for new vehicles.
Heating
Electricity certificates system.
Special support for wind power.
Central government support for installation
of solar cells.
Agriculture and
fisheries
Support for biogas.
Targeted agri-environment payments
under Rural Development Programme.
Sustainable cities support.
Ecolabelling.
Waste
Landfill tax.
Rules on municipal waste planning and
on producer responsibility for certain
products.
Ban on disposal of burnable and organic
waste.
Source: Bragadóttir et al. (2014), Swedish Ministry of the Environment (2014).
The possibilities of significantly increasing the coverage of the EU ETS in
Sweden by opting-in new sectors depends on very much on the
transport and the agricultural sectors, which represent approximately
70% of GHG emissions outside the EU ETS.
Opting-in the transport sector would require an overall review of all
economic instruments, both cross-sectional and sector specific, in order
to understand and assess the fiscal impact of a new regulatory set up for
taxing the sector. Not adjusting the taxes as a result of inclusion will put
cost-efficiency at risk. Removing both the tax on carbon and energy for
the sake of inclusion will on the other hand seriously threaten the fiscal
budget balance. The risk of not finding a way to neutralise the fiscal effects of opting-in transportation, combined with the complexities of the
many other economic instruments used in the transport sector, constitutes a major barrier that needs to be addressed. This also holds true for
the other sectors, but only to a lesser extent, where the cross sectional
energy tax and carbon tax may complicate how the sectors may be included in the EU ETS.
36
Sectoral expansion of the EU ETS
2.3
The sectoral perspective
This subsection discusses barriers for inclusion of the main non-ETS sectors in the Nordic context.
2.3.1
Emissions and fiscal revenues
When assessing suitability for inclusion of sectors into the EU ETS the
Commission has used the significance of the source as one of the screening criteria. The EU ETS covers around 44% of total emissions in the
Nordic countries, as shown in Table 9. In Sweden 35% of emissions are
covered by the EU ETS, compared with 52% in Finland.
In total, environmental taxes collected in the Nordic countries
amounted to approximately EUR 35 billion in 2012, many of which are
targeted at the road transport (Bragadóttir et al., 2014). Besides the
sector specific instruments there are significant cross sectoral instruments such as carbon and energy taxes. The revenues from the cross
sectoral taxes are difficult to subdivide per sector. However, a large
share of the revenue from the cross sectoral taxes can be attributed to
the transport sector.
Table 9: CO2e emissions outside the EU ETS per sector 2012/2013 in MtCO2e
Country
Denmark
Finland (2012)2
Iceland
Norway
Sweden1 (2012)
Nordic countries
Note:
Transport
Heating
Agriculture
& fisheries
Waste
Other
sectors
Non-EU ETS
emissions
Total
emissions
excl.
LULUCF
12.2
12.7
0.9
15.2
19.1
60.0
3.1
2.7
0.0
1.2
1.6
8.6
9.6
5.7
0.7
4.5
7.6
28.1
1.1
2.1
0.2
1.2
1.6
6.1
4.0
6.3
1.0
6.0
7.5
24.8
30.0
29.5
2.7
28.0
37.5
127.7
51.6
61.0
4.5
52.7
57.6
227.4
Here the emissions from heating are equal to the sum of IPCC categories “1.A.4.A. Commercial/Institutional” and “1.A.4.B. Residential” and, thus, excludes among others, emissions attributable to district heating (not part of the EU ETS) and the use of heating fuels in
agriculture. Actual emissions from heating are thus larger that presented here. Complete
data is available only for Finland and Sweden. However, for comparability, only the sum of
the IPCC categories 1.A.4.A. and 1.A.4.B. are presented here.
Source: European Environment Agency (2015b).
Sectoral expansion of the EU ETS
37
Transport sector
Of the sectors currently not included in the EU ETS, transport is the
largest. It stands for approximately 26% of total emissions in the Nordic countries. 5 The share is higher than the EU average of 20% (see
Table 10). Within the transport sector, road transport is by far the
largest contributor with a share of 85%. Emissions from rail transport
and domestic sea transport are insignificant, with the exception of
higher levels in the Norwegian domestic sea transport due to offshore
oil and gas extraction industry (Norwegian Environment Agency.,
2014).
Table 10: Transport sector emissions in 2012 in MtCO2
Nordic
country
Civil aviation
(incl. in the
EU ETS)
Road transportation
Railways
Navigation
Other transportation
Sum (relative to
total emissions
excl. LULUCF)
0.1
0.2
0.0
1.2
0.5
2.1
11.4
11.2
0.8
10.1
17.9
51.4
0.3
0.1
0.0
0.0
0.1
0.5
0.5
0.5
0.0
2.0
0.3
3.3
0.0
0.6
0.0
1.8
0.3
2.7
12.2 (23.7%)
12.7 (20.8%)
0.9 (19.1%)
15.2 (28.8%)
19.1 (33.2%)
60.1 (26.4%)
Denmark
Finland
Iceland
Norway
Sweden
Nordic
countries
Note:
In EU-28, 19.6% of total emissions are attributable to transport. Fuels consumed for international transportation are reported separately and excluded from national total (UNFCCC,
1998).
Source: European Environment Agency (2015b).
In addition to being a very significant source of emissions, the transport
sector is a very significant source of tax revenue. On the Nordic level,
EUR 17 billion was collected in environmental taxes in 2012 by sector
specific fees and taxes such as motor vehicle registration taxes, different
kinds of vehicle taxes and road usage fees (OECD, 2014). This type of
taxes and excises on petrol and diesel are on top of the list of every Nordic country in the ranking of most revenue generating taxes motivated
by environmental concerns (OECD, 2014). This excludes some of the
more significant cross sectoral tax instruments used in the Nordic countries such as the carbon tax and the energy tax especially levied on fossil
fuels like petrol and diesel in the road transport sector.
5
Excluding LULUCF.
38
Sectoral expansion of the EU ETS
Heating sector
Emissions from heating not included in the EU ETS represents 4% of
total emissions in the Nordic countries. The emissions from Finland
and Sweden not covered by the ETS would be larger if Finland and
Sweden had not opted-in small combustion installations connected to a
district heating network. There is no data publicly available that states
how large the sector specific environmental tax revenues are from the
heating sector.
Agriculture and fisheries sector
The emissions from agriculture represent 12% of total emissions in the
Nordic countries, as shown in Table 11. A large share of these, 54%,
originates from the breakdown of organic materials in agricultural
soils, 33% from the digestive processes of livestock and the remaining
12% from methane and nitrous oxide emissions from manure. Denmark is the largest agricultural emitter despite the countries limited
size. In total the sector specific environmental taxes amounted to approximately EUR 150 million in 2012.
Table 11: Emissions from agriculture in 2012 in MtCO2e
Nordic country
Enteric
fermentation
Manure
management
Agricultural soils
Sum (relative to
total emissions)1
2.9
1.5
0.2
2.0
2.5
9.3
1.7
0.7
0.1
0.3
0.8
3.5
5.0
3.5
0.4
2.1
4.3
15.3
9.6 (18.6%)
5.7 (9.4%)
0.7 (15.2%)
4.5 (8.5%)
7.6 (13.3%)
28.1 (12.4%)
Denmark
Finland
Iceland
Norway
Sweden
Nordic countries
Note:
Excluding LULUCF.
Source: European Environment Agency (2015b).
Waste sector
The GHG emissions from the waste sector represent 3% of total emissions in 2012. Most part of the emissions originates from solid waste
disposal, as shown in Table 12. Emissions from solid waste disposal has
seen, and is still experiencing, a significant reduction due to non-GHG
related measures such as the EU Landfill Directive, national waste management plans and landfill taxes. Since 2000, the emissions have decreased with 40% (European Environment Agency, 2015b). The efficiency of the instruments already in place can be expected to drive down
emissions in the sector in the future and thus reducing the need for including the sector in the EU ETS.
Sectoral expansion of the EU ETS
39
The waste sector specific environmental taxes amounted to almost
EUR 2 billion in 2012 for the Nordic countries in total (OECD, 2014).
Table 12: Emissions from waste sector in 2012 in MtCO2e
Nordic country
Solid waste
disposal
on land
Wastewater
handling
Waste
incineration
Other
Sum (% relative to total
emissions)1
0.7
1.7
0.2
1.0
1.1
4.7
0.1
0.2
0.0
0.2
0.5
1.0
0.0
0.0
0.0
0.0
0.1
0.1
0.2
0.1
0.0
0.0
0.0
0.4
1.1 (2.1%)
2.1 (3.4%)
0.2 (4.1%)
1.2 (2.3%)
1.6 (2.8%)
6.1 (2.7%)
Denmark
Finland
Iceland
Norway
Sweden
Nordic countries
Note:
Excluding LULUCF.
Source: European Environment Agency (2015b).
2.3.2
Consistency with existing policies and regulation
When extending the EU ETS the Commission has previously used the
consistency of the existing instruments with the EU ETS to conclude
whether a sector is appropriate for inclusion or not. Existing instruments may distort the prices set by the EU ETS and, as a consequence,
reduce its efficiency.
Transport
Emissions from road transport are regulated with a wide spectrum of
policy instruments both on the EU level and the national level. The current policy instruments are both economic (such as CO2 taxes) and noneconomic (such as CO2 standards for new vehicles). Many of these are
set by the EU, like the fuel efficiency standards for new cars. The Commission has previously concluded that the consistency between these
instruments and the EU ETS require a thorough analysis before a possible extension of the EU ETS to the road transport (CEC, 2008a, pp. 53–
55). However, it was not concluded that the existing policies would entirely prevent the inclusion of the road transport into the scheme. The
interaction and consistency between the EU ETS of the existing policies
and regulatory measures governing the road transport will be further
discussed in Section 3.
Heating
Like transport fuels, heating fuels are subject to taxation in all Nordic
countries and other policies that reduce the fuel demand, e.g. energy efficiency standards for new buildings. Unlike transport, part of the heat-
40
Sectoral expansion of the EU ETS
ing sectors is already included in the EU ETS. Large stationary combustion installations with a capacity over 20 MW are included and some of
the smaller installations through an application of the opt-in procedure.
Thus, for heating, extending the EU ETS is a question of lowering the capacity threshold for inclusion. The cost efficiency of decreasing the
threshold has so far been the reason why small installations are excluded on an EU wide level from the EU ETS (CEC, 2008a, p. 23).
It is claimed that relying on CO2 pricing alone will not reduce emission from heating, because of mismatches of incentives and benefits between those that construct buildings, those that own them and those
that occupy them. There is empirical evidence that these mismatches
can be overcome with energy efficiency measures (Institution for European Environmental Policy, 2013).
Agriculture
As discussed above, the emissions from agriculture are subject to a
range of non-ETS regulations and policies. In addition, emissions from
the agriculture sector are included in the ESD, under which an emission
reduction target for the period 2013–2020 is posed for the non-ETS sectors (EC, 2009). Production and transportation activities in the sector
are subject to taxes and subsidies on e.g. energy, CO2 emissions or vehicle taxes. Many of the regulations concerning agriculture aim primary at
reducing other pollutants (e.g. nitrogen and phosphorus run-offs) but as
a side effect the policies also reduce GHG emissions. Thus the consistency between the EU ETS and these other policies should be further assessed. As soon as technical conditions allow, the Union aims to start
preparing policy for inclusion of the Land Use and Land Use Change and
Forestry (LULUCF) sector into the 2030 policy framework. There are
different policy options for inclusion of the LULUCF-sector, such as inclusion of the sector into the ESD or merging LULUCF and non-CO2 emissions from agriculture into one new and independent pillar in the EU’s
climate policy. The aim is to have the sector included by 2020 in the policy framework (EC, 2014a).
Waste
The waste sector is also subject to a range of economic and noneconomic GHG reducing instruments both under the EU and national
legislation. In 2008, the Commission assessed the suitability of inclusion
of the waste incineration sector. Waste incineration is subject to the regulatory framework under the Waste Incineration Directive and the Integrated Pollution Prevention Control (EC, 2008a). The conclusion was
that waste incineration generates other pollutants, both airborne other
Sectoral expansion of the EU ETS
41
than GHG as well as waterborne, from the treatment of waste gases, and
that there is a need to control these other pollutants by other measures
than the EU ETS. Accordingly, the waste incineration sector was left out
from the third trading period of the EU ETS (CEC, 2008a, p. 36). Coincineration of waste, is however, included in the EU ETS (EC, 2003) but
differences in the interpretation what constitutes co-incineration between Member States has effectively led to differences in the coverage of
the EU ETS between Member States. In Sweden all waste incineration
plants whose main purpose is to generate energy are classified as coincineration plants whereas in Finland a more narrow interpretation of
co-incineration is applied (Pöyry, 2012).
2.3.3
Risk of increasing emissions of co-pollutants
Increase of emission of GHG from non-ETS sectors as a result of inclusion is not a concern, since emissions from activities included in the EU
ETS are capped. The aggregate cap is adjusted once, to accommodate the
emissions from the included activities, after which an emissions increase
in one ETS sector must be accompanied by an emissions reduction in
another ETS sector. 6
However, an increase of emission of co-pollutants is a concern, since
co-pollutants like particulate matter (from transport) and nitrogen and
phosphorus runoff (from agriculture) are not covered by the EU ETS. In
economic terms, the problem is that in the presence of co-pollutants
marginal abatement benefits across sources of GHG is not equal. The EU
ETS only values the benefits from GHG reductions. Emissions of copollutants may increase as a result of inclusion, if inclusion shifts emissions from one sector to another, e.g. from electricity generation to
transport. The extent to which emissions of co-pollutants increase depends on the price elasticity of CO2 emissions. Currently there are very
large differences in the price of emitting CO2 between individual sectors
in the Nordic countries.
Due to the cold climate, the price elasticity of CO2 emissions in the
heating sector is arguably low. It is arguably low also for the agricultural
sector and the waste sector because operational decisions in these sectors rely on other factors than the cost of emitting carbon dioxide, e.g. on
preventing groundwater contamination.
6 A related question is that how the inclusion would affect the rate at which the transport sector reduces
emissions over time.
42
Sectoral expansion of the EU ETS
In an extensive review of past research, Dahl (2012) finds that gasoline price elasticities vary between -0.33 and -0.11, while diesel price
elasticities vary between -0.38 and -0.13. 7 Given the low price elasticities, only a total abolishment of fuel taxes could result in a noticeable
increase in the use of transport fuels, and emissions of CO2 and copollutants. Thus, the risk of an increase of co-pollutants is very small for
road transport.
2.3.4
Monitoring, reporting and verification (MRV)
The framework for monitoring, reporting and verification of emissions is
essential for the credibility of the EU ETS. As a consequence, the condition of feasible monitoring, reporting and verification (MRV) has been a
fundamental requirement for inclusion of new sectors in the EU ETS. So
far the Commission has taken the approach that only sectors for which
the emissions can be monitored, reported and verified with the same
accuracy as for emissions already under the scope of the EU ETS are to
be included in the system.
As emissions from the transport sector represent a large share of the
total emissions from the EU countries, shipping and road transport have
been considered by the Commission for inclusion. Aviation was already
included in 2012. Both shipping and road transport have been considered suitable candidates as MRV is technically feasible with sufficient
level of level of accuracy. 8 International shipping is not included in the
EU ETS but a regulation for MRV of GHG emissions from the maritime
transport enters into force in the beginning of July 2015 (EC, 2015).
The barriers for inclusion of road transport will be subject to a fuller
analysis in Section 3 but to summarize the challenge is to design a cost
efficient framework for MRV. The transport sector consists of a large
amount of small emissions sources. In the event that the road transport
is included, the MRV framework should be designed so that both the
costs that accrues to the compliance entity and the costs of administration of the regulators and implementing agencies in proportion to the
environmental benefits of inclusion. A downstream approach whereby
every road vehicle is included and given compliance obligations would
result in high transaction costs for the vehicle owners and the regulators. An upstream approach whereby larger entities higher up in the
7
8
Dahl (2012) reports that price elasticities were higher at high prices for both gasoline and diesel fuel.
For shipping see EC (2008b, p. 4) and for road transport see CEC (2008a, p. 54).
Sectoral expansion of the EU ETS
43
supply chain would be included (e.g. fuel suppliers) would result in lower transaction costs but has so far faced barriers relating to incompatibility with the current Directive, which in its current wording covers only direct sources of emissions.
There are examples of other trading schemes that have included
small-scale sources in the scheme through the upstream approach. A
prominent example is California's cap-and-trade programme, which covers transport and residential and commercial buildings through an upstream inclusion of fuels suppliers.
MRV for heating is very similar as MRV for road transport and thus
technically possible. Installations with a capacity of over 20 MW are already included in the EU ETS. Finland and Sweden have also included
smaller installations. Extending the EU ETS to the entire heating sector
faces the same problems as including road transport in the scheme. A
downstream approach generates high transaction costs due to the very
large number of small emitters, high costs for MRV and small emissions
per combustion unit. The high transaction costs for MRV has so far made
the ETS a less cost-efficient tool than other policy tools for reducing
emissions on an EU-level.
In connection with the previous revision of the EU ETS, the Commission concluded that emissions from the agricultural sector could not be
subject to sufficiently accurate MRV to be included in the EU ETS (CEC,
2008b, p. 4). 9 The development of a MRV framework with a sufficient
level of accuracy would on the other hand generate disproportionate
transaction costs for MRV (CEC, 2008a, p. 58). In the agriculture sector
production activities are dispersed and disaggregated to a large number
of farmers and other producers of agricultural products and livestock,
and emissions are to a large extent produced by downstream small emitters. As a consequence, not only feasibility of the MRV is a challenge but
in addition it can be assumed that MRV would come with high transaction costs for farmers.
Feasibility of MRV has also been a barrier for inclusion of the waste
sector in the EU ETS. There is large variability in the waste streams that
is incinerated. As a consequence, a MRV framework for the sector would
be very complex. The foreseen complexity of the MRV was one of the criteria for not including the waste sector in connection with the last revision of the EU ETS (CEC, 2008a, p. 36). New Zealand has included waste
9 The problem is significant and of all the emissions trading schemes in the world only the Kazakhstan
ETS included agriculture in its early legislative state in 2013, but this will not likely hold in practice
(World Bank, 2014).
44
Sectoral expansion of the EU ETS
in its trading system. In New Zealand, landfill operators are obliged to
report their emissions and surrender emission units, but the price impact in the sector is assessed to be limited (New Zealand Climate change
information, 2015).
2.3.5
Risk of emissions increase outside the EU as a result
of expansion of the EU ETS
The risk of carbon leakage depends on the possibilities to relocate the
polluting activity to countries outside the EU with a less strict or nonexisting climate policies. In domestic transport and heating there is no
risk of carbon leakage. With current technology, the fuel is combusted
and the CO2 released by the vehicle and relocating the vehicle is not an
option. Similar arguments apply for heating. With current technology,
emissions from heat generation must occur relatively close to where the
heat is consumed. In waste, agriculture and fisheries the risk carbon
leakage is present. Agricultural activity in the Nordic countries faces
tough price competition from imports and a unilateral increase of the
costs without e.g. a compensating increase in agricultural subsidies may
result in carbon leakage, as a result of which global emissions may increase. A unilateral increase of costs may also undermine food security.
A similar reasoning applies to waste.
Even if the risk of carbon leakage is associated with including either
transport or heating in the EU ETS is low, their inclusion may trigger
carbon leakage in other EU ETS sectors, e.g. in the iron and steel sector
or paper and pulp sector, both of which are of high economic importance
in the Nordic countries. Indirect carbon leakage is a concern especially
for road transport because of the current high fuel taxes. If fuel taxes are
lowered as result of inclusion, it is likely that the road transport sector
will be a net buyer of emission allowances from other sectors. The additional demand will put an upward pressure on the allowance price.
The risk of carbon leakage is already mitigated by free allocation to
sectors subject to competition from industries in third countries. It is
also notable that a lower a CO2 cost for transport activities may benefit
the iron and steel and pulp and paper sectors. In addition, currently a
large number of carbon price schemes outside the EU are emerging,
among others a national scheme in China. Some, like the Korean ETS and
Californian cap-and-trade are already operational. The prospect of
emerging new CO2 pricing schemes should deter relocating ambitions.
Sectoral expansion of the EU ETS
45
2.3.6
Other barriers for inclusion
In addition to the aforesaid barriers also other factors, such as efforts to
regulate emissions internationally, should be considered when discussing an extension of the EU ETS. Shipping and aviation are examples of
sectors constituting significant emission sources for which MRV is feasible and aviation was effectively included in the EU ETS already in 2012.
Both international shipping and international aviation are mentioned in
the Kyoto Protocol as sectors that should be regulated under auspice of
the International Commercial Aviation Organization (ICAO) and the International Maritime Organization (IMO) respectively (United Nations
(1998). Due to the slow progress of the international scheme under
ICAO aviation was nonetheless unilaterally included in the EU ETS in
2012. The inclusion of international aviation raised resistance and objections from both non EU-Member States and companies. 10 As a consequence of the negotiations for a global approach under the International
Civil Aviation Organization advancing in September 2012, the Commission temporarily chose to exclude international aviation from the EU
ETS (EC, 2013). The purpose of the so called “stop-the-clock” was to secure a possible international agreement on GHG emissions from aviation
(EC, 2014b).
The international nature of the industry and need for an international approach is also the reason why shipping has not yet been included in
the EU ETS (CEC, 2008a, p. 55). As efforts under both IMO and the UNFCCC so far have not resulted in regulatory measures to limit or reduce
emissions from international shipping, the Commission published in
June 2013 a strategy for integration of maritime emissions into EU’s policy for reducing domestic greenhouse gases. The MRV regulation for international shipping mentioned in Subsection 2.3.4 is the first step in the
strategy and the possible following steps include setting intermediary
emission reduction targets for the maritime transport and to apply effective and efficient market-based measures (CEC, 2013b). Any following
steps in relation to shipping should, however, be aligned with the approach under the IMO. The experiences from aviation and shipping
10 See e.g. C-366/10 Judgment of the Court (Grand Chamber) of 21 December 2011 Air Transport Association
of America and Others v Secretary of State for Energy and Climate Change. The House of Representatives and
the Senate of the United States of America even adopted a Bill to prevent the extension of the EU ETS to international aviation see the European Union Emissions Trading Scheme Prohibition Act of 2011 (Enrolled
Bill [Final as Passed Both House and Senate] ENR)[S.1956.ENR].
46
Sectoral expansion of the EU ETS
demonstrate the close linkage between the EU ETS, its coverage and the
international efforts to regulate emission reductions.
2.4
Conclusions
In terms of significance of emissions, the transport sector, agriculture
and fisheries are of major significance, whereas heating and waste is of
less significance. The significance of emissions is a strong argument in
favour of inclusion of road transport. Conversely, the insignificance of
emissions is a strong argument against including heating and waste in
the EU ETS. 11 However, any expansion of the EU ETS would reduce distortions in the economy, assuming that the expansion inclusion creates a
level playing field. Creating a level playing field is likely to require adjustment of existing policy instruments.
The transport sector is a significant source of tax revenue, whereas
the other sectors are not. Approximately half of all revenue collected by
taxes motivated by environmental concerns can be attributed to the
transport sector. The tax revenue constitutes a barrier to inclusion to the
extent that taxes are overlapping with the EU ETS.
With respect to the consistency with existing policies and regulation,
the question is how the EU ETS interacts with the existing policy space.
None of the four sectors are in an unregulated state so the question of
interaction with existing policies is relevant for all. The worst overlap is
with energy and carbon taxes, which are prevalent in the transport and
heating sector, but less so in the agriculture and fisheries sector and the
waste sector. Energy and CO2 taxes distort the prices set by the EU ETS,
and thus reduces efficiency.
Currently, all emissions covered by the EU ETS are regulated downstream. To reduce transaction costs for small emitters, upstream inclusion has been suggested as an alternative for downstream inclusion. Upstream inclusion is however incompatible with the EU ETS Directive and
constitutes a barrier for including sectors with many small emitters.
MRV is technical feasible for the transport sector and heating sector.
For the agriculture and fisheries sector the lack of accuracy of MRV is a
barrier to inclusion and for the waste sector the complexity of MRV is a
barrier to inclusion. The very large number of large number of small
11 Admittedly, the emissions data for the heating sector is incomplete. Actual emissions are likely to be higher. However, even if actual emissions from heating were, say, 50% higher, the share of total greenhouse gas
emissions remains small.
Sectoral expansion of the EU ETS
47
emitters in the heating and transport sectors makes downstream inclusions infeasible as downstream inclusion would result in disproportionately large transaction costs.
Table 13: Barriers to inclusion per sector
Category
Transport
Heating
Agriculture and
fisheries
Waste
Significance of
emissions
Road transport: very
significant source.
Other subsectors:
insignificant source.
Insignificant source
of emissions.
Significant but not
as significant as
road transport.
Insignificant source
of emissions.
Significance of
fiscal revenue
Transport and road
transport in particular
is a significant source
of tax revenue.
Insignificant.
Insignificant.
Insignificant.
Consistency
with existing
policies and
regulation
Existing energy and
CO2 taxes are a barrier to inclusion.
Existing energy and
CO2 taxes are a
barrier to inclusion.
A barrier to the
extent that current
regulation targets
GHG emissions.
A barrier to the
extent that current
regulation targets
GHG emissions.
Compatibility
with current
Directive
Upstream inclusion is
incompatible with the
Directive.
Upstream inclusion
is incompatible
with the Directive.
Upstream inclusion
is incompatible
with the Directive.
Upstream inclusion is
incompatible with
the Directive.
Risk of an
increase in
emissions of
co-pollutants
Low.
Low.
Low.
Low.
Monitoring,
verification and
reporting
Technically feasible,
but downstream
inclusion incurs very
high transaction cost.
Technically feasible, but downstream inclusion
incurs very high
transaction cost.
Lack of accuracy of
MRV is a barrier.
MRV complexity is
a barrier.
Risk of carbon
leakage
Very low.
Very low.
Present but mitigated by a number
of existing policies.
Present but mitigated by a number of
existing policies.
48
Sectoral expansion of the EU ETS
3. Inclusion of road transport
in the EU ETS
This section explores the barriers and the solutions for including road
transport in the EU ETS. Subsection 3.1 summarises the community level
discussion and rational why road transport has not already been included in the EU ETS. Subsection 3.2 presents the taxes that road vehicles are
subject to in each Nordic country. Subsection 3.3 discusses the main barriers to inclusion. Subsection 3.4 concludes and discusses the relevance
of the barriers identified in Subsection 3.3 for other non-ETS sectors.
3.1
The EU perspective
Road transport and small mobile emitters (e.g. private cars) were discussed already upon establishment of the EU ETS but were left out as the
approach was to start off with large stationary sources (CEC, 2000, p. 10).
The road transport sector was further considered in connection with the
revision of the ETS Phase 3. Increased environmental efficiency spoke
for inclusion of the sector but the Commission concluded that further
analysis was needed as to the effects on other ETS sectors, of the high
abatement costs for road transport, as well as to the interaction with the
existing policies. The sector was to be considered for inclusion in the
long term (CEC, 2008a, p. 161).
In 2012, the Commission revisited the option of including fuel consumption in the current non-ETS sectors, as a means to balance demand
and supply within the EU ETS (CEC, 2012b).
In October 2014, the European Council recalled in its Conclusions on
the EU’s 2030 Climate and Energy Policy Framework that under the existing ETS Directive, individual Members States can opt to include the
road transport sector in the scheme. As discussed in the previous section, road transport is a significant emissions source in the EU and the
reduction of emissions from transport fuel combustion is a priority. Reducing the dependency of fossil fuels for the transport sector is also seen
by the Council as a priority target (EC, 2014a, Article 2.13). One argument often presented in this context is that petroleum taxes cannot
guarantee that emissions from road transport are reduced by a certain
amount, whereas inclusion in the EU ETS does, see e.g. Heymann (2014).
In the Nordic countries the emissions from transport fuels represents a larger share of total emission than the EU average. Emissions
from certain transport sub-sectors are already included in the EU ETS.
Aviation was included in 2012 and the emissions from railway-transport
are included to a large extent, through the electricity producers. The inclusion of railway-transport through electricity producers means that
the sub-sector has been included in the ETS implicitly and automatically
through the electrification of the railway-transport rather than through
a separate administrative decision to do so.
Globally there are examples of operational cap-and-trade systems
covering road transport. The largest of these is the California cap-andtrade programme, which has been operational since 2013 (California Environmental Protection Agency, 2013). In the beginning of the second
compliance period, 12 in 2015, the coverage was extended to road
transport by inclusion of suppliers (position holders and importers) of
RBOB (reformulated gasoline blend-stock for oxygen blending) and distillate fuel oil as well liquefied petroleum and natural gas as well as petroleum refineries (Californian Environmental Protection Agency, 2015). The
transport sector is responsible for approximately 37% of the Californian
emissions (California Environmental Protection Agency, 2015). Similar to
the EU ETS, the Californian system has an absolute cap and mandatory
participation for entities above a certain threshold. Other ETS systems
that have included transport include New Zealand and Shanghai.
3.2
3.2.1
The Nordic perspective
Denmark
The transport sector accounts for 12.2 MtCO2e (23.7%) of total GHG emissions in Denmark in 2012. Of this, 11.4 MtCO2 was due to road transport.
In the beginning of 2015, the total number of motor vehicles in Denmark
was 3.0 million, of which 2.3 million were passenger cars, 1.6 million petrol driven and 0.7 million diesel driven (Statistics Denmark, 2015).
Road vehicles and road transport in Denmark are subject to a registration tax, an ownership tax, fuel taxes and road user charges. The reg12
In the Californian cap-and-trade a trading period is referred to as a compliance period.
50
Sectoral expansion of the EU ETS
istration tax is paid once at first registration and is not dependent on the
fuel efficiency of the vehicle.
Table 14: Tax rates on transport fuels in Denmark in 2013
Product
Tax
Eurocents per litre
EUR per tCO2
Energy tax
CO2 tax
Total tax
32.96
5.27
38.23
138.81
22.19
161.00
Energy tax
CO2 tax
Total tax
35.06
5.83
40.90
131.66
21.90
153.56
Motor gasoline
Diesel oil
Note:
Conversion factors from Motiva (2010).
Source: Danish Customs and Tax Administration.
Owners of passenger cars are liable to pay a green ownership tax (“grøn
ejerafgift”). The tax depends on the fuel efficiency (km per litre) of the
car and it is paid periodically, in periods of 3, 6 or 12 months. The tax
rate is different for petrol and diesel.
The fuel taxes comprise an energy tax, a NOx tax (omitted here) and
a CO2 tax. The tax rates are given in Danish øre/litre. Table 14 shows the
tax rates for petrol and diesel in 2013, in EUR per litre and EUR per ton
of CO2 emissions. Table 15 shows the tax revenue from the different taxes levied on road transport in Denmark.
Table 15: Revenues from taxes levied on the road transport sector in Denmark 2013
Tax
Petrol
Certain oil products (fuel oil, heating tar and diesel oil)
Motor vehicle registration duty
Road charges
Motor vehicle weight duty from households
Motor vehicle weight duty from producers
Total
Note:
Revenues
(million EUR)
Share of entire tax revenue
by the state (%)
977
1,248
2,041
51
1,086
374
5,777
0.8
1.0
1.7
0.0
0.9
0.3
4.8
Diesel is the main components in the category “Certain oil products, fuel oil, heating tar
and diesel oil”.
Source: Statistics Denmark.
Sectoral expansion of the EU ETS
51
3.2.2
Finland
The Finnish transport sector accounts for 12.7 MtCO2e (20.8%) of total
GHG emissions in 2012. Of this, 11.2 MtCO2 (88.2%) was due to road
transport. The total number of automobiles registered in Finland was
approximately 3.6 million in 2013, of which 3.1 million passenger cars,
2.4 million petrol driven and 0.7 diesel driven (Statistics Finland,
2014). The remaining 0.5 million automobiles consisted mainly of diesel powered vans.
Table 16: Tax rates on transport fuels in Finland 2013
Product
Tax
Eurocents per litre
EUR per tCO2
Energy content tax
CO2 tax
Strategic stockpile fee
Total tax
50.36
14
0.68
65.04
212.10
58.96
2.86
273.92
Energy content tax
CO2 tax
Strategic stockpile fee
Total tax
30.7
15.9
0.35
46.95
115.27
59.70
1.31
176.29
Motor gasoline
Diesel oil
Note:
Conversion factors from Motiva (2010).
Source: Finnish Customs.
In addition to VAT, road transport in Finland is subject to a car tax, an
annual vehicle and a fuel tax (Finnish Information Centre of Automobile
Sector, 2015a). The car tax it is paid once during the lifetime of a vehicle,
at first registration. It is based on the vehicle’s value and the vehicle’s
fuel efficiency, measured in grams of CO2 emissions per kilometre.
The annual vehicle tax depends on the type of vehicle and fuel; for
passenger cars, vans and recreational vehicles it is determined by the
fuel efficiency of the vehicle. Diesel powered passenger cars are charged,
in addition, a tax on motive power dependent on the vehicle’s weight.
The fuel tax consists of an energy content tax, a carbon dioxide tax
and a strategic stockpile fee. The tax rates are given in EUR per litre or
kilogram. Originally, the tax rate of the CO2 tax was calculated based on a
CO2 price of EUR 50 per tCO2 (Government of Finland, 2013a).
Table 16 shows the tax rates for petrol and diesel in 2013; the last
column shows the tax per ton of CO2 emissions. It shows that the energy
content tax is higher for diesel. Table 17 shows the tax revenue from
road transport fuels in 2013 both in absolute terms and relative to total
taxes collected in 2013.
52
Sectoral expansion of the EU ETS
Table 17: Revenues from taxes levied on road transport in Finland 2013
Tax
Revenues
(million EUR)
Share of entire tax revenue
by the state (%)
932
866
2,777
4,575
1.1
1.0
3.1
5.2
Registration tax
Annual tax
Fuel tax
Total
Note:
Revenue from VAT on vehicles and transport fuels is excluded.
Source: Finnish Information Centre of Automobile Sector (2015b).
3.2.3
Iceland
While CO2 emissions from road transport have declined considerably
after 2007, the transport sector is still the largest contributor of GHG
emissions in Iceland outside the scope of the EU ETS, accounting for
19% of total GHG emissions in 2012 (Environment Agency of Iceland,
2014, pp. 30 and 32). Private car ownership is common in Iceland; in
2012 the country had 653 passenger cars per 1,000 inhabitants, the second highest ratio in the European Economic Area (CEC, 2014c). Mitigation efforts in the transportation sector therefore play an important role
in the Icelandic climate policy and in recent years the government has
initiated extensive studies to identify possibilities of reducing transport
emissions in a cost-effective manner. 13
Table 18: Tax rates on transport fuels in Iceland 2013
Product
Tax
Eurocents per litre
EUR per tCO2
Excise duty (general and special)
Carbon tax
Total tax
39.4
3.08
42.48
165.94
12.97
178.91
Excise duty
Carbon tax
Total tax
33.8
3.54
37.34
126.91
13.29
140.20
Gasoline
Diesel oil
Note:
Conversion factors from Motiva (2010).
Source: Althingi (1993), Althingi (2004), Althingi (2009).
13
See for example Davíðsdóttir et al. (2009).
Sectoral expansion of the EU ETS
53
One of the major objectives of both the Icelandic climate and energy
policy is to increase the use of renewable energy in transportation. 14 In
line with this objective, a new carbon tax on gasoil, diesel oil, gasoline,
residual fuel oil and petroleum gas was imposed in 2009, as an addition to existing excise duties on diesel oil and gasoline (Althingi, 2009).
The tax is based on the carbon content of each fuel type and was initially intended to reflect the price of emission allowances in the EU ETS
market in the previous year (Althingi, 2009). Since 2011, excise duties
on vehicles, as well as the semi-annual tax on vehicles, have been based
on CO2 emissions (Althingi, 1988a, 1993). Other economic incentives
have been introduced to promote the use of low-carbon or zero-carbon
cars and fuels. For example, a substantial discount is granted from the
excise duty on methane driven vehicles and such cars are subject to the
minimum semi-annual car tax (Althingi, 1988a, 1993). Furthermore,
vehicles powered by electricity and hydrogen are up to a certain limit
exempt from VAT, and sellers of such cars are eligible for tax deductions (Althingi, 1988b). Non-fossil fuel oils are not subject to an excise
duty, and if oils and fuels that are not of fossil origin are blended with
conventional oils and fuels, the mixture is exempt up to the extent of
the additive (Althingi, 2004).
In order to accelerate the shift to renewable energy in transportation, as well as to fulfil international commitments on GHG emissions
and on use of renewable sources in transport, renewable additives in
land transport fuels were mandated in 2013. From 1 January 2015, a
minimum of 5% of all fuels sold to land transportation has to be of renewable origin (Althingi, 2013).
The Climate Mitigation Action Plan includes other measures to reduce GHG emissions from transportation, including public procurement
of low-carbon and fuel efficient vehicles within both the state government and the city of Reykjavik (Icelandic Ministry for the Environment
and Natural Resources, 2010, pp. 27–28). The government and local
municipalities have also initiated projects to increase the share of public
transportation, walking and bicycling (Icelandic Ministry for the Environment and Natural Resources, 2014a, p. 75).
Table 18 shows the tax rates for gasoline and diesel oil in 2013; the
last column shows the tax per ton of emissions of CO2. Table 19 shows
the tax revenue from road transport fuels in 2013 both in absolute terms
and relative to total taxes collected in 2013.
See Icelandic Ministry of Industries and Innovation (2012, p. 4–5) and Icelandic Ministry for the Environment and Natural Resources (2010, p. 35).
14
54
Sectoral expansion of the EU ETS
Table 19: Revenues from taxes and charges levied on the road transport sector in Iceland 2013
Tax
Semi-annual car tax
Kilometres charge
Carbon tax
Excise duty on vehicles
Excise duty on gasoline (and oil products)
Excise duty on diesel oil
Total
Note:
Revenues
(million EUR)
Share of entire tax revenue by
the state (%)
42
5
20
27
29
48
171
1.1
0.1
0,5
0,7
0,7
1.2
4.3
Revenue from VAT on vehicles and transport fuels is excluded.
Source: Icelandic Financial Management Authority (2013). Treasury accounts for 2013.
3.2.4
Norway
Total transportation emission in Norway was 15.2 MtCO2e in 2012 or
29% of total emission. Norway had approximately 3 million registered
automobiles in 2013 of which 2.4 million were passenger cars and 0.6
were vans and goods vehicles (Statistics Norway, 2013, Table 415).
The GHG emissions from transporting goods and people on roads were
10.1 MtCO2e in 2012, or 66% of transport sector emissions.
Road transport in Norway is subject to a registration tax, an annual
motor vehicle tax, a fuel tax and a carbon tax.
The motor vehicle registration tax is based on four different components; vehicle weight, engine effect, CO2 and NOX emissions. All the elements, except the NOX element, are progressive. The engine effect component has been reduced over time. There is a deduction for low emission
cars (less than 120 g/km). However, total registration tax cannot be negative. High emissions vehicles (more than 250 g/km) are penalized by the
tax system (Bragadóttir, 2014). The tax is substantial and revenues collected amount to EUR 2.3 billion or 2.1% of total fiscal revenues 2013.
Sectoral expansion of the EU ETS
55
Table 20: Tax rates on transport fuels in Norway 2013
Product
Tax
Eurocents per litre
EUR per tCO2
Road usage tax
CO2 tax
Total tax
66
13
79
276
54
330
Road usage tax
CO2 tax
Total tax
52
8
60
196
31
227
Motor gasoline
Diesel oil
Note:
Conversion factors from Motiva (2010).
Source: Norwegian Ministry of Climate and Environment (2014, p. 66).
The annual motor vehicle tax is also a significant source of revenues and
represents approximately 1% of total fiscal revenues. The tax consists of
a weight component and an environmental component. The weightrelated component is dependent on the total weight of the vehicle, suspension system and number of axles and is meant to cover wear and tear
of the roads. The tax is divided into an excise duty for lightweight vehicles (less than 7,500 kg) and an excise duty for heavyweight vehicles
(7,500 kg or more). The environmental part is computed according to
weight and emission standards following the EURO classification.
To finance road construction and bridges, tunnels etc. there are
several toll roads around the country where vehicles have to pay to use
the road, bridge or tunnel. Some larger Norwegian cities also have toll
rings where all vehicles entering the city centres have to pay a fee
(OECD, 2011).
Table 20 shows the 2013 tax rates for petrol and diesel. The Norwegian road usage tax constitutes a significant portion of the total taxes
levied on transport fuel use, whereas the carbon tax plays a minor role,
especially for diesel use.
56
Sectoral expansion of the EU ETS
Table 21: Revenues from taxes levied on the road transport sector in Norway in 2013
Tax
Revenues
(million EUR)
Share of entire tax revenue
by the state (%)
1,296
2,692
281
2,264
657
7,191
1.0
2.1
0.2
1.8
0.5
6.3
Annual motor vehicle tax
Motor vehicle registration tax
Re-registration tax on motor vehicles
Excise duty on fuel
Carbon tax
Total
Source: Statistics Norway (2015).
3.2.5
Sweden
In total the transport sector in Sweden emitted 19.1 MtCO2e or 33% of
total emission in 2012. Road transport counted for 94% of these emissions through approximately 5.0 million registered vehicles in 2013, of
which 4.5 million were passenger cars and the remaining 0.5 million automobiles consisted mainly of vans (Statistics Sweden, 2014).
Road transport in Sweden is subject to an annual vehicle tax, a fuel
tax, a carbon tax, congestion taxes and road charges.
The vehicle tax is based on a base fee of EUR 42 and the vehicle’s fuel
efficiency, measured in grams of CO2 emissions per kilometre (Swedish
Tax Authority, 2013). Cars, campers, light trucks and light buses that
meet specific environmental demands and are put into service for the
first time are exempt from vehicle tax for the first five years from the
time the vehicle was introduced. The revenues from the vehicle tax
amount to EUR 1.5 billion or 1.5% of total fiscal revenues.
Table 22: Tax rates on transport fuels in Sweden 2013
Product
Tax
Eurocents per litre
EUR per tCO2
Energy content tax
CO2 tax
Total tax
36
29
65
151
124
274
Energy content tax
CO2 tax
Total tax
20
36
56
76
124
200
Motor gasoline
Diesel oil
Note:
Conversion factors from Motiva (2010).
Source: Swedish Ministry of the Environment (2014).
Sectoral expansion of the EU ETS
57
Road charges in Sweden are levied for financing the construction of
new roads. However, the charges also have a steering effect and may
be used e.g. to restrict traffic in certain areas or on certain routes. Since
1st February 1998, all domestic and foreign heavy goods vehicles
(HGV) above 12 tons driving on Swedish roads are levied with a road
charge (CEC, 2013c). The charges depend on the exhaust class of the
vehicle (EUR 0, 1, or 2), and how many axles the vehicle has.
The cities of Stockholm and Gothenburg have introduced congestion
taxes in order to reduce congestion in and around the central parts of
city, and to reduce emissions of pollutants that are harmful to health and
the environment. The tax also has a fiscal purpose since most of the revenues are intended for investment in public transport (Swedish
Transport Agency, 2011).
Table 22 shows the tax rates for petrol and diesel in 2013. In contrast to the other Nordic countries, the carbon tax is significantly higher.
But the total tax levied, including the lower complementary energy tax,
is in accord with the rest of the Nordic countries.
Table 23: Revenues from taxes levied on the road transport sector in Sweden 2013
Tax
Revenues
(million EUR)
Share of entire tax revenue
by the state (%)
1,320
86
171
1,016
1,275
4,808
1.5
0.1
0.2
1.1
0.2
2.9
Annual tax on vehicles
Road charges
Congestion taxes
Carbon tax on fuel
Excise duty on gasoline
Total
Source: Swedish National Financial Management Authority (2014).
3.3
3.3.1
Main barriers to inclusion
Barriers due to policy congestion
The EU’s has set two overarching goals for the transport sector, defined
in the Transport White Paper (CEC, 2011), to reduce Europe’s dependence on imported oil and to reduce CO2 emissions from transport. The
two goals are highly correlated since there is a one-to-one correspondence between combusted oil and emissions of atmospheric CO2 emis-
58
Sectoral expansion of the EU ETS
sions. Current policy instruments in the EU, and the Nordic countries,
can be divided in the three categories as follows: 15
1. Compulsory fuel efficiency standards for new road vehicles, set by
the EU.
2. One-off registration taxes and recurring ownership taxes set by national governments, which in the Nordic counties are typically tied to
the fuel efficiency, or equivalently CO2 efficiency, of the vehicle.
3. Fuel taxes, set by national governments and which typically include
different components, e.g. an energy component and CO2 components, as in every Nordic country.
The first two categories affect the fixed cost, whereas the third category affects the variable cost of using road vehicles. Introducing the EU
ETS as fourth category to this already crowded policy space will increase instrument congestion. Majone (1989) describes the concept as
follows: “in an already crowded policy space, solutions beget new
problems in the form of policy overlaps, jurisdictional conflicts and unanticipated consequences”. The largest overlap is with the fuel taxes,
i.e. the third category, which vary between EUR 161–330 for petrol and
EUR 140–227 for diesel per tCO2. The CO2 component of it varies between EUR 13–123 per tCO2 for both petrol and diesel. The fuel taxes
may distort the prices signals of the EU ETS, and consequently reduce
cost efficiency if road transport is included in the EU ETS. Cost efficiency is reduced because emissions are not reduced in order of ascending
marginal abatement cost.
The question of policy overlap, between the three existing categories
of policy instruments and the suggested fourth category, raises the more
fundamental questions of policy reform. Are all current policy instruments needed? What purpose do they serve? Currently there is significant weight on the fixed costs of acquiring and owning road vehicles.
Would a shift towards the variable cost of operating road vehicles result
in a better alignment of the incentives of the consumers and the regulator? Proponents of compulsory fuel efficiency standards claim that customers severely discount the value of future fuel savings, which prevents
them from carrying any upfront costs for fuel efficiency technologies. As
15 Some of the current policy instruments, such as road user charges and information based instruments, do
not fit into any of these categories.
Sectoral expansion of the EU ETS
59
a result, the technologies do not diffuse through the society or do so only
very slowly, see e.g. Greene et al. (2013).
Ideally the policy space should be determined by the objectives and
the objectives by political priorities. Thus, the discussion of a policy reform should be placed in the context of the objectives. Historically, the
objective of tax revenue has been high on the political agenda in the
Nordic countries.
3.3.2
Fiscal barriers
Revenues from environmental taxes are significant in the Nordic countries. The OECD estimates that the total amount in 2013 was in excess of
EUR 35 billion. Carbon taxes in the road transport sector alone can be
estimated to stand for more than 10% of the revenues, approximately
EUR 3.7 billion, as is shown in Table 24.
There are significant differences in the Nordic countries’ political
valuation of how large the carbon tax should be to offset the negative
externalities of GHG emissions. Sweden has the highest tax rate on CO2
emission with EUR 124 per tCO2 while Iceland values the CO2 emissions
externality to EUR 13 per tCO2.
Double taxation or lower fiscal revenues?
In principle an inclusion of road transport into the EU ETS implies that
carbon taxes in the sector should be replaced by the pricing mechanism
of the trading scheme. Doing so will increase the cost efficiency of reaching the GHG emissions targets by allowing transport emissions to be
priced at market rates.
An inclusion of road transport that does not come with an abolishment of the carbon tax implies exposing the sector to double taxation.
Paying the market price for CO2 and on top of a carbon tax forces the
sector to pay for the emission externality twice. Even though the market
price for emissions for the time being is relatively low, this may change
in the future, making the double taxation a significant issue that needs to
be addressed.
60
Sectoral expansion of the EU ETS
Table 24: CO2 taxes, emissions and CO2 tax revenues in the Nordic countries 2013
Country
Denmark
Finland
Iceland
Norway
Sweden
SUM
Note:
CO2 tax
(EUR per tCO2)
Emissions in transport
(MtCO2e)
Revenues1
(million EUR)
22
60
13
54
124
11.4
11.2
0.8
10.1
17.9
51.4
251
672
10
543
2,213
3,690
Revenues estimated based on CO2 tax and reported emissions in the transport sector.
Source: The World Bank (2014), European Environment Agency (2015b), Norwegian Ministry of
Climate and Environment (2014), Icelandic Ministry for the Environment and Natural Resources (2014a).
On the other hand, ensuring single taxation by replacing the fiscal revenues from the current CO2 taxes with income from auctioning of emissions allowances poses a serious fiscal problem. The total revenues collected from carbon taxes in the road transport sector are considerable in
the Nordic countries. Abolishing the carbon tax implies significant income losses for all countries, especially for Sweden with a high tax rate
and large emissions in the transport sector.
The size of the problem can be illustrated in terms of the fiscally neutral EU ETS price. Such a price shows the level to which the EU ETS price
of CO2 has to increase in order to offset the fiscal revenues lost by removing of the carbon taxes. The calculation is based on the assumption
that the emissions from the road transport do not change as a result of
inclusion (i.e. increase in cap is equal to current emissions) and that all
of the permits are auctioned.
In Norway and Iceland the fiscally neutral price is the same as the
CO2 tax rate in the respective countries. That is, to offset the removal of
the CO2 tax the price has to increase to the same level as the tax. This
relation holds because no emission allowances are auctioned in Norway
and Iceland. Auction revenues only come from road transport auctioning, which has to cover the loss in carbon taxation revenues.
Sweden, Finland and Denmark have a non-zero level of auctioning. A
price increase, increase auction revenue from all sectors, both old and
new. As an example the price does not need to increase to the tax rate of
EUR 124 per tCO2 in order for Sweden to cover the fiscal loss. It suffices
if the price increases to EUR 83 per tCO2.
Sectoral expansion of the EU ETS
61
Table 25: Fiscal neutral CO2 price for including transport in EU ETS per Nordic country 2013
Country
Fiscally neutral EU ETS price
(EUR per tCO2)
Fiscally neutral EU ETS price,
100% auctioning
(EUR per tCO2)
12
26
13
54
83
9
17
4
16
59
Denmark
Finland
Iceland
Norway
Sweden
Source: Own calculations.
For both Denmark and Finland with relatively large shares of auctioning
(66 and 55% respectively) the necessary increase in the CO2 price from
the current market price are relatively modest. This indicates that a possible route to circumvent the fiscal and double taxation problem is to
include road transport in EU ETS, and at the same time increase the
share of auctioning and lower the share of free allowances. As an example, if both Denmark and Finland auctioned all allowances the necessary
CO2 price to neutralise the fiscal loss in CO2 taxation is only EUR 9 and
EUR 17 per tCO2. For all Nordic countries, increasing the share of auctioning at the same time as including road transport into the EU ETS may
be a feasible way to mitigate the fiscal risks of removing carbon taxation
on road transport.
Furthermore, auctioning also includes market price uncertainty. The
volatility of carbon prices, as compared to a stable tax rate, directly spills
over into general government income uncertainty.
How to mitigate the problems?
The differences in the carbon tax rate levels between the Nordic countries and the differences in the fiscally neutral price raises the question
of how much of the carbon tax that actually adjusts for the emission externality and how much that are fiscally motivated. Combined with other
taxes in the transport sector, such as energy taxation or road usage taxes
based on consumption, the tax on fuel consumption in road transport is
significant in all Nordic countries. The question is how much of these
taxes that are motivated from an environmental perspective and how
much for fiscal reasons. For the case of Sweden it has been estimated
that 70% of the CO2 tax in 2013 can be attributable to fiscal or other reasons (Carlén, 2014). This implies that the correct carbon tax, pricing the
emission externalities, is only EUR 37 per tCO2 instead of the current tax
level of EUR 124, which is more in line with the other Nordic countries.
Such evaluations of the carbon tax opens up for other compensation
62
Sectoral expansion of the EU ETS
mechanisms to cover for the drop in fiscal revenues if road transport is
included in the EU ETS and at the same time the carbon tax is abolished.
Firstly, moving the parts of the current carbon tax that can be attributable to fiscal or other reason out of the carbon taxation lowers the
discrepancy between the current EU ETS market price on CO2 and the
actual carbon tax rate. The tax, less the carbon component, can still be
levied, one way or another, based on the underlying reasons. For the
case of Sweden, where 70% of the CO2 tax revenues can be attributable
to reasons other than adjusting for the emissions externality, a significant share of today’s carbon tax revenues will be unaffected by an inclusion of road transport into EU ETS.
Secondly, there may be other reasons for a continued high taxation.
The political valuation may deem the current market price too low or
too volatile to incentivise rapid technology advancement in the
transport sector. A government intervention may be necessary to provide more certainty and stability to investors by supporting a higher and
more stable carbon price. A possible mechanism to guarantee the fiscal
revenues is then to introduce a top up carbon tax above the market CO2
price which is switched on if the market price is below the desirable level, i.e. the necessary fiscally neutral carbon price. Such a price-floor, with
a minimum carbon price within the EU ETS, is in place in the United
Kingdom for fossil fuels supplied to all types of UK electricity generators.
By securing revenues from both auctioning of the allowances in the road
transport sector and from the price floor mechanism the fiscal revenues
can be upheld and guaranteed to be on the desired level.
A price floor mechanism will also reduce the volatility and uncertainty of general government revenues by securing a minimum price or
tax rate on carbon.
3.3.3
Barriers related to monitoring, reporting and
verification of emissions
As discussed in Subsection 2.3.5 the framework for MRV guarantees the
environmental integrity of the emissions trading scheme and only sectors for which the emissions can be monitored with sufficient accuracy
can be included in the EU ETS. The data on emissions, should in addition,
be easy to collect (CEC, 2008a, p. 43).
Currently, entities included in the scope of the EU ETS are required
to apply for a permit to issue GHG. The entities monitor their emissions
in accordance with an approved monitoring plan and report the emissions annually to the national authorities. The emissions are verified by
Sectoral expansion of the EU ETS
63
accredited independent entities. The surrender, holding and transfer of
emission allowances and international carbon credits as well as the reporting of emissions takes place in the Union Registry (CEC, 2013). The
principles governing the MRV are included in the EU ETS Directive and
have been transposed into separate Commission regulations concerning
monitoring and reporting and accreditation and verification applicable
in all Member States 16 and complemented by national legislation. Should
a Member State opt-in additional sectors the Commission can adopt specific MRV regulation. 17 The Union Registry is subject to the Union Registry Regulation and administered by the Commission jointly with national administrators. Thus the infrastructure and legislation relating to
MRV is to a large extent harmonized and joint for the entire EU ETS and
complemented as needed nationally.
An inclusion of the transport sector would thus require the adoption
or regulation relating to MRV of emissions from road transport as well
as necessary changes to the Union registry. Also the question of the
method of allocating the allowances corresponding to the cap for the
road transport would need to be solved.
The technical feasibility to monitor emissions from transport fuel
combustion is not a barrier to include the road transport sector into the
EU ETS (CEC, 2008a, p. 54). Monitoring of emissions from transport fuel
combustion is relatively straightforward, merely a question of converting the amount of fuel consumed into CO2 using the corresponding carbon intensity factor, in terms of CO2e per litre or kilogram of fuel. This is
also the approach taken for the monitoring under the California cap-andtrade, where the emissions for the annual quantity of fuel served by the
fuel supplier are reported based on standard equations for different
fuels (California Environmental Protection Agency, 2013)..
As the road transport sector consist of multiple small emission
sources (separate vehicles), the question of cost efficiency of MRV is
central. MRV entails costs for the participants as well as the administrators and implementing agencies and these should be proportionate to
the significance of the source and not outweigh the benefit of extending
the coverage of the ETS. As an example the fee in Finland for an emission permit for emitting less than 50,000 CO2 annually is EUR 1,500
(Finnish Ministry of Employment and the Economy, 2014). The fee is
reasonable for large stationary sources but in relation to a private vehicle owner it constitutes a large burden. Also the costs for administra16
Se Article 14.1 of the EU ETS Directive and CEC (2012a).
Article 24.3 of EU ETS Directive.
17 See
64
Sectoral expansion of the EU ETS
tion rise substantially if a large amount of monitored entities are included in the system.
In connection with the previous revision of the scope of the EU ETS
the Commission therefore considered including the entire sector as one
participant. Monitoring of emissions would take place upon fuel sales
and each vehicle owner would be allocated emissions allowances to
“pay” with. This would require new infrastructure and the total administrative costs would likely still be very high. The upside of this approach
is that it includes the direct source of emission into the system and is
thus in line with the current wording and principles of the EU ETS (CEC,
2008a, p. 53).
The second option that has been considered is an upstream approach whereby an entity higher up in the supply chain is the point of
regulation, e.g. a fuel supplier or even the vehicle producers. In the case
of fuel suppliers the monitoring could e.g. be based on the system for
energy taxation (CEC, 2008a, p. 54, see also CEC, 2014a, p.233). While
this would increase the cost-efficiency of the MRV and entail lower administrative costs, upstream inclusion is in conflict with the principle
regulating emissions at the point of release to the atmosphere. The Californian cap-and-trade has taken this second approach and included fuel
suppliers and importers as the point of regulation for the road transport
sector (California Environmental Protection Agency, 2013, sections
95100–95158, § 95810–§ 95811).
To conclude, MRV is not an absolute barrier for inclusion of road
transport in the EU ETS but the nature of the sector would likely require
including upstream emitters for the road transport in order to fulfil the
requirement of proportionality of the transaction costs of MRV in relation to benefits of extending the scope of the ETS. The inclusion of upstream entities will be further examined in the following section.
3.3.4
Barriers related to upstream inclusion
The point of regulation in an ETS can be downstream or upstream. In a
downstream system, like the EU ETS, emissions are regulated at the
point of release to the atmosphere. If upstream, as in the New Zealand
ETS, emissions from fossil-fuels are regulated higher up in the supply
chain, e.g. at the point of production or import (Kerr & Duscha, 2014).
The Californian cap-and-trade is an example of a mixed system whereby
the point of regulation in certain sectors e.g. in the chemical industry is
downstream whereas it in other sectors such as road transport is upstream. This demonstrates that a mixed system is feasible.
Sectoral expansion of the EU ETS
65
A common denominator for all sectors currently included in the EU
ETS is that they express the principle of direct emissions and that the
point of regulation is downstream. The current wording of the EU ETS
Directive is built around large stationary sources and aircraft operators.
An inclusion of upstream level in all of the EU ETS states would require
an amendment of the current wording of the ETS Directive, in addition
to adding the activity to the list of activities covered by the scheme.
Should separate Member States opt-in the transport sector the national
legislation might require amendment to reflect the inclusion of an upstream point of regulation.
There are several options for upstream point of regulation; the fuel
suppliers (position holders and importers), refineries, the vehicle manufacturers or even oil extractors. The Commission has in addition to fuel
suppliers also mentioned tax warehouse keepers and excise duty points
(CEC, 2014a, p. 233) Including oil extractors could, however, be difficult
as it would affect Member States very differently. In California, the fuel
suppliers are the point of regulation. An upstream approach has been
considered to contain many advantages, one of them being the reduction
in administrative complexity (CEC, 2014a, p. 233). Under upstream inclusion road vehicles would indirectly be part of the EU ETS. Whatever
the price of allowances is, it is likely that the large share of it would be
passed on to the consumers. This is very similar to the electricity market
and the pass through of the allowance price to the electricity consumer.
To summarize including upstream point of regulations into the EU
ETS is possible but it requires amending the legislation governing the EU
ETS. It also requires further assessment as to which entities in the supply chain would be most suitable for inclusion.
3.4
Conclusions and extrapolation of the main
barriers for road transport to other sectors
Road transport is a very significant source of GHG emissions in the EU,
and especially so in the Nordic countries. The significance of emissions
and technical feasibility of MRV makes road transport a prospective
candidate for inclusion in the EU ETS. The main barriers for inclusion
are related to the interaction with the existing policy space, loss of fiscal
revenues, high administrative costs of downstream inclusion and incompatibility of upstream inclusion with the EU ETS Directive. The barriers are closely linked, as is illustrated in Figure 1.
66
Sectoral expansion of the EU ETS
Figure 1: Main barriers to inclusion of road transport in the EU ETS
ROOT CAUSE
Policy space
congestion
BARRIERS TO INCLUSION
POLICY
CHOICE
Introduce the EU
ETS on top of
the existing
regulation
Loss of efficiency
Lower or remove
exiting fuels
taxes
Loss of tax revenue
Upstream
Incompatibility with the
Directive. Will require a change
to the Directive and possibly to
the union registry.
Downstream
Disproportionally high
transaction costs
MRV for road
transport
While the efficiency loss from overlapping instrument is something
that the Nordic countries can accommodate, the loss of tax revenue
from lowering or removing existing fuel taxes is not. Thus, the loss of
tax revenue must be compensated. If the allowance price increases as a
result of inclusion of road transport, auctioning revenue from all sectors will increase and offset at least partly the lower transport fuel taxes. One potential route to fiscal neutrality is a higher allowance price as
a result of inclusion, as a consequence of which auction revenue from
all sectors increase.
Upstream inclusion and the need to revise the EU ETS Directive is
something that the Nordic countries, and the EU, can accommodate,
whereas the low cost-efficiency of downstream inclusion is not. Downstream inclusion of individual road vehicles and their operators is not
realistic since it would result in transaction costs that are disproportionally large to the benefits of inclusion.
Heating faces similar barriers to inclusion as road transport. The use
of heating fuels is taxed in every Nordic country, albeit less than
transport fuels. Removal or lowering existing taxes on efficiency
grounds leaves a hole in the state budget, which may or may not be filled
by higher auction revenue. Downstream inclusion of heating faces the
same transaction cost barrier as road transport as a consequence of the
large number of small fossil fuel-fired boilers in the Nordic countries.
Sectoral expansion of the EU ETS
67
The waste sector is subject to a regulatory framework that is driven by other environmental concerns that global warming, e.g. for the
waste incineration sector there is a need to regulate co-pollutants from
waste incineration activities, which makes deregulation of existing policy instruments difficult should the sector be considered for inclusion
in the EU ETS.
Inclusion of agriculture and fisheries faces very different barriers
than road transport. The fundamental barrier for agriculture and fisheries is MRV. Emissions from these sectors cannot be measured with the
same accuracy as emissions under the current scope of the EU ETS. Land
Use, Land Use Change and Forestry is, similarly, only being considered
for inclusion into the policy framework for 2030.
68
Sectoral expansion of the EU ETS
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Sammanfattning
Det europeiska systemet för handel med utsläppsrätter infördes år
2005. I början var systemets omfattning begränsat men har sedan början stegvis expanderats, geografiskt, sektoralt och gasmässigt. Denna
rapport analyserar möjligheterna till ytterligare sektoral expansion av
handelssystemet i de nordiska länderna. Analysen görs i förhållande till
hinder och lösningar för att inkludera fyra sektorer av betydelse som för
tillfället inte hör till handelssystemet: transport, uppvärmning, jordbruk
och fiskeri samt avfall. Analysen fokuserar på vägtransportsektorn. Vägtransport är en mycket betydelsefull källa av växthusgasutsläpp i de
nordiska länderna. De huvudsakliga hindren identifierade i denna rapport för att inkludera vägtransporten i handelssystemet har att göra
med överlapp med existerande styrmedel, höga administrativa kostnader för så kallad downstream-inklusion samt potentiell förlust av skatteintäkter. Erfarenheter från andra handelssystem visar att dessa barriärer kan övervinnas.
TemaNord 2015:574
Sectoral expansion of the EU ETS
TemaNord 2015:574
Ved Stranden 18
DK-1061 Copenhagen K
www.norden.org
Sectoral expansion of the EU ETS
- A Nordic perspective on barriers and solutions to include new sectors in the
EU ETS with special focus on road transport
The European Emissions trading Scheme (EU ETS) was launched
in 2005. The scheme started off with a limited scope, but has
gradually expanded, in terms of geographical, sectoral and
gas coverage. This report analyses the possibilities for further
sectoral expansion in the Nordic countries. The analysis is done
in terms of barriers and solutions for inclusion of four major
sectors currently outside the scope of the scheme: transport,
heating, agriculture and fisheries, and waste. Focus is on the
road transport sector, which is a major source of greenhouse gas
emissions in the Nordic countries. The main barriers identified for
inclusion of road transport are related to the overlap with existing
policy instruments, high administrative costs of downstream
inclusion, and potential loss of fiscal revenue. Experiences from
other trading schemes show that the barriers can be overcome.
TemaNord 2015:574
ISBN 978-92-893-4363-3 (PRINT)
ISBN 978-92-893-4364-0 (PDF)
ISBN 978-92-893-4365-7 (EPUB)
ISSN 0908-6692
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