Allocation process NAPs

The 25 national allocation plans (NAPs) established autonomously by the EU Member States (MSs) are central to the EU emissions trading scheme (ETS). According to Articles 9-11 and Annex III of the ETS Directive (2003/87/EC), NAPs must state how the total quantity of emissions allowances will be distributed to installations within their jurisdiction for each trading phase. The process of deciding the second phase allocation is currently under way. Each MS must submit their NAPs for 2008-2012 to the EU Commission by 30 June 2006. Over the subsequent 3-month period, these will be assessed by the Commission according to criteria outlined in the Directive. 

The final traditional area of dispute concerns administrative costs. The phase I national allocation plans (NAPs) involved negotiation over allowances with a total asset value of almost 50 billion per year (assuming an average price of 20/tCO2). Political decisions on how to allocate these assets between sectors and individual installations naturally creates intensive lobby activity by all participants in order to obtain the maximum possible share of the rents.21 The time and energy devoted by companies, governments, and indeed consultancy and research sectors, to this enormous rent allocation process represents huge transactional costs.22... 

After these first two prominent countries in the European allocation process, we turn to a set of three smaller countries, two of which, Denmark and Sweden, like the UK, have some experience with emissions trading and governments strongly supportive of climate policy, and a third, Ireland, the government of which was committed to being an early mover in part because Ireland held the presidency of the EU Council in the first half of 2004 when the NAPs were due to be submitted. 

This chapter presents lessons learnt in connection with the national allocation plan for Denmark (Ministry of Environment 2004). Section 1.1 outlines some particular features of the Danish energy sector and the historical CO2 emissions. Section 1.2 describes the previous experience with emissions trading in Denmark, and Section 1.3 describes the process and milestones in the production of the Danish National Allocation Plan (NAP). 

May 2003 The FlexMex2 Commission presented a report to the government on principles for allocation within the EU ETS. These principles had been developed through analyses of different allocation methods at sector level, using currently available emission data for about 450 installations (corresponding to about 90% of the emission volume in the Swedish National Allocation Plan (NAP)). In this proposal, allocation was based on historic emissions. For process emissions (metallurgy, cement, catalytic cracker), the projected increases were added to the allocation. An allocation scheme based on these principles at sector level was presented (SOU 2003). 

Although no explicit theoretical framework has been developed for analysing the National Allocation Plan (NAP) process in Spain, insights from the public choice and institutional path dependency approaches have been used in order to structure, organise and interpret the available information. 

In contrast to the procedures followed by other Member States and recommended by the Commission s guidelines on NAPs, the Italian allocation process did not develop through a two-step top-down approach a first decision on overall allocation based on macro level policy goals which sets the constraints for the following second decision on sector level allocations. The Italian NAP decisions were, instead, intrinsically linked to the GHG National Reduction Plan (NRP) characterised by a one-step bottom-up approach a first-step single decision on... 

Ahman et al. (2005) recognize that individual Member States decisions on NAPs affect the overall efficiency of the system, and also that a strong EU approval process of NAPs is required to limit distortions from heterogeneity of NAPs. In addition, the application of updating is not limited to cross-border distortions. Similar arguments can be made about allocation procedures that differ across sectors (see Keats Martinez and Neuhoff, 2005). 

Over the course of the two-year-long process, the UK managed to develop the key elements of a workable allocation programme. The UK s excellent progress in reducing emissions prior to the start of the EU ETS and the First Kyoto Commitment period did not necessarily make the task of developing its NAP any easier. Nor did the early start of the UK in the development of its NAP mean that decisions could be made sooner, because in practice it meant that more options could be considered. 

The administrative costs of subsequent NAPs are likely to be substantially smaller than those for the Phase 1 NAP. The development of a facility-specific database, creation of the information needed to forecast sector-specific emissions, the consultation process, as well as the efforts developed by stakeholders to participate and influence the process all contributed to the considerable administrative costs of the UK Phase 1 NAP. Due to the experience gained both by UK government officials and by stakeholders, administrative costs of subsequent NAPs are likely to be substantially lower. However, the multiple-period approach may increase the administrative burden of the scheme relative to a case in which the allocations are decided only once, since some elements will undoubtedly be revisited and since greater understanding by stakeholders could well mean that some issues become more contentious. Overall, however, the considerable effort to develop the Phase 1 NAP and the framework and data underlying it provide a very solid foundation for future periods. 

The complicated political relationships as well as the considerable problems experienced during data collection led the NAP authors to seek an allocation procedure that was as simple as possible. Discussion of different sector caps would have complicated the process to a much greater extent and would have nourished the redistribution dispute within the German industry which was already raging. Additionally, the question as to whether and to what extent sectors such as for example the electricity industry would be in a position to pass on the opportunity costs of the allowances to consumers was still hotly disputed in 2003 and 2004 in view of the oligopolistic structures of the German electricity market. 

The serious conflicts of interest in the process of the NAP preparation, as well as the multitude of practical restrictions (data availability, pressure of time), led to a simple procedure for the basic model of allocation for the existing installations it proved to be the smallest common denominator. Regarding the allocation of allowances on the basis of historical emissions for the period 2000-2002 without further sectoral differentiation, a very simple base model was created. Here, allocation arose out of the historical emissions for this period multiplied by a so-called compliance factor. This simple model was expanded, however, by a multitude of special rules which had significant consequences for the compliance factor and considerably eroded the uniformity and transparency of the allocation model. 

It was also apparent that the first cap of 25.2 Mt (May 2003) was not very ambitious. It was based on historic emissions, with a number of add-ons, like projected increases in process emissions, provisions for data uncertainty and provisions for new entrants. This generous cap was later reduced to the final 22.9 Mt after political negotiations. The reason for this may have been that the FlexMex2 Commission was afraid that a lower cap would put Swedish industry at a disadvantage compared to that of other Member States. In some aspects this turned out to be true. When the other NAPs were presented, Sweden s allocation to the energy sector and especially to new entrants was much stricter than in other Member States. 

The steel, refinery and energy sectors were very active throughout the whole process preceding the Swedish NAP. It was therefore surprising how little was heard from the Swedish pulp and paper industry and from the cement industry in this context. Were they unprepared or did they actively choose to maintain a low profile The pulp and paper industry says that allocation was not their main concern. They were much more concerned about the effects of the EU ETS on electricity prices. 

A final point worth considering in relation to the Irish NAP is the success or otherwise of its most unique feature the complete separation of macro and micro level plans. The advantage of this structure was that it allowed for complete focus on individual tasks with each being entirely separate from the other. This also eased the adjustments necessary after the Commission s assessment and the baseline verification process, as individual allocations were simply a portion of an arbitrary total, and could be determined transparently and mathematically whatever change was made to the inputs. 

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