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B. Status of the EU ETS

1. First trading period
2. Second trading period
3. EU ETS review

1. Status of the EU ETS: first trading period (2005-2007)

With around 12.000 installations in 25 Member States (and Bulgaria and Romania still to enter) the EU ETS started operating as from 1 January 2005. Those installations are responsible for around 2 Billion tonnes (gigatonnes) of CO 2 emissions each year, representing 41% of the total EU 25 greenhouse gas emissions and more than 50% of the EU25 CO 2 emissions. The EU ETS is therefore the single largest greenhouse gas emitting sector in the European Union.

In the EU ETS sector the electrical power generators are by far the biggest emitters with around 63% of the total EU ETS CO 2 emissions. Other significant emitting sectors in the EU ETS are the cement and lime industry (around 9%), refineries (around 7.5%), the iron and steel sector (around 7%) and other combustion installation from a.o. the chemical sector (9%).

In March 2006 the EU ETS installations had to submit their emissions report for the year 2005. In April 2006 the country totals of these verified emissions were published. These emission reports showed that the EU ETS sectors were significantly over-allocated. This means they received more allowances compared to the actual emissions. For the EU 25 this was around 169 Million tonnes (Mtonnes) of CO 2 or 7.8% over the average annual allocation for the period 2005-2007.

The relative (%) over-allocation was the highest in the Baltic Member States ( Lithuania (46%), Latvia (38%) and Estonia (33.6%)). The frontrunners in the absolute over-allocation were:

• Poland (36 Mtonnes)
• France (25.2 Mtonnes)
• Germany (24.9 Mtonnes) and
• The Czech Republic (15.10 Mtonnes)

This over-allocation lead to an immediate price crash of the European Allowance (EUA) price from around 30 EUR/tonne CO 2 to 12 EUR/tonne CO 2.

The second round of verified emission reports (April 2007) showed that the over-allocation in 2005 was a structural element of the first trading period of the EU ETS. The EU 25 total over-allocation stranded at 156 Mtonnes of CO 2 or 7.15% above the annual average allocation for the first trading period.

The emission trading markets were well aware of this structural over-allocation. This has lead to a steady decline in the EUA prices to around 0,1 EUR/tonne CO 2 in the second half of 2007.