European Union Emission Trading Scheme - Phase II

Phase II

The second phase (2008–12) expanded the scope of the scheme significantly. The EU's "Linking Directive" introduced CDM and JI credits. Although this was a theoretical possibility in phase I, the over-allocation of permits combined with the inability to bank them for use in the second phase meant it was not taken up. Aviation emissions are included from 2012. In 2007, three non-EU members, Norway, Iceland, and Liechtenstein joined the scheme.

The inclusion of aviation is a move considered important by the EU. It is estimated to lead to an increase in demand for allowances of about 10–12 million tonnes of CO₂ per year in phase two. This in turn is expected to lead to an increased use of JI credits from projects in Russia and Ukraine, which would offset the increase in prices and eventually result in no discernible impact on average annual CO₂ prices.

When the aviation sector was included in the ETS, starting on 1 January 2012, it caused considerable reaction from the airline industry and other countries, including China, India, Russia, and the United States. The United States and other countries argued that the EU did not have jurisdiction to regulate flights when they were not in European skies; China and the United States threatened to ban their national carriers from complying with the scheme. However, the EU insists that the regulation is applied equally to all carriers, and that it does not contravene international regulations. In the absence of a global agreement on airline emissions, the EU argued that it was forced to go ahead with its own scheme which included an exemption clause for countries with "equivalent measures".

Ultimately, the Commission wishes the third trading period to cover all greenhouse gases and all sectors, including aviation, maritime transport, and forestry. For the transport sector, the large number of individual users adds complexities, but might be implemented either as a cap-and-trade system for fuel suppliers or a baseline-and-credit system for car manufacturers.

The National Allocation Plans for Phase II, the first of which were announced on 29 November 2006, result in an average cut of nearly 7% below the 2005 emission levels. The use of offsets from JI and CDM projects was allowed, with the result that no reductions in the EU will be required to meet the Phase II cap (CCC, 2008, pp. 145, 149). According to verified EU data from 2008, the ETS saw an emissions reduction of 3%, or 50 million tons. At least 80 million tons of "carbon offsets" which were bought as part of the scheme.

In late 2006, European Commission started infringement proceedings against Austria, Czech Republic, Denmark, Hungary, Italy and Spain, for failure to submit their proposed National Allocation Plans on time.

The annual Member State CO₂ yearly allowances in million tonnes are shown in the table:

Carbon price

The carbon price within Phase II increased to over €20/tCO₂ in the first half of 2008 (CCC, 2008, p. 149). The average price was €22/tCO₂ in the second half of 2008, and €13/tCO₂ in the first half of 2009. CCC (2009, p. 67) gave two reasons for this fall in prices:

• Reduced output in energy-intensive sectors as a result of the recession. This means that less abatement will be required to meet the cap, lowering the carbon price.
• The market perception of future fossil fuel prices may have been revised downwards.

Projections made in 2009 indicate that like Phase I, Phase II would see a surplus in allowances. Carbon prices are being sustained by the prospect of banking allowances to use them in the tougher third phase.

In March 2012, the EUA permit price under the EU ETS had "tanked" and was too low to provide incentives for firms to reduce emissions. The permit price had been persistently under €10 per tonne compared to nearly €30 per tonne in 2008. The market had been oversupplied with permits. On April 27, 2012, the European Commission announced the full activation of the EU Emissions Trading System single registry. The full activation process will include the migration of over 30,000 EU ETS accounts from national registries. The EC has further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS.