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DG CLIMA, European Commission’s (EC) service for climate change mitigation, will publish the proposal of changes to the EU Effort Sharing Decision (ESD) around 20 July. We expect that the proposal has now entered into the ‘interservice consultation’ where it is considered and agreed by other EC services. It’s the last chance to influence its shape before it’s out.

This is a big deal! The proposal will put forward changes to the ESD for the 2021-2030 period (ESD II). The ESD is the twin of the EU Emissions Trading System (EU ETS), and governs the nearly 60% of European emissions, including from agriculture, transport, and buildings. The first phase of the ESD (2013-2020) has a target of reducing these emissions by 10% compared to 2005 levels.

The ESD will have to play a bigger role alongside the EU ETS to put Member States on the pathway to deliver net zero emissions in the second half of the century.

This won’t happen as long as the ESD is full of hot air. The European Environment Agency (EEA) data for 2014 shows that Member States will overdeliver against their 2020 targets.

Figure 1. Current emission levels and historical trend versus 2020 and 2030 targets for ESD sectors on 2005 levels

Source: EEA 2014 data, Sandbag calculations

Sounds like good news? Well, it certainly shows that the EU is making progress.  But the scale of the remaining challenge is huge, and the EU is storing up problems for itself if it doesn’t start to cut emissions more quickly and recognise it in the emission reduction targets.

A look at the EU-wide ESD sectors as a whole shows that the current EU collective 30% reduction target for 2030, set by the October 2014 Council Conclusions (2.1), would hardly drive any emission reductions beyond business as usual (BAU). In our previous report, Effort Sharing Dinosaur we projected that emissions in all Member States under the ESD will already be 28% lower than 2005 levels in 2021.

Increase the ESD II 2030 target to a minimum of 40%, or ideally to 50%, to get the ESD to work as effectively as possible.

In order to stimulate reductions beyond BAU the target will need to be significantly higher. We project that Member States could reach even a -50% a by 2030. If the ESD is full of hot air during 2021-2030 this will happen simply if project developers invest in measures that profit them anyway (see Effort Sharing Dinosaur for detail).

Figure 2. Emissions, targets and surplus under a 30%, a 40% and a 50% ESD target in 2030 with full carry-over pre to post 2020 (MtCO2e)

Source: Sandbag’s calculations based on the EEA 2014 data.

To drive emissions beyond BAU the ESD II would have to start with a higher target, have no surplus carried over from the first phase and with emissions calculated on a new base year, e.g. taking the average of 2018, 2019 and 2020. See our previous blog on full recommendations on the ESD II ambition.

Inbuilt flexibilities are the only way to deliver more ambition and more emission reductions at less cost whilst keeping Member State’s individual targets fair and balanced.

Emission reductions under the ESD II can be achieved cheaply, but better flexibilities are key. What are flexibilities? Well, they’re mechanisms that allow allowances to be reallocated to where emission reductions are the cheapest or from Member States that have a surplus (e.g. have successfully managing to cut their emissions) to those with a shortfall.

If flexibilities are enhanced from what exists in ESD I there is an opportunity to lower costs of the collective effort across the EU, which means that the EU is able to do more in total, and can, therefore, agree now to increase ambition for ESD II while keeping equitable shares of emissions reductions.

There are number of options for flexibilities on the table, including the ones championed by the Council conclusions from October 2014:

  • enhance existing flexibilities within the ESD (2.12);
  • introduce a new one-off flexibility with the EU ETS for the Member States with national reduction targets significantly higher than the EU average and their actual reduction potential (2.12);include Land Use, Land Use Change and Forestry (LULUCF) into the 2030 greenhouse gas mitigation framework (2.14).

Next week, Sandbag will publish a new report in which we will assess these options against some of our ideas, including:

  • full flexibilities with the ETS;
  • European Project based Mechanism (EPM).

ESD II doesn’t need more allowances from outside the system, it needs better flexibilities within.

The ESD could be designed to allow allowances in from other systems like the EU ETS.  Sandbag considers that adding to supply is not the way to facilitate cheaper emission reductions within the ESD.

Given the amount of hot air and the ESD sectors’ potential to further decarbonise, Sandbag believes that the introduction of an EPM into ESD II would be the best approach. An EPM would allow to generate credits  in the ESD sectors where the reductions are the cheapest and   then trade them for compliance by Member States with targets higher than their cost-efficient emission reduction potential. That would mean that the ambition of the 2030 reduction target could be safely increased.

The EPM would also facilitate an economy-wide carbon budget post-2030 by introducing market mechanisms into the ESD, establishing the optimal share of emission reductions in both sectors, and speeding up carbon price discovery in ESD sectors. Our 2050 challenge could rely on market efficiency to drive the decarbonisation effort in the period until 2050 across ESD and ETS.

Stayed tuned for our report next week, and make sure you ask the EC why we would need flexibilities out of the ESD, if we can have the EPM!

Source: New feed