CCA23 Review
25 April 2007
Double Counting between CCA and EUETS - A review of CCA23
InTRODUCTION
1.This paper summarises the operation of the double counting procedures developed for Target Period 3 (TP3) of the Climate Change Agreements. It reviews the application of the procedures, the magnitude of the corrections required and the lessons learnt. It seeks views on the operation of the mechanism in TP 3 and sets out Defra’s views on future policy.
BACKGROUND
2.When the European Union Emissions Trading Scheme (EU ETS) was introduced, it covered emissions already included in Climate Change Agreements (CCAs). For Phase I of EU ETS, industry preferred to keep the existing CCA targets rather than take out the EU ETS emissions. Emissions from energy use covered by the CCA are therefore included in the EU ETS. If a Target Unit (TU) reduces emissions, then they may have a surplus of allowances for sale on EU ETS or banking for future use. This same reduction in emissions may also mean that the TU over-performs against their CCA target, which can be converted into allowances for sale on UK ETS. In other words the TU gains allowances on both trading schemes for the same reduction in emissions. Conversely, if emissions increase, TUs may find themselves forced to obtain allowances on both EU ETS and UK ETS to meet the requirements of the different schemes.
3.It was necessary to avoid the situation where the TU would be able to benefit from a surplus arising from the same emission reduction in both schemes, or alternatively be penalised in both schemes to cover the same shortfall. CCA23, and a subsequent addendum for CHP, describe the methodology that was used to avoid this double counting of emissions for TP3.
THE PROCESS
4.There are two stages to the current process. Firstly the overlap factor is assessed and demonstrated. This is done by self-certification by the TU via the Sector Association. It required the completion of the CCA23 Annex 1 and submission to AEA with a copy of the verification certificate.
5.Secondly, that data was transferred to the double counting table of the CCA16 spreadsheet along with additional information about retirements. The CCA10 workbook calculated the corrections necessary at a TU level, but not the total correction including double counting and trading.
6.There is an option within CCA23 where, if a TU cancels all of its surplus allowances, the double counting correction is ignored.
RESULTS FROM TP3
No of TUs involved / 139No of sectors involved / 23
Net amount of EU allowances (EUA) in corrections / 3,634,000 causing a tightening in CCA targets
Total EUA resulting in an easing of targets / 198,000
Total EU resulting in a tightening of targets / 3,832,000
Number of TUs cancelling allowances to avoid a double counting correction / 4
Allowances cancelled / 46,000
Table 1 Overview of double counting results
(EU ETS installations may be bubbled into one TU. Also model 2 trading groups are treated as just one TU as TU data is not available.)
7.Table 2 shows the corrections by sector in terms of allowances, as changes to sector and the range of changes to individual TUs. All the sectors with two or fewer participants have been aggregated for confidentiality reasons. Similarly, range data is not provided for sectors with four TUs. The histogram shows the distribution of the magnitude of these changes by TU.
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CCA 23 (Review)
25 April 2007
Sector / No of TUs involved in Double Counting / Sector overlap allocation less overlap achievement (EUA) (negative tightens CCA target) / Range of TU overlap allocation less overlap achievement (EUA)(negative tightens CCA target) / Percentage change in sector agreement target due to double counting (negative tightens CCA target) / Range of percentage changes in TU targets due to double counting (negative tightens CCA target)
Aerospace / 4 / -10,340 / -515 / -7,493 / -2.9% / -2.4 / -22.3
Cement / 4 / -285,033 / -25,493 / -139,098 / -6.5% / -3.6 / -62.4
Ceramics - non-fletton / 12 / -41,466 / 123 / -21,373 / -4.0% / 4.6 / -64.5
Chemicals / 49 / -384,147 / 70,534 / -86,200 / -3.2% / 32.5 / -84.3
Dairy Industry / 7 / -50,124 / 926 / -23,375 / -5.8% / 3.6 / -1077.0
Food & Drink / 16 / -22,899 / 14,425 / -16,724 / -0.4% / 21.8 / -27.9
Glass / 4 / -24,639 / 10,209 / -28,100 / -1.1% / 5.8 / -48.5
Lime / 3 / -57,379 / -7.7%
Malting / 3 / -2,609 / -0.7%
Motor Manufacturers / 12 / -165,128 / -311 / -53,428 / -13.5% / -1.0 / -102.0
Steel / 4 / -2,229,461 / 4,360 / -2,221,245 / -7.9% / 2.1 / -9.3
Textiles / 3 / -6,772 / -1.3%
Wood Panel / 4 / -58,511 / -3,035 / -36,221 / -8.9% / -5.6 / -40.2
All sectors with fewer than 3 TUs / 14 / -295,432 / 3,958 / -219,757 / 1.9 to -5.9% / 16 / -178
Table 2 Sector breakdown of double counting correction
Sectors with less than three TUs - Aluminium, Brewing, Ceramics - refractories, Eurisol, Poultry Meat Processing/Feed, Non-ferrous, Paper, Semi-conductors, Spirits, Energy Intensive Horticulture
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8.Closer study of the raw data suggest that over a third of the TUs had large over achievements in EU ETS and therefore required a double counting correction of some significance. The extremes appear to result as a consequence of significant differences between actual emissions and the NAP allocation.
ISSUES ARISING IN DELIVERING THE DOUBLE COUNTING CORRECTION
9.Evaluation of the overlap percentage and data quality with respect to self-certification - some TUs were slow in submitting their data and others had inaccuracies in the data supplied which necessitated last minute revision. The data was self-certified, though some sectors have had this verified. The audit programme for 2007-8 and subsequent years will also review these submissions as part of full audits.
10.Reporting bubbles - there was no guidance on how to handle bubbles in the double counting spreadsheet. This was covered by one to one discussions with AEA.
11.Dealing with CHP – CHP was not considered in CCA23 originally. CCA facilities utilising energy from CHP schemes must ensure that the carbon dioxide emissions from the CHP are correctly treated under the double counting rules. The method for allocating carbon dioxide to the CCA facility is in line with the method for allocating the energy, as outlined in Schedule 2 of the Umbrella Agreements. More details and a worked example were contained in the paper CCA23 CHP Addendum.
12.Proof of cancellation of EU ETS allowances to avoid the double counting correction – the original intention was that the Environment Agency would provide suitable proofs, but it turned out there were data protection issues. Defra/ AEA accepted a copy of the registry email to the TU confirming the cancellation.
13.Calculation of the CCA10 table 1 sector correction for double counting and trading – there was insufficient guidance on this, which led to widespread errors from the extremes of omitting to report the double counting correction in table 1 to double counting the double counting correction. Errors also occurred when converting from TU units from table 2 to sector units in table 1 and on a couple of occasions the incorrect table 2 was used which did not include double counting in the formulae in table 18. In almost all cases, there is a simple formula that can be applied to table 2 to calculate the correction and AEA advised the SAs accordingly.
14.EU ETS new entrant allocations – there seemed to be some inconsistencies in the allocations given to new entrants with the phasing of the allowances. Where the Phase 1 allowance was split equally over the three years and there was a significant distortion, Defra allowed a notional reallocation on a monthly basis.
THE FUTURE OPERATION OF CCA23 PROCEDURES
15.In target period 4, relevant EU ETS year for comparison will be 2007, the final year of Phase I, when allowances prices are exceptionally low. All remaining Phase I allowances be cancelled at the end of March 2008. It is likely that many more operators would choose to utilise the provision for surrender of EU ETS allowances, and therefore avoid the double counting procedures, For any operator who did not choose to surrender the allowances, CCA23 procedures would continue to apply, as they would for any operator who wished to take advantage of the opportunity to reduce their CCA liability by offsetting EU ETS underperformance. If this is the case, CCA23 procedures in Target Period 4 may not affect the majority of operators, and would affect only those operators who chose to make use of them.
16.The targets for Target Period 5 (2010) will be subject to a review in 2008. That review could include the splitting of the target for the installations/ facilities concerned, removing the need for CCA23 procedures. The ETG WG1/2 paper of June 2006 listed 9 potential problems that could apply to “carving out” EU ETS activities from CCA targets. Defra /AEA consider that these can either be overcome or accommodated (see Annex 1).
DEFRA’S POSITION
17.Defra considers that the magnitude of the corrections discussed above is such that if the CCAs targets continue to cover energy use covered also by EU ETS, a double counting correction is necessary. From Defra/ AEA perspective the correction worked relatively smoothly in the third target period, though lessons have been learnt, particularly about the need for improved guidance as discussed above. Feedback so far from sectors indicates that some TUs initially struggled with the mechanism, but the problems were relatively easily overcome.
18.Defra also considers that the results from target period three demonstrate that the CCA23 methodology gives results which produce the intended outcomes. Defra does not agree with some suggestions that some of the results are anomalous.
19.Self certification appears to have worked smoothly. Defra will decide whether formal verification of the overlap data is needed for the fourth target period, subject to a small number of audits in the near future. A decision will be made in time for EUETS verifiers to be instructed for 2007, if self certification is to end.
Conclusions
20.Defra invites views on
- the ease of operation of the CCA23 mechanism in target period three,
- the outcomes of the corrections.
21.From a better regulation perspective, Defra considers it would be preferable to remove the EU ETS emissions from the CCA targets, and avoid overlap of instruments. This could be achieved either for both target periods 4 and 5, or, recognising the likely effect of low EU ETS allowance price in 2007, for target period 5 only, the split to be negotiated during the 2008 target review.
22.If the EU ETS energy use is not removed from CCA targets, a double counting correction mechanism will remain necessary. Subject to discussion at WG1/2, Defra consider this should be the current CCA23 mechanism (with additional guidance).
23.It is Defra’s intention, following discussions with the Emission Trading Group’s Working Group 1/2 in April 2007, to hold a formal consultation on the mechanism for Target Periods 4 & 5, after which Defra will issue formal guidance.
Annex 1
Problems could that apply to “carving-out” EU ETS activities
from CCA targets
Problem / Details- Equity
Agree split would be “bottom up”
- Possible reduction in CCL entitlements
It should be possible to take both EU ETS and CCA into account when calculating the 90/10 rule,
- The scale of the task
If this were done for target period 5 only, the split could be accommodated in the 2008 target review.
- Administrative burden
changes to defined CCA facilities (PP4 including 90/10 calculations);
variations to umbrella and underlying agreements;
changes to site documentation lodged with sectors.
Operator time spent recalculating targets, evaluating the 90/10 rule and securing board approval will be significant. The burden could fall particularly heavily on small emitters (<25,000 tCO2 p.a.) who, but for the slowness of the EU legislative process, should have been removed from the EU ETS in Phase 2.
If this were done for target period 5 only, the split could be accommodated in the 2008 target review.
- Additional monitoring burdens
Operators will have to submit their EU ETS energy use and emissions for that scheme anyway, and this is verified. There may not be additional metering required.
- Complexity of calculations
Separation of secondary fuels (electricity and steam) – on many sites secondary fuels will be supplied from a mix of sources: some from on-site / adjacent EU ETS installations and some - including indirect, grid electricity - which are outside overlaps with the EU ETS.
It should be possible to develop guidance to address this point.
Throughput measures may need to be redefined where they were reliant on production in EU ETS installations.
Throughput should be the same if the same energy components are used to make the same production.
A split which is effected on a bottom-up basis will require the target to be reweighted to exclude the improvement projects that do not apply to the reduced CCA facility.
The new target will be a target based on the energy use under consideration – ie a new target offer should be made based on the energy efficiency potential of those energy sources.
- Process of scrutiny
The new target will be a target based on the energy use under consideration – ie a new target offer should be made based on the energy efficiency potential of those energy sources.
- “Conceptual difficulties” of residual CCA target
there would no longer be a site level measure of energy efficiency / carbon emission performance;
the reduced coverage of the residual CCA target could make performance more volatile, eg: switching between EU ETS and non-EU ETS sources of secondary fuels.
Site level energy efficiency measures are currently built up from these components. This would still be possible.
- Does not fully address potential for perverse incentives
Incentives to use one or other energy source exist under both scenarios because, for example, of differing price levels. eg high EU ETS allowance prices would incentivise switch to electricity under both. Defra agree that under the double counting mechanism there is a counter balance to this incentive in requiring UKETS allowances to be bought to offset the gain in EU ETS.
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