In its latest action plan to combat climate change, the EU Commission proposes both a new renewable energy directive (main story) and a major overhaul of the EU emission trading system (ETS). Referring to the directive, Piebalgs says: "This is a temporary measure designed to support deployment of new renewable technologies." ETS, however, will ensure that the energy market realigns itself away from fossil fuel generation and towards renewables in the long term. "The maturity of the [renewables] industry and the high price of carbon would ensure its further development," Piebalgs believes.
ETS adds the cost of carbon emissions into the market price of electricity through an EU cap and trade system, now aimed at achieving a 21% reduction in emissions by 2020 compared with levels in 2005. The target could be raised to 30% by 2020 if a new global climate change agreement is reached for the post 2012 period.
Under ETS, companies are set a maximum amount of emissions they are allowed to produce for a given period, with one tonne of carbon emission counted as one allowance, known as an EUA. A company that has reduced its emissions to below the level of its allowance can sell excess EUAs to companies that have exceeded their emissions cap. These have recently been trading at around EUR 20 each.
The Commission proposes removing responsibility for allocating emission caps from national governments to the EU executive, which will also assume responsibility for doling out free EUAs to companies in future. The number of free allowances will gradually be reduced to zero by 2020, with companies required to buy EUAs in an auction process instead.
Importantly for the wind sector, electricity generators will be legally required to buy all their annual requirement for carbon emission allowances already from 2013, a cost that will be added to the price consumers pay for their fossil-fuel fired electricity. Wind will become relatively cheaper.
Buying EUAs is cheaper than paying penalties for exceeding emission allowances, which for 2008-2012 are set at EUR 100 per tonnes of carbon. In addition, companies can buy certified emission reduction credits (CERS) generated by projects developed under the Kyoto Protocol's Clean Development Mechanism (CDM) and Joint Implementation (JI) program and use them to reduce a specified proportion of their EUA requirement.
In this way ETS provides powerful price signals to improve the efficiency of energy use, conserve energy, and build more renewables. "The future ETS will ensure a sufficiently high price that companies have a strong commercial interest in avoiding the cost of ETS allowances," says the Commission. The action plan assumes the price of each EUA will rise to EUR 30-40.
"The measures announced for the next phase of the EU ETS will increase and firm up the price of carbon -- essential if we are to drive investment in low carbon technologies at the scale required to deliver the deep carbon cuts necessary to mitigate the impact of climate change," says Tom Delay of the UK's Carbon Trust.
Submission of Kyoto CERs to meet post-2012 ETS obligations will be allowed provided they are generated in the period 2008-2012 and not already used. "It is expected that operators will be able to achieve more than one-third of the emission reductions required between 2013 and 2020 through their use," says the Commission. If a 30% by 2020 target is adopted, the limit on CDM/JI credits may be raised to up to half of the additional reduction effort, it says. The Commission estimates revenues resulting from the ETS will total EUR 50 billion annually by 2020, money it says should be recycled back into further renewable energy investment.