The EU’s Effort Sharing Decision (Newsletter #3)

Joint article by Carbon Market Watch and ClientEarth

The EU’s Effort Sharing Decision (ESD) covers all sectors not included in the EU-ETS, except international shipping, aviation and LULUCF. These ESD sectors are responsible for 60% of the EU’s greenhouse gas emissions, yet current reduction goals in the ESD are very weak and can be met mostly through the use of offsets. Clearly the ESD needs to be scrutinized and strengthened if the EU wants to do its fair share to stay below 2 degrees warming. Together with a group of NGOs, Carbon Market Watch and ClientEarth will be taking a closer look at the ESD over the coming year.

The EU’s 20% greenhouse gas (GHG) reduction target[1] for 2020 is implemented through the EU’s Emission Trading Scheme (EU-ETS) and the Effort Sharing Decision (ESD). Under the ESD, EU Member States have taken on binding annual targets for reducing their GHG emissions from the sectors not covered by the EU ETS, such as housing, agriculture, waste and transport (excluding aviation). These sectors account for almost 60% of the EU’s total emissions. Graph 1 below illustrates the break down between the two policies.

Graph 1: EU Policies for 20% GHG reduction targetEU-Climate-policy-ETS-and-ESDSource: EEA, 2012

How the ESD works

The overall EU target under the ESD is a 10% emission reduction in 2020 compared to 2005 levels. Each Member State has an individual ESD target determined according to its economic capacity. Member States receive an annual allocation of Effort Sharing allowances as a mechanism to ensure annual compliance and steer a downwards trajectory to 2020. Targets range from a 20 % reduction for the richest Member States to a 20 % increase for poorer ones in 2020 compared with 2005 levels. Less wealthy countries are allowed emission increases in these sectors to account for their higher economic growth which is likely to be accompanied by higher emissions. Graph 2 shows the ESD reduction targets for all 27 EU member states.

These targets are currently too weak – a combination of low ambition further compounded by the economic crisis. To illustrate this low ambition, we are projected to overachieve the -10% Effort Sharing reduction target by an additional 8% by 2020 at EU level The emission reduction potential in the ESD sectors is much higher than the current 10% reduction targets. Studies demonstrate significant cost-effective additional reductions could be achieved by 2020.[3]

Graph 2: Effort Sharing Targets for 2020 relative to 2005 emissions levelsESD-MS-targetsSource: EEA, 2012

Offsets in the ESD

Similarly to the EU-ETS, the ESD 2020 targets can be partially met with CDM and JI credits. The use of offset credits is so generous and ESD targets so weak that overall, EU Member States are projected to accumulate a significant oversupply of ESD allowances and international offsets.

The use of international credits in the ESD is limited to 3% of each Member State’s allowances in 2005. Although this number sounds low, it means that two thirds of the overall emission reductions required by 2020 under the ESD can be met through the use of international credits. Up to 750 Mt JI/CDM credits could be used during the period from 2013 to 2020.[2]

Furthermore, the ESD allows an EU Member State to transfer part of its unused international credits entitlement to another Member State. In other words, the buyer country can use these entitlements to purchase further international credits above the 3% limit.

The ESD also allows Member States to carry over surplus allowances in a given year to subsequent years. Member States can also sell their allowances to other Member States during 2013-2019.

Combined with the low ESD targets for most Member States, these offset and carry over rules mean that little or no additional domestic action will have to be taken by EU Member States to meet their ESD 2020 goals. Graph 3 illustrates that only six countries are projected to have a shortfall of credits. Most of these are small countries: Luxemburg, Ireland, Malta, Belgium, Greece and Spain.

Graph 3: Projected overachievement and shortfalls in ESD sectors
ESD-shortfall-and-oversupply

Source: EEA, 2012

Quality of offsets

As in the EU-ETS, the quality of offset credits is particularly important, since offsets that do not represent real and additional emissions reductions further undermine the already weak targets. However, while the EU-ETS is governed at the European level, the decision on what types of offsets are allowed in the ESD is taken at Member State level. International credits from industrial gas projects that destroy HFC-23 and N2O (from adipic acid projects) are prohibited in the EU ETS from May 2013. Yet, only 18 Member States have declared that they will not use such credits towards their ESD targets. Concerns about quality do not only relate to credits from industrial gas projects but to all credits from non-additional projects such as for example coal power projects.

The ESD 2020 and beyond

A legal framework will be needed post 2020 if we are to have economy wide, binding EU targets. However, the future of the ESD beyond 2020 is still unclear. In its current form the ESD enshrines low ambition and does not do enough to drive investment. However, if it were improved, it could be a powerful driver of emissions reductions and also help decrease Member States’ strong reliance on costly energy imports. After all, 25 out of 27 Member States are net energy importers. Measures to reduce non-ETS emissions also come with clear benefits for citizens – energy efficiency in building retrofits help shield consumers from rising energy bills, and cleaner transport will reduce illness and premature deaths associated with air pollution. Measures in the ESD sectors also have the potential to create 350,000 to 450,000 net additional jobs in the EU by 2030.[4]

But these and other benefits will only be realized if we have a strong, economy wide regulatory framework for climate change beyond 2020. As the instrument that gives effect to economy wide GHG targets and determines the ‘equitable’ target split between EU states, the Effort-Sharing Decision holds the key to a political agreement on a climate and energy framework for 2030. It will need to continue beyond 2020 to ensure that Member States have some flexibility in their choice of national mitigation policies mix, while taking into account differing national circumstances and capacity. It will require reform in order to become a tool to drive investment in a wide range of sectors, and unlock the climate benefits that are currently being neglected in the shadow of the ETS.

 


[1] Below 1990 emission levels.

[2] Greenhouse gas emission trends and projections in Europe 2012. Tracking progress towards Kyoto and 2020 targets. EEA Report No 6/2012. ISSN 1725-9177

[3] Next Phase of the European Climate Change Programme : Analysis of Member States actions to implement the Effort Sharing Decision and options for further community-wide measures (contract DG ENV C.5/SER/2009/0037)

Behavioural Climate Change Mitigation Options and Their Appropriate Inclusion in Quantitative Longer Term Policy Scenarios (DG Climate Action contract 070307/2010/576075/SER/A4)

Potentials and costs for mitigation of non-CO2 greenhouse gas emissions in the European Union unitl 2030, Results (DG Climate Action contract 07.030700/2009/545854/SER/C5)

[4] http://www.europeanclimate.org/index.php/en/news/111-an-economic-assessment-of-low-carbon-vehicles

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