ROMANIAN JOURNAL OF EUROPEAN AFFAIRS

Vol. 11, No. 3, 2011

European Emission Trading Scheme at a turning point from

the pilot phase to post-2012
Aura Carmen Slate*

Abstract : Climate change action has become a top priority for the European
governments and for the European Union. Since the polluters are part of the energyintensive industries, the mechanisms designed to reduce greenhouse gas emissions
should focus on the economic sector as a primary source of concern. Therefore,
environmental issues interrelate with the economic ones and one viable expression
of this relation is the EU ETS, a cap-and-trade mechanism. The ETS started with a
pilot phase in year 2005 and will continue with a third phase after 2012, period
which coincides with the end of Kyotos commitment. Although statistical data prove
that the EU ETS is becoming more efficient with each phase, in the absence of global
involvement the efforts invested in the scheme will be made in vain.
Keywords: European emission trading scheme, national allocation plan,
allowance, greenhouse gases, EU-wide cap.
JEL: Q Environmental and Ecological Economics; Q 5 Environmental Economics;
Q 56 Environment and Development; Environment and Trade

Introduction
The European Emission Trading Scheme
could be a possible answer to climate change
challenges in the European Union. But is the
mechanism designed to reduce greenhouse
gas emissions sufficiently enough to achieve
Europes role as an international leader
in climate change action? The limitations
within the framework of the scheme, as
well as the obstacles encountered, such as
low international commitment, could affect
the emission trade mechanism, although it
recorded good results in emission reduction
trend of the last two years.

We begin our study by explaining the

prior legislation and the methodology of the
emission trading scheme, then in another
section we discuss about the first two phases
of the allocation system and the way the
European Union gained experience in the
implementation process at national level.
Part four deals with the flaws of the EU
ETS, while the fifth section refers to possible
recommendations and measures to improve
the mechanism, and also debates over the
post-2012 period as a turning point for the
energy and environmental policy of the EU.
The article concludes with a case-study on
the Romanian implementation process of
the scheme, if the implementation process

* Aura Carmen Slate holds a Master of Arts in European Studies and a Master of Arts in History and Practice of International
Relations at the Bucharest University, Romania. Her latest article is Obstacles and Future Prospects for Cooperation in
German-Russian Energy Partnership. Analysing Angela Merkels First Chancellor Mandate, Bucharest University Press:
2010. E-mail: slate.acarmen@yahoo.com.

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Electronic copy available at: http://ssrn.com/abstract=1924763

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

was successful and the greenhouse gas

emissions have been reduced.
EU ETS is the abbreviation for European
Union Emission Trading Scheme. The
initiative to start such a programme is stated
in the preamble of the Directive 2003/87/EC.
But the first official document to announce
it was the Green Paper released in March
2001 which [] launched a debate across
Europe on the suitability and possible
functioning of greenhouse gas emissions
trading within the European Union. The
Sixth Community Environment Action
Programme (Decision No 1600/2002/EC)
[] identifies climate change as a priority
for action and provides for the establishment
of a Community-wide emissions trading
scheme by 2005. Climate change and the
gas emission reduction with 8% by 2012
in contrast with 1990 levels have been
the main concerns of the European Union
since the Kyoto Protocol was adopted in
1997. However, the major motivation
that led to the development of the EU
ETS as a possible mechanism to respond
environmental challenges was the United
Nations Framework Convention on Climate
Change in 1992, which purpose was to
establish a scheme for trading emissions in
order to avoid dangerous manifestations in
the climate system.
The main European legislation for the
EU ETS consists of several Directives, such
as: Directive 2003/87/EC of the European
Parliament and of the Council of 13
October 2003, establishing a scheme for
greenhouse gas emission allowance trading
within the Community and amending
Council Directive 96/61/EC, Directive
2004/101/EC of the European Parliament
and of the Council of 27 October 2004,
amending Directive 2003/87/EC in
respect of the Kyoto Protocols project
mechanisms, Directive 2008/101/EC of the
European Parliament and of the Council of

19 November 2008, amending Directive

2003/87/EC, and also Directive 2009/29/
EC of the European Parliament and of
the Council of 23 April 2009, amending
Directive 2003/87/EC. The main legislation
will serve us a very useful purpose by
providing significant information about the
scheme.
2. Prior legislation and allocation
methodology of the EU ETS
In the document entitled Preparing
for Implementation of the Kyoto Protocol
(COM (1999) 230), 19 May 1999, the
European leaders expressed the intention
to fight against climate change for the next
decades. The European Union proved to
be an international leader in environmental
actions at the decision-making level and
developed a practical dimension by
establishing a comprehensive monitoring
and evaluation system in the implementation
process: Ambition, however, has to be
complemented by concrete action and
tangible results. When assessing the current
situation, the conclusions are not very
positive. Emissions are again on an upward
track. Therefore, more needs to be done in
order to curb this trend and for the EU to
stand a chance of meeting its commitment.
This requires more action and more efforts
on all fronts and at all levels (European
Commission, 1999).
From the beginning, the mechanism
EU ETS was designed to function in
accordance with a coherent package of
policies implemented by the Member
States in terms of taxation as a suitable path
to limit dangerous gas emissions. Initially,
only sectors like energy and transport
industry were held responsible for high gas
emissions, therefore installations in these
sectors were first to be established in the
Member States. The trading scheme covers

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Electronic copy available at: http://ssrn.com/abstract=1924763

Aura Carmen Slate

energy-intensive industries, including steel,

glass industry, paper industry, cement
industries, as well as large combustion
installations, including power generators.
The EU ETS consists of two phases, a
mandatory <warm-up> phase (Asselt
& Biermann, 2007, pp. 497-498) and a
second phase starting the year of 2008.
Since the effort to reduce emissions cannot
be accomplished only by the Member
States and the EU as an entity, the Directive
2003/87/EC announced that the strategy for
climate change mitigation should be built
on a balance between the Community,
domestic and international action. The
Directive came into force in 2005, on 1st
of January, and no installation was allowed
to carry out any activities without a permit,
issued only if the operator or the holder was
able to monitor and to report the emissions,
released by the Member States legal
authority.
We must also take into account the
economic benefits that an emission trading
scheme inside the EU brings for the entire
Community and for its Members. Emission
trading is a mechanism that allocates
allowances to companies in order to stop
greenhouse gas emissions according to
each countrys environmental target.
The quotas, permits or caps, as
the allowances are called in the Green
Paper from March 2000, are allocated
to companies included in the scheme.
The method of allocation is based on
auctioning and allocation free of charge.
Allocation free of charge is also known
to be the grandfathering principle of
the Kyoto Protocol. (In a strict sense, a
<grandfathered> right is not related to the
notion of the allocation free of charge of a
realisable asset, but rather to a historical right
to do something (European Commission,
2000, p. 18)). Encountering a great deal of
criticism, the grandfathering principle of

62

the Kyoto Protocol charges as responsible

for the climate change difficulties just the
industrialized countries (Annex I Parties in
Kyoto Protocol) that need to take action
before the developing countries. They
imposed the so-called differentiated
responsibility (Mller, 2005, p. 3) and the
commitment architecture of the allocation
mechanism of the international trading
scheme. Anyway, the mechanism agrees
that the companies can emit more than their
permits if they can find another company
that emits less than its permits that have
been allocated in the national plan and that
is ready to sell permits to the company in
need. Therefore, not only a new regime of
the international environmental governance
was sketched with the trading scheme,
but also companies could enhance their
profits and invest in new technologies and
innovation programmes.
In order to provide a better understanding
of our study it would be necessary to
enumerate a few definitions of the concepts
that are going to be discussed over the
present paper. The definitions are provided
according to the Directive 2003/87/EC, the
primary document of the EU ETS.
(a) allowance means an allowance
to emit one tone of carbon dioxide
equivalent during a specified period,
which shall be valid only for the
purposes of meeting the requirements
of the Directive;
(b) emissions means the release of
greenhouse gases into the atmosphere
from sources in an installation or the
release from an aircraft performing an
aviation activity;
(c) greenhouse gases means the
gases listed in Annex II and other
gaseous constituents of the atmosphere,
both natural and anthropogenic, that
absorb and re-emit infrared radiation;
(d) greenhouse gas emissions permit

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

means the permit issued in accordance

with Articles 5 and 6;
(e) installation means a stationary
technical unit where one or more
activities listed in Annex I are carried
out and any other directly associated
activities which have a technical
connection with the activities carried
out on that site and which could have
an effect on emissions and pollution;
(f) tonne
of
carbon
dioxide
equivalent means one metric tonne
of carbon dioxide (CO2) or an amount
of any other greenhouse gas listed in
Annex II with an equivalent globalwarming potential;
(g) combustion means any oxidation
of fuels, regardless of the way in which
the heat, electrical or mechanical energy
produced by this process is used, and
any other directly associated activities,
including waste gas scrubbing;
(h) electricity generator means an
installation that, on or after 1 January
2005, has produced electricity for sale
to third parties, and in which no activity
listed in Annex I is carried out other than
the combustion of fuels;
3. The EU gains experience in the pilot
phase 2005-2008 and demands more in
the second phase 2008-2012
The first period of the EU ETS began in
January 2005 and it was finished in late 2007.
The document of paramount importance for
this first phase is the Directive 2003/87/EC
which provides not only the methodology
of allowances allocation, but also the
continuity of the trading scheme after the
ending period of the Kyoto Protocol in year
2012. Likewise it is a very ingenious piece
of legislation since it covers a large period
of time and commits the EU to take action
in accordance to Kyotos targets, it makes a

connection between EU and other countries

interested to develop a similar market for
carbon allowances like the United States
that did not ratify the Kyoto Protocol, and
above all, the most important thing, it
provides a design for the first international
mechanism for reducing GHG built on
a competitive basis among Member
States, because the purpose beyond GHG
reduction is increasing energy efficiency
and innovation.
The particularity of the pilot phase
was the difficulty to find the best path to
a coherent methodology for the national
allocation plans or as they are called NAPs,
not always designed in order to meet Kyoto
targets. NAPs were established by the
competent national authorities and were
supposed to set the total number of gas
emission permits which the government
of each Member State inclines to allocate
in the emission trading framework, as
well as the allocation methodology for
the permits to each installation covered
by the present Directive. NAPs also
showed the implication rate of each state
to achieve Kyotos target and the industries
held responsible for gas emissions. NAPs
encountered impediments in 2007 when
they faced price volatility, as carbon prices
fell below 1 per tonne (Tilford, 2008, p.
16). This especially affected the investments
in new technologies of energy efficiency.
The second problem of NAPs was
that they lacked enough control in the
allocation process. It is important to know
that the allocation at the national level
is made according to historical data and
risk prognoses. Moreover, the allocation
is made in two stages: the first one is
allocation with gas emission permits for
each industrial sector, and the second one
is allocation for each installation integrated
into the scheme. Since the first phase of

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Aura Carmen Slate

EU ETS was at its starting time, NAPs were

too relaxed as the Kyoto targets required.
For instance, countries like Germany were
affected by tight allocation permits, whereas
countries like Spain or Portugal announced
less ambitious NAPs. Despite the fact that
the methodology of the EU ETS mechanism
took into account the differences among
Member States or even different levels in
economic development, relaxed NAPs
were on the verge to endanger Kyotos 8
per cent reduction target assumed by the
EU. This was the dilemma which every
developed country faced, namely how
not to affect economic growth but still
reducing emissions. Anyway, the perverse
results of varying degrees of commitment
on the part of EU Member States (Tilford,
2008, p. 20) advantaged countries with
high caps and even the companies coming
from countries with low caps. Companies
which were allocated not enough permits
for their activity used to buy allowances
from companies that faced undemanding
caps, that led to profits for less developed
countries but also was more than an
advantageous opportunity for companies
that chose to purchase allowances and not
to reduce pollution rates.
Due to the misinterpretations that had
been made in the first phase of national
allocation plans 2005-2008, the EU needed
to strengthen the directives and to provide
more demanding emission reduction.
One important document is the Directive
2004/101/EC of the European Parliament
and of the Council of 27th October 2004
which was amending Directive 2003/87/
EC, linked directly to the use of certified
emission reductions (CERs) and emission
reduction units (ERUs) starting 2008. The
lessons to be learnt from the first phase of the
EU ETS are stressed in the Communication
from the Commission (COM (2005) 703
final, Brussels, 22. 12. 2005) Further

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guidance on allocation plans for the

2008 to 2012 trading period of the EU
Emission Trading Scheme. The document
is relevant for the Commissions review of
the allocation plans, which extends a rather
technical analysis of the first year of the EU
ETS. The aim of the Commission guidance
plan is [] to achieve more coherence in
the second trading period, to the extent
that the divergent progress by Member
States towards their individual Kyoto targets
allows for. The guidance document is
an opportunity for the Commission to
accomplish a strategic review of the EU ETS
and to express further proposals to improve
the trading scheme in the near future.
But the central motivation, for which this
guidance Communication was released,
was to consider critical opinions about the
national allocation plans that proved to be
dysfunctional in terms of loose caps. The
Commission urges Member States to work
towards simpler plans for the second trading
period, since simple allocation plans
boost the understanding of the instrument
among stakeholders and also increase
transparency and predictability. To prove
the Commissions rigorous methods,
the EU provided a set of standardised
data, a set of tables (Annexes, part of the
Communication document), which are
regarded as integrated parts of the second
phase of national allocation plans. The
Member States are expected to co-ordinate
their activity in terms of national allocation
with the set of standardised data and of the
Common Format, which was elaborated for
the use of the first phase.
Seen as a learning period, the first
phase revealed all-important characteristics
that were supposed to aggregate the Member
States in their future struggle to achieve
Kyotos targets. According to the Summary
of Experience (European Commission,
2005, p. 3) gained from allocation plans

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

for the first phase (2005-2007) the General

Lessons for the second phase (2008-2012)
enumerate a few observations: it is advisable
to avoid the lack of transparency in the
design of the allocation plans, loose targets,
too restrictive measures for the power
generators installations and less restrictive
measures for other sectors covered by the
EU ETS, but to increase the use of emissions
trading which is necessary to meet the
Kyoto targets cost-effectively.
The guiding lines for the second phase
refer especially to the national allocation
plans. First, as already stated before, the
first recommendation is the progress to
Kyoto targets. The last cited document
stresses that the emissions in year 2005 as
well as the gap between Kyoto targets and
what had been achieved until that moment
was increasing. Some Member States are
even denounced as being too far from
their commitments to Kyoto targets. This
is why the Commission encouraged the
Members to use in a proper way the trading
scheme. Second, setting national caps for
the second period is another important
issue in the document. National allocation
plans are designed according to forecasts
and prognoses that use two evaluation
factors, such as economic growth (higher
the GDP, higher the emissions) and carbon
intensity. The methodological design
follows this logic: a developed economy
drives to new technology, which drives to
the development of the tertiary sector and
the decline of the secondary sector and all
amounts to a low carbon emission trend.
4. How to address emission trading
schemes
flaws?
Limitations
and
recommendations
The need of an EU-wide cap is of
paramount importance for the future of
emission trading scheme. This means that

national governments will no longer decide

their national caps that have brought
doubts on the trading scheme as a viable
mechanism for emission reduction. It
would be necessary to provide the EU with
a specialized body which can set not only
a standardized EU-wide cap but also to
encourage the Member States to strengthen
their policies in order to achieve Kyotos
aim.
Furthermore, many experts argue over
the implementation of longer periods
and phases, since short periods of time
are disadvantageous for companies
investments. It is also argued about the fact
that longer periods will lead to the certainty
that new technologies of carbon storage or
carbon capture, for example, prove to be a
success in the emission reduction process.
Other specialists argue about the fact
that only bigger industrial energy users
should be kept in the scheme because it is
inappropriate to address the same demands
to small consumers such as car owners
or road transport sector. The argument in
favour of this is that car emissions have
risen for the last decade and measures must
be taken inside the transport sector.
Moreover, in order to change the
path from a fossil-based economy to an
environmental friendly one, the EU must
take serious measures for the development
of renewable sources of energy and new
technologies of lowering carbon emissions.
The most innovative of all is carbon capture
and storage or CCS which requires high
investments. However, CCS together with
renewable sources of energy will make a
difference in the foreseeable future and help
the EU to decrease its emissions with 50%
until 2050 and to make its contribution to
prevent global warming with 2 degrees C.
The importance of the European
Council in March 2007 under the German
Presidency was a crucial starting point in

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Aura Carmen Slate

the revision of the EU ETS and setting new,

ambitious targets. German Presidency of
the EU announced in late December of
2006 a few objectives that were supposed
to re-evaluate the energy policy: the revision
of the Energy Action Plan, monitoring
the results in the Energy Packages,
trying to achieve greater commitment in
energy sector of the Member States. Two
important moments that took place under
the German Presidency were the Energy
Council Meeting in February 2007 and
the Conference Completion of the Single
European Market for Electricity and Gas striking the balance between competition
and energy security (Glos, 2007) opened
by the German Minister of Economy and
Technology in Berlin. The energy dossier
opened by the German Presidency of the
EU is considered to be a success since it
covers not only short-term objectives, but
also long-term objectives such as a perpetual
dialogue between the Member States on
energy and climate topics. In the following
lines we present the essential documents
of high importance for the future of trading
schemes function that are considered to be
the result of the European Council in March
2007 under the German Presidency.
A reforming document of the EU
ETS is 20 20 by 2020 Europes climate
change opportunity, which was elaborated
during the March Summit in 2007 under
the German Presidency of the EU. It is a
defining moment to start to build Europes
leadership in climate change policies and
to transform Europes economy into a
model to be followed by other countries in
sustainable policy sector. This document
addresses also to the enhancement of the
EU ETS mechanism. Two targets were
announced by the Working Group of the
March Summit: A reduction of at least 20%
in greenhouse gases (GHG) by 2020 rising
to 30% if there is an international agreement

66

committing other developed countries to

<comparable emission reduction and
economically more advanced developing
countries to contributing adequately
according to their responsibilities and
respective capabilities>, and A 20%
share of renewable energies in EU
energy consumption by 2020 (European
Commission, 2008, p. 2). Although much
effort was invested in order to design and
to prepare the Communication as one of
the most important documents regarding
the reform of the emission trading scheme,
we have to search for substantial measures
covered by the document which were
announced at the beginning of the text by
an inspiring speech: The earlier Europe
moves, the greater the opportunity to use
its skills and technology to boost innovation
and growth through exploiting first mover
advantage. The trend of global opinion
is clear, and the EU can take the lead in
pointing the way to an international climate
agreement for the post 2012 period
(European Commission, 2008, p. 3). Is
the first mover advantage going to dilute
the substance of the document? This can
only be discussed over the limitations and
successes of the third phase of the EU ETS.
As for the EU ETS mechanism, 20 20 by
2020 Communication delivers the updating
of the trading scheme and the preparations
for the beginning of the third period.
This cap and trade system, a pioneering
instrument to find a market-based solution
to the climate change, needed to be
strengthened because of the generous
number of allowances handed out in the
first phase (2005-2007) and because of
the national allocation plans which brought
distortions in terms of market competition.
Four recommendations are made in the
document regarding the reform of the
trading scheme: the first one refers to the
inclusion of other greenhouse gases under

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

the mechanism, other gases than CO2

, the second one refers to the inclusion
of all major industrial emitters into the
scheme, the third issue refers to the national
allocation plans that were going to be
replaced by auctioning or free allocation
through single EU-wide rules, cutting the
allocations year by year in order to reduce
emissions in the EU with 21% by 2020, and
the forth issue addresses to the commitment
of the Member States to bring areas like
building, transport, agriculture, waste and
industrial plants under the coverage of the
present scheme.
Directive 2008/101/EC of the European
Parliament and of the Council of 19
November 2008 underlines the importance
of achieving a global target of limiting
temperature increase with no more than
2 0C above the pre-industrial levels. This
aspect was discussed in the Working Group
of the European Council in March 2007,
but was inspired from the Limiting Global
Climate Change to 2 degrees Celsius.
The way ahead for 2020 and beyond,
which is rather a long-term document.
The hope that a strong agreement signed
under international consent was under
preparations for the post-2012 period,
European leaders wanted to shape the
so-called highly energy-efficient and low
greenhouse gas-emitting European Union
until a post-Kyoto agreement entered into
force. Therefore, they announced even
more ambitious targets: that is to reduce
the emissions with at least 20% below
1990 levels by 2020. For the third phase,
the emissions from aviation sector turned
out to be the central issue since it is stated
that aviation has an essential contribution to
greenhouse gases: Aviation has an impact
on global climate through releases of carbon
dioxide, nitrogen oxides, water vapour and
sulphate and soot particles, whereas a
comprehensive package of measures should

also include operational and technological

measures, improvements in air traffic
management under the Single European
Sky, research into new technologies,
including into methods for improving fuel
efficiency of aircraft (European Parliament
and the Council, 2008). Moreover, aviation
emissions need to be included into an
international scheme and the Member
States must strive to achieve agreements for
global measures in this respect.
Directive 2009/29/EC of the European
Parliament and of the Council of 23 April
2009 is also a result of the European
Council of March 2007 and has as its main
objective to set a predictable path to reduce
emissions. This Directive is centred on the
concept of greenhouse gas and recommends
the alignment of the definition under the
current scheme with the one in UNFCCC.
Ironically, the document lacks a proper
definition of the concept. There are two
ways to improve the EU ETS mechanism
after having experienced the first trading
period and the national allocation plans for
the second period, and these are, on the
one hand, the imperative to harmonise the
emission trading scheme in order to better
exploit the benefits of emission trading, to
avoid distortions in the internal market and
to facilitate the linking of emissions trading
systems, and on the other hand, to ensure
more predictability by including new
sectors and gases under the scheme: The
Community scheme should be extended to
other installations the emissions of which
are capable of being monitored, reported
and verified (European Parliament and the
Council, 2009).
But the most innovative measure is
setting a Community-wide quantity of
allowances, that is expected to decrease
in a linear manner beginning from the midpoint of the period from 2008 to 2012,
ensuring that the emissions trading system

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Aura Carmen Slate

delivers gradual and predictable reductions

of emissions over time (European Parliament
and the Council, 2003). This will lead
by 2020 to a reduction of emissions with
20%. Considering the fact that the first two
phases reported distortions in the market
competitiveness, the present Directive
encourages the development of a new
solidarity and growth mechanism (88% of
the total quantity of allowances distributed
among the Member States according to their
emission rates, 10% distributed among the
Member States with low income levels per
head to adapt to climate change).
5. Third phase after 2012 is the EU ETS
a viable mechanism to reduce emissions?
Since the greenhouse gas emissions
in the EU-27 account for 10.5% of global
anthropogenic emissions, and since the
largest emitters are Germany, United
Kingdom, Italy, France and Spain (European
Environment Agency, 2008), and the
responsible polluters are the industries
oriented to the production of electricity,
heat, transport, fossil fuel combustion
from households, iron, steel production,
mechanisms such as the emission trading
scheme must be implemented and
monitored within the framework of a
coherent methodology.
For the first phase the EU ETS mechanism
proved to work successfully in emission
reduction despite its flaws commented in
the previous section. There were taken into
account a number of 10675 installations
for the first period. The following charts are
based on the Annual European Community
Greenhouse Gas Inventory Report
submitted to the UNFCCC in 2008 which
consists of the emissions from the EU and
all the Member States between years 19902006, the Initial Report on the European
Community submitted to the UNFCCC

68

in 2007, the reports submitted by all the

Member States to the Commission, the
Community Independent Transaction Log
(CITL) for verified emissions under the EU
emission trading scheme, second national
allocation plans (European Environment
Agency, 2008). The charts demonstrate
that greenhouse gas emissions decreased
between 2005 and 2006 by 0.3% in the EU27 and by 0.8% in the EU-15. The decrease
was estimated in France, Italy, Spain and
Belgium (main polluters) and the increase
in Poland, Finland and Denmark (European
Environment Agency, 2008).
As the first chart shows, there are three
activities that are covered by the scheme
and are responsible for the largest emissions
in the EU in the first year of the pilot phase:
public electricity and heat production
(27.1%), road transportation (18.0%)
and households (fossil fuels combustion)
(9.4%). When the pilot phase ended, the
second phase needed adjustments, because
there were problems with the price setting
on the certificate market, and with the
certificates for the power generation system,
since is the largest emitter activity covered
by the scheme. There were also reported
fluctuations in the CO2 prices due to the fact
that the Member States were the distributors
in the allocation process which caused,
according to specialists (Drge, 2007, p. 3),
a decrease in the price transparency. If we
add to this inconvenient the fact that less
auctioning caused less transparency about
the undisclosed price of the certificates,
all led to economic and competitive
disadvantages among companies.
For the year 2009 (complete data about
the emissions for the year 2010 are not ready
yet) the European Environment Agency
estimates that the emission reduction in
EU-27 has decreased with 6.9% compared
to the year 2008 (European Environment
Agency, 2010). The reductions show that

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

Share of 2006 greenhouse gas emissions in the EU 27, by main activity

Chart 1
Source: European Environment Agency, 2008, p. 17

Share of 2006 greenhouse gas emissions in the EU 27, by gas

Chart 2
Source: European Environment Agency, 2008, p. 17

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Aura Carmen Slate

they have decreased with 17.3% below

the levels of 1990 and if the EU Members
keep enforcing even better measures and
implement domestic policies it will be an
easy target to achieve emission rate with
20% below 1990 level in the year 2020.
Three dimensions were combined to
achieve progress in decreasing emissions:
domestic policies and measures, use of
Kyoto mechanisms and use of LULUCF
activities (land use, land-use change and
forestry). The first dimension of policies
and measures at a domestic level to be
promoted: enhancing energy efficiency,
protecting and enhancing carbon stocks,
promoting
sustainable
agriculture,
promoting renewable energy, carbon
sequestration and other environmentallysound technologies, tackling transport
sector emissions, controlling methane
emissions through recovery and use in
waste management (European Environment
Agency, 2008). In order to achieve the
Kyoto targets, the Member States must
combine the domestic policies with the
use of Kyoto-mechanisms that can be
used in the second phase between 2008
and 2012: Joint Implementation (JI), Clean
Development Mechanism (CDM) and
international trading scheme. JI and CDM
are used by developed countries in order
to invest in environmental and renewable
technologies programmes in developing
countries. CDM and JI provides developed
countries with useful mechanisms to achieve
their emission targets and even provides
sustainable development programmes and
a more competitive internal market for the
developing countries in energy efficiency
field. As for the international trading
scheme, it is a methodology a country can
apply in order to sell its emission reductions
to a country that finds it difficult to achieve
its target, only after the former country has
even better results than those required

70

under Kyoto for the present year.

However, one must add the effects of the
economic recession on the Member States
capacity to reduce emissions. The recession
proved to help the emissions decrease but
it also meant that the Member States did
not invest as much as it was expected in
innovation and renewable technologies.
As the Climate Action Commissioner
Connie Hedegaard said, Due to the crisis
the significant drop in emissions does not
come as a surprise. [] And we must also
realise that because of the crisis it suddenly
became easier to reduce emissions and that
is good. Unfortunately that also means that
European business din not invest nearly
as much as planned in innovation, which
could harm our future ability to compete
on promising markets (Hedegaard, 2010).
The ETS mechanism is more than a capand-trade system: it encourages innovation
and investment in the renewable energies
all over the world and of course in Europe,
too. The companies are striving not only
to reduce the emissions according to
the allocation plans, but also to reduce
emissions by integrating new technologies
in their daily activities, an engine for
innovation and energy efficiency.
The third phase of emission trading
scheme announce drastic changes (Bruyn
et al, 2010, p. 35) that have been proposed
compared to the second phase. First, the
revision consists of a centralized EU-wide
cap on emissions, which are going to be
reduced with 1.74% that will result in a
total reduction of 21% by 2020. Second,
allowances will be auctioned in such a
way that 50% of emissions will fall under
an auction regime. Third, the most affected
will be the electricity production sector
since all emissions here will be auctioned.
All these measures covered by the Directive
2009/29/EC put pressure on all energyintensive industrial installations integrated

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

into the scheme. It is expected that the

third phase will cause improvement in the
innovation and competitiveness sector of
the EU as an impact of the changes after the
year of 2012.
High expectations are likely to fulfil
in the next years under the third phase of
the EU ETS that are vital to the future of
the new environmental regime. To begin
with, from 2013 heavy industry will bring
its contribution to the scheme in order
to cut emissions, and by heavy industry
we understand sectors like electricity
generation, coking, mineral-oil refineries,
ferrous-metal production, cement, lime,
ceramics, bricks, glass, pulp and paper.
After that, no emission permits will be
given for free to industry sectors, but only
by purchasing the permits in auctions
starting gradually with 20% in 2013, 70%
in 2020 and 100% in 2027. But will all
the Member States be able to achieve the
target? The decision-makers thought that
states which encounter problems in the
transition to a low-carbon economy will
receive an amount of 12% permits more to
auction. Furthermore, the investment in the
third phase is close to 300 million emission
allowances at an estimated value of EUR
6 to 9bn (Council of the European Union,
2009). 50% of the total amount of money as
a result of the EU ETS revenue is expected
to be mobilised in a coherent manner to
innovation and research areas aimed at
boosting the effectiveness of Member States
(European Council Conclusions, 2011, p.
9) through climate-related projects.
The third phase of the EU ETS will start
in 2013, although preparations were made
in year 2007 at the European Council in
March as we have already showed. These
preparations may prove not to be satisfactory
enough due to the lack of commitment at
the international level towards the main
issues that need to be tackled with as

soon as possible. One example, were the

overestimated results of the Copenhagen
Conference at the beginning of the year
2009. In the forthcoming of the Conference,
the EUs commitment to increase reduction
of emissions moved from 20% to 30% by
2020. But the Conference proved not to
be as successful as expected and viable
international climate policy without the
largest polluters of the world, such as
United States, China, India, and others is
not possible. The EUs pioneering role in
the international climate policy and all its
efforts (Drge, 2008) will be less successful
in the absence of global commitment.
6. How did Romania face the
implementation of the EU ETS. Case study
Common efforts are expected to
be implemented in order to achieve
successful results of the trading scheme in
the emission reduction aspects: emission
allowances trading should form part of
a comprehensive and coherent package
of policies and measures implemented
at Member State and Community level
(European Parliament and the Council,
2003). All sectors of the European Union
economy were covered by the scheme,
in particular, industry and energy, also
all sectors that are subject of intensive
emissions, all these require complementary
measures of the Member States to those of
the Community to meet the Kyoto targets.
Romania, as well as Bulgaria, the two
new Member States starting 1st January
2007, faced a real challenge since they had
to adjust to the scheme and to develop a
national allocation plan in the middle of
the pilot phase. We are going to analyse
the Romanian case from the perspective
of national legislation. Romania became
Member of the EU in year 2007. Therefore,
the first national allocation plan was

71

Aura Carmen Slate

designed to cover only the last year of the

pilot phase. The Ministry of Environment
chose to elaborate the second national
plan for the period 2008-2012 in the same
time with the first one, in order to submit
them both to the Commissions acceptance
as one document. The motivation, as it
is stated in the Discussion Document
Romania National allocation plan,
was the efficiency issue. We must
add, that the national authority used the
same methodology for both plans: []
using as much as it is possible, the same
methodology (Ministry of the Environment
and
Water
Management,
2006).
Considering all these, it is likely that many
problems could have risen in the process of
implementation. The amount of emission
certificates for the year 2007 was of 81 317
000 and for the second period 2008-2012,
457 391 000. The national plans modus
operandi was a combination of methods,
the historical one and the prognoses one,
using data of 2003 as a base-year. Historic
emissions refer to the period between
2001-2004, taking 2003 as a base-year
according to the National Inventory Report
(Ministry of Environment and Sustainable
Development, 2008).
The first draft for the national allocation
plan was designed in 2006 as part of the
preparations made by the Romanian
government before the adherence to
the EU. This draft is considered to be the
legal instrument for the implementation
of the Directive 2003/87/EC, which was
transposed in the national legislation
framework by the Government Decision

72

780/2006. The first version of the national

plan was published in August 2006, then it
was notified by the European Commission
in December 2006, some clarifications
were made in February and July 2007 and
the revised NAPs were again notified in
August 2007.
Two national allocation plans were
proposed to the Community by Romanian
Ministry of Environment in 2006 for the year
2007, the last year of the pilot phase and for
the period 2008-2012 as the second phase.
In accordance with the Directive 2003/87/
EC, the Ministry of Environment is the legal
national authority responsible for the EU
ETS implementation in Romania. The first
step was to develop a national allocation
plan that had to be notified by the European
Commission. The national allocation plan
set the total amount of emission allowances
that the Romanian government intended
to allocate in the scheme framework as
well as the allocation methodology of the
certificates to the installations covered by
the scheme.
The allocation was made in two stages,
first allocation for each industry sector, the socalled allocation at sector level, and second
allocation for each installation, allocation
at installation level. The latter allocation is
calculated by historical approach, relevant
emissions for the installation in the baseyear, meeting the criterion the allocation
is not more than the expected needs
(Ministry of Environment and Sustainable
Development, 2008).

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

Chart 3
Source: Ministry of Environment and Sustainable Development, 2008, p. 10.

Chart 4
Source: Ministry of Environment and Sustainable Development, 2008, p. 10.

The national allocation plan covered the

energy generator sector (the largest emitter
in the scheme for Romanian case) making
predictions for the emissions of GHG for
the foreseeable future. The Ministry used
the data of ENPEP Programme (Energy and
Power Evaluation Programme) and analysed
energy production, energy import, energy
conversion in electricity and heating,

energy consumers. For other sectors, the

GHG amount was evaluated according to
the evolution of the gross national product,
the evolution of all the sectors included
in the scheme, domestic measures that
are considered to be complementary to
the Communitys legislation, and energy
demand.

73

Aura Carmen Slate

Share of GHG emissions by main source and by gas in 2008:

Chart 5
Source: European Environment Agency, 2008, p. 92.

Share by sector of 2010 GHG according to the With existing measures projections:

Chart 6
Source: European Environment Agency, 2007, p. 14.

For the Romanian case, energy and

transport sectors are responsible for the
largest emissions of GHG, as we can see form
the charts, both for the projected emissions
for the year 2010 and for the complete data

74

of the year 2008. According to experts

opinion Romania is expected to meet Kyoto
target with significant margin even without
additional measures. If additional measures
are to be introduced then further significant

European Emission Trading Scheme at a turning point from the pilot phase
to post-2012

reduction is expected. The evolution of the

emissions trend for year 2010 is subject of
future studies, since we lack standardised
data at the moment.
Conclusions
According to our assumption at
the beginning of the study, the EU ETS
mechanism was invested with great reliance
as being more than a system that reduces
greenhouse gas emissions. On a deeper
research of the main legislation of the ETS
as well as of the data provided by European
authorities, the emission trading scheme
prove to be an innovative instrument
in dealing with climate change facing
both advantages and flaws. It is a unique
mechanism which gives Europe the chance
to be an example in the international
environment regime.
The EU ETS is a mechanism functioning
in a global market and is designed to face the
new challenges of the climate change. The
ETS is not the only one responsible for GHG
reductions in the European Union because
Member States develop similar projects
at national level in the same purpose. As
a conclusion, the EU ETS bridged the gap
between Member States and Community
demands in what proves to be an efficient
mechanism.
The main body of legislation consists
of several directives that were subject of
debate in the previous parts of our study.
The documents are projected for long-term
objectives, for long periods of time which
means that the system will be perfected
over the years as the pilot phase undergone
changes. Also, the interrelated documents
are binding together in a circular policy
design, each directive strengthening the
measures of the previous one.
The emission trading scheme convinced
companies to settle the path of a less energy-

intensive industry and to create a European

carbon market which is rather a strong
driver to a low-carbon investment. The
greatest advantages of the scheme are the
regulations imposed in the energy sector,
which is the largest emitter of GHG in the
European Union. This will increase energy
efficiency, competitiveness, the formation
of the European energy internal market. As
a result of considerable investments within
the framework, innovation in renewable
technologies was achieved.
There are also obstacles to overcome
which consists of flaws in the mechanism
design and low commitment to the
international environmental governance.
First, the EU ETS is a possible answer to
climate change, as an economic instrument
to be implemented in the Member States, but
it could become an inessential mechanism if
the international feedback and commitment
to GHG reduction of the greatest polluters is
insignificant.
Second, a design flaw is the predictable
feature of the EU ETS system. Based on
predictions made according to the baseyears, the mechanism could bring distortions
in the understanding of the methodology,
implementation, evaluation and these
could cause failures in meeting the GHG
targets. The EU ETS known as the volumebased scheme (Llewellyn, p. 35), is not easy
to implement as an efficient mechanism,
because of the credibility and predictability
issues: stability in the price fluctuation and
in the allocation of permits or quotas.
Third, the EU ETS is only an economic
instrument and it is impossible to ask it to
cover in its framework all the problems
caused by climate change in terms of
emission reduction. The system could be
improved by extending the list of dangerous
gases that need to be reduced and by
achieving a greater cooperation between
the Member States.

75

Aura Carmen Slate

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