EU Emissions Trading Scheme

Transcription

1 EU Emissions Trading Scheme UK National Allocation Plan

2 Introduction Summary 1. Determination of the Total Quantity of Allowances 2. Determination of the Quantity of Allowances at Activity Level 3. Determination of the Quantity of Allowances at Installation Level 4. Technical aspects 4.1 Potential, including technological potential 4.2 Early action (if applicable) 4.3 Clean technology (if applicable) 5. Community legislation and policy 5.1 Pooling (Competition policy) 5.2 New entrants (Internal market policy) 5.3 Community legislative and policy instruments considered 6. Public consultation 7. Criteria other than those in Annex III to the Directive Appendix A Appendix B Appendix C Appendix D Annex III of Directive Methodology for Calculating Sector Totals New Entrants, Closures and Auctioning Estimated Savings from Climate Change Programme 2

3 Introduction This document sets out the National Allocation Plan for UK installations which are subject to the European Union Emissions Trading Scheme (the EU ETS or the Scheme ) for the period 2005 to The EU ETS is a Community-wide scheme established by Directive 2003/87/EC 1 ( the Directive ) for trading allowances to cover the emissions of greenhouse gases from permitted installations. The first phase of the EU ETS runs from 1 January 2005 to 31 December Each Member State must develop a National Allocation Plan for the first phase stating: the total quantity of allowances that the Member State intends to issue during that phase; and how it proposes to distribute those allowances among the installations which are subject to the scheme. 2 These Plans must be based on objective and transparent criteria, including those listed in Annex III of the Directive. Annex III consists of both mandatory and optional criteria and is reproduced for convenience at Appendix A. National Allocation Plans must be published and notified to the European Commission. The Commission, together with the other Member States, will then consider each National Allocation Plan. The Commission may reject any aspect of any Plan on the basis that it is incompatible with the Directive, giving reasons, and may propose amendments. Once accepted by the Commission, the National Allocation Plans will form the basis for the final decisions made by each Member State on the total quantity of allowances to be issued and their distribution to installations subject to the Scheme under Article 11 of the Directive. For the period 2005 to 2007, these final allocation decisions must be made by 1 October Implementation of the EU ETS is a devolved matter in the UK. Accordingly, this Plan has been developed by the UK Government and the Devolved Administrations for Scotland, Wales and Northern Ireland pursuant to their respective obligations under regulation 18 of the Greenhouse Gas Emissions Trading Scheme Regulations ( the ETS Regulations ), which transpose the Directive into domestic law. Where we describe the UK position in the remainder of this document, this should be read as meaning the agreed view of the UK Government and the Devolved Administrations. In developing this Plan, the UK has taken into account the guidance published by the Commission to assist Member States in the implementation of the 1 Directive of the Council and European Parliament establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Directive 1996/61/EC. 2 Article 9(1) of the Directive. 3 Article 11 of the Directive. 4 SI 2003/3311 3

4 criteria listed in Annex III of the Directive 5. This document suggested a common format for National Allocation Plans which has been followed in drafting this Plan. The common format takes the form of a series of questions addressing the mandatory and optional criteria in Annex III. The answers to these questions, which are set out below, describe how the UK considers the criteria have been met. The UK published a draft National Allocation Plan in January 2004 for consultation. This Plan has been prepared in light of the issues raised and responses received during that consultation. Further discussion of these issues and the changes made as a result of the consultation process are set out in Section 6. It has not been possible to resolve all issues prior to the notification of this plan and these will be subject to a brief period of further consultation. 6 In accordance with criterion (9) of Annex III, Section 6 explains how further comments can be made on this Plan (including further consultation on the unresolved issued mentioned above) and how the UK proposes to take account of those comments before any final decision on the allocation of allowances is taken. 5 COM (2003)830 6 Details of these issues can be found in Section 6 below. 4

5 Summary 1. The UK has determined that 736 MtCO 2 will be allocated during Phase 1 of the EU ETS. 2. Allocations of allowances will be made in a two-stage approach that allocates allowances at sector level the first instance and subsequently allocates to installations within each sector. 3. Allocations at sector level will be made on the basis of the sector s projected emissions between 2005 and 2007, save for the power generation sector which will be allocated 5.5MtCO 2 below its projected emissions. 4. Allocations at installation level will be issued in three equal annual instalments and will be made on the basis of each installation s share of relevant emissions. Relevant emissions are generally the average of the highest five years emissions during baseline period ( ). Special rules for calculating relevant emissions of: installations undergoing commissioning during baseline period; installations where rationalisation of production has taken place during baseline period; and installations commencing operations in Allowances will be made available to new entrants in Phase 1 free of charge from a new entrant reserve of 7.7% of total allowances. Priority access to a ring fenced portion of the reserve will be given to Good Quality CHP reserve. 6. Any surplus allowances remaining in the new entrant reserve at the end of each year in Phase 1 will be auctioned. 7. Installations that cease to carry out an Annex 1 activity will not be issued with allowances for the years after cessation. 8. The UK is submitting separate applications for the temporary exclusion of installations that are covered by the UK Emissions Trading Scheme or by Climate Change Agreements alongside this NAP. Paragraph 1.13 Sections 2 & 3 Section 2 & Appendix B Section 3 Appendix C Appendix C Appendix C Paragraph

6 1. DETERMINATION OF THE TOTAL QUANTITY OF ALLOWANCES What is the Member State s emission limitation or reduction obligation under Decision 2002/358/EC or under the Kyoto Protocol (as applicable)? 1.1 The overall EU commitment under the Kyoto Protocol is to reduce emissions of greenhouse gases by 8% on 1990 levels by The UK s commitment under the Burden Sharing Agreement 7 is to reduce its emissions of greenhouse gases by 12.5% below base year 8. The target annual level of emissions implied by the Burden Sharing Agreement is 653 Mt carbon dioxide equivalent calculated 9 from data in the UK s 2004 inventory submission, which is the most recent data provided to the EU and to the UNFCCC and contains estimates from 1990 to 2002 inclusive. 1.2 In addition to these international commitments, the UK has a domestic goal of moving towards a 20% reduction in CO 2 emissions by This goal was confirmed in the UK Climate Change Programme, published in November The UK Energy White Paper which was published in February sets the framework for putting the UK on a path to a reduction in CO 2 emissions of 60% by 2050, with significant progress by The most recent year for which the UK has published emissions data is 2002 when total annual emissions of all greenhouse gases 12 were estimated to be MtCO 2 equivalent and emissions of CO 2 were estimated to be MtCO The data show falls of slightly less than 3.5% for all greenhouse gases and slightly more than 3.5% for CO 2 emissions between 2001 and However, provisional estimates show that emissions probably rose by about 1.5% between 2002 and What principles, assumptions and data have been applied to determine the contribution of the installations covered by the emissions trading Directive to the Member State s emission limitation or reduction obligation (total and sector historical emissions, total and sector forecast emissions, least-cost approach)? If forecast emissions were used, please describe the methodology and assumptions used to develop the forecasts. 7 Council Decision 2002/358/EC for emissions of carbon dioxide, methane and nitrous oxide, 1995 for fluorinated compounds. 9 Consistent with the provisions of the Annex to COP decision 19/CP7 on the treatment of land-use change and forestry in the accounting of assigned amount Including emissions from land use change. 13 See UK Greenhouse Gas Inventory 1990 to 2002, National Environmental Technology Centre, 2004 (Report reference AEAT/ENV/ R/1702, available electronically at 6

7 1.4 In determining the contribution which the installations covered by the Directive should make towards the UK s international and domestic emission reduction targets, the UK s starting point has been to estimate its total projected emissions in 2010 and then to consider the additional savings which the EU ETS sector should deliver. The UK has then calculated sector allocations by applying the details of the emissions projections in a combination of top-down and bottom-up methodologies (described in more detail in Section 2 and Annex B) and by taking account of the additional EU ETS savings (see paragraph 1.11 below). Emissions projections 1.5 The UK published projections of carbon dioxide 14 and non-co 2 greenhouse gas emissions 15 alongside the Climate Change Programme in November These formed the basis of the UK s Third National Communication under the United Nations Framework Convention on Climate Change (October 2001) 16. The baseline with measures projection in the Communication estimated that the UK s emissions of the basket of greenhouse gases was expected to be 14.8% below 1990 levels in 2010, with emissions of carbon dioxide measures 8.2% below. 1.6 The UK Climate Change Programme and the Third National Communication set out the policies and measures designed to secure the delivery of the Kyoto target and to move towards the domestic goal. The policies and measures as quantified were estimated to reduce the UK s emissions of the Kyoto basket of greenhouse gases to 23% below the base year and to reduce the UK s carbon dioxide emissions to 19% below the 1990 levels, with further measure that could not be quantified to bring the domestic target within reach. 1.7 The UK has been updating its energy and emissions projections. The updated projections will show the expected level of total UK emissions of CO 2 over the next few years taking account of latest forecasts of emission reductions from the policies in the Climate Change Programme. Estimates of CO 2 emissions will then be available for 2005, 2010 and This exercise is ongoing and is currently referred to as the updated energy projections or UEP. An initial view of input assumptions for UEP was published for consultation in July 2003 and preliminary results of July model runs were published in August Those preliminary results were used within the draft NAP in January. 1.8 A working paper setting out the latest projections, and summarising the basis of the Energy Model and revised input assumptions to those projections, is being published separately during May In headline terms, it is noteworthy that: 14 Energy Paper 68: Energy Projections for the UK, November 2000, The Stationery Office: 15 Projections of Non-CO 2 Greenhouse Gas Emissions for the United Kingdom and Constituent Countries, November 2000, WS Atkins Consultants Ltd. 16 See 7

8 (a) without allowance for measures set out in the UK Climate Change Programme, total UK emissions of CO 2 in 2010 would be projected around 572 MtCO 2, a 5.4% reduction on 1990 levels; (b) with allowance for measures set out in the UK Climate Change Programme which have already been implemented or for which firm plans are in place, the July projections 17 suggested that total UK emissions of CO 2 in 2010 would be around MtCO 2, a 15.4% reduction on 1990 levels; (c) latest projections, allowing for an updated assessment of these measures, show total UK emissions of CO 2 in 2010 around 519 MtCO 2, a 14.3% reduction on 1990 levels. Since the draft NAP was published in January 2004, the Government has published an Energy Efficiency Implementation Plan. 18 The latest projection allows for firm measures within that Plan, as well as other refinements to the underlying sectoral projections; and (d) potential for further carbon savings of up to another 2.7 MtCO 2 by 2010 is identified in the Energy Efficiency Implementation Plan. These measures are not sufficiently developed to allow for at this stage they are more likely to impact on allocations in the 2 nd phase of the EUETS. If further carbon savings of 2.7 MtCO 2 in 2010 are delivered then UK emissions around 516 MtCO 2 would be around 14.7% below 1990 levels. 1.9 Work on the projections is continuing and could lead to further revision of projected emissions overall and of the contribution within that from sectors and installations covered by the EUETS. This work will be finalised in time to feed into the revised sector and installation allocations which we aim to publish in late July/early August. In particular: (a) further research is underway to consider the appropriateness of growth rates assumed for the ETS sectors within the updated energy projections, and to consider the case for further division of some sectors. This work responds to concerns raised in the consultation process. It will feed into possible revised sector and installation allocations which we aim to produce in late July/early August; (b) work is continuing to consider projected emissions from the iron and steel sector, where there are unresolved differences between data submitted for the purposes of national statistics used in Government projections of overall UK emissions - and data submitted by companies to inform the NAP; (c) work to refine the projected profile of emissions from Combined Heat and Power (CHP) schemes by sector and to consider the impact of CHP new entry on other emissions; (d) work to refine the split of carbon savings attached to Climate Change Programme measures by fuel; 17 These were the projections used in the draft NAP published in January See 8

9 (e) (f) further work needed to ensure consistency between the projections, the emissions inventory methodology and data at the company level; and further work to look at consistency of emission factors across refineries The most recent projections for non-co 2 greenhouse gases are those published in the UK s Third National Projection. These indicate a fall of about 38% between 1990 and 2010, or about 39% over the same period if 1995 is used as the base year for the fluorinated compounds. If combined with a fall of 14% in CO 2 emissions this would produce a reduction of about 20% between the base year and 2010 for UK greenhouse emissions as a whole. Emissions projections for non-co 2 gases are currently being updated and this work is scheduled for completion in August What is the total quantity of allowances to be allocated (for free and by auctioning)? Phase 1: The UK has decided that the first phase of the EU ETS (2005-7) will be used to deliver additional CO 2 savings which it was envisaged in the UK Climate Change Programme would be delivered by emissions trading but for which there are no firm policies yet in place (equivalent to 1.5 MtC or 5.5 MtCO 2 by 2010). These additional savings equate to 5.5 MtCO 2 in total from 2005 to As explained in Section 2 below, the UK has incorporated the effects of its climate change policies and the achievement of the additional savings referred to in the previous paragraph into the methodology for calculating sector allocations Using this methodology, the total quantity of allowances to be issued to EU ETS installations for 2005 to 2007 will be 736 MtCO 2. This figure is subject to further revision in light of ongoing work. In particular, the figure will be revised in light of the following: (a) the completion of the ongoing work on the UK s energy projections (see paragraph 1.9 above); (b) the receipt of revised data on historic emissions from individual installations either as a result of clarification of the emission points covered by the Scheme in the permits to be issued by the relevant regulators and/or as a result of the verification of the historic emissions data. This process is likely to continue over the summer; (c) the review of the Climate Change Agreement targets on which some of the activity level calculations were based (see further Section 2 below); and (d) the identification of additional installations. 9

10 1.14 The UK plans to allocate 92.3% of the total quantity to existing installations, which will be issued for free in three equal instalments The remaining 7.7% will form a new entrant reserve of 56.8m allowances which will be made available to new installations and certain existing installations that will be given access to the NER as detailed in section 5.2 below. If there are any allowances remaining in the new entrant reserve at the end of any year in Phase 1, these will be auctioned. Phase 2: The Government is firmly committed to its domestic goal of moving towards a 20% reduction in CO 2 emissions below 1990 levels by In determining the total quantity of allowances to be issued for the second phase of the EU ETS from 2008 to 2012, the Government will ensure that installations covered by the Scheme make an appropriate contribution to that goal. This issue will be considered further in the review of the UK Climate Change Programme which will take place later in Relationship between Kyoto and domestic targets, updated energy projections and EU ETS policy 1.17 The relationship between the UK Kyoto and domestic targets, the carbon dioxide emissions estimated from the updated energy projections (UEP) and the decisions set out above on the first phase of the EU ETS are set out in Chart 1. The blue line (labelled Kyoto ) shows the implications for carbon dioxide if UK emissions were allowed to rise to the level of its Burden Sharing Agreement target. Since there is no Kyoto commitment for carbon dioxide alone the estimate is a back calculation based on non- CO 2 emissions projections in the Third National Communication. The yellow line (labelled with CCP ) represents the latest projections of emissions allowing for measures set out in the UK Climate Change Programme which have already been implemented or for which firm plans are in place. This would lead to a 14.3% reduction on 1990 levels by 2010 (see paragraph 1.8(c) above). The red line (labelled with CCP + EU ETS ) shows what would happen were the policy for Phase 1 of the EU ETS set out at paragraph continued into Phase 2 of the Scheme (representing annual reductions of 5.5 MtCO 2 by 2010) and no other additional measures introduced. This would lead to a 15.2% reduction on 1990 levels by The green line (labelled domestic goal ) sets out a straight line from 2000 to a 20% reduction on 1990 levels by The result of the intention to use the EU ETS to move UK emissions further towards the national goal will be that the emissions profile for Phase 2 will move below the red line towards the 20% reduction represented by the green line. As explained in paragraph 1.16, the policy for Phase 2 will be 10

11 considered in more detail as part of the review of the Climate Change Programme later in Chart 1 Relationship between UK targets, Energy Projections and EU ETS 610 Kyoto MtCO UEP 'with measures' UEP 'with measures' + EU ETS 490 National goal What is the proportion of overall emissions that these allowances represent in comparison with emissions from sources not covered by the emissions trading Directive? Does this proportion deviate from the current proportion of emissions from covered installations? If so, please give reasons for this deviation with reference to one or more criteria in Annex III to the Directive and/or to one or more other objective and transparent criteria The installations covered by the EU ETS were responsible for around 46% of UK CO 2 emissions in If the total quantity of allowances for the first phase was extrapolated to 2010, based on projected emissions, the installations covered by the EU ETS would still account for around 46% of UK s total emissions by What policies and measures will be applied to the sources not covered by the emissions trading Directive? 11

12 1.20 The UK Climate Change Programme sets out the approach that the UK is taking to reduce greenhouse gas emissions across six broad sectors: energy supply; business; transport; domestic; agriculture, forestry and land use; and public sector. It therefore includes both EU ETS installations and sources which are not covered by the EU ETS Emissions from the energy supply sector include those from the production of fuel for final consumption by other sectors. This includes electricity generation, oil production and refining, gas production and transmission, and the production of coal and other solid fuels. The electricity supply industry (ESI) is still largely reliant on fossil fuels. Unless these plants can be replaced by plant with low or no emissions, emissions from ESI will increase during the latter years of the current decade as existing nuclear power stations close The Energy White Paper, published in February 2003, defines a longterm strategic vision for energy policy. It has four goals for energy policy, putting the UK on a path towards a 60% reduction in CO 2 emissions by about 2050 with real progress by 2020; maintaining the reliability of energy supplies; promoting competitive markets in the UK and beyond; and ensuring that every home is adequately and affordably heated In 2002, renewable energy accounted for 3% of electricity generated in the UK. The target for England, Scotland and Wales under the Renewables Obligation 19 is that 10.4% of all sales from licensed electricity suppliers will be generated from eligible renewable sources by 2010, subject to the cost to the consumer being acceptable. In the absence of the Obligation, renewables might have expanded towards perhaps 5% of generation in More recently, the Energy White Paper set out the ambition of doubling the share of electricity generation from renewables provided for in the 2010 target by The UK is committed to pursuing policies to achieve that and recently announced an extension of the Renewables Obligation to 15% of electricity from renewables by CHP technology is a key element of the UK strategy for the energy supply sector. In 2002, the UK s installed CHP capacity was around 4,700 megawatts. The UK has set itself a target to achieve an installed capacity of at least 10,000 megawatts of Good Quality CHP by The carbon savings from increased use of CHP are reflected among a range of other policies within the Climate Change Programme, particularly the climate change levy, climate change agreements and community heating Measures that will reduce emissions from the business sector include: 19 Introduced in April 2002, the Renewables Obligation requires all licensed electricity suppliers in England & Wales to supply a specified and growing proportion of their electricity sales from a choice of eligible renewable sources. The Obligation is enforced by the Renewables Obligation Order (SI 2002/914). The Renewables Obligation Scotland is the equivalent instrument in Scotland enforced by the Renewables Obligation (Scotland) Order 2002 (SSI 2002/163). 12

13 a) the climate change levy, including an exemption for renewables and CHP, and discounts for certain sectors when accompanied by negotiated agreements (or climate change agreements ) 20 ; b) an integrated programme of measures run or administered by the Carbon Trust to accelerate the take up of cost effective, low carbon technologies and other measures by business and other levy payers; c) the UK Emissions Trading Scheme 21 ; d) permits issued under the Integrated Pollution Prevention and Control (IPPC) Directive 22 which impose both emissions limit values on greenhouse gases where these are likely to be emitted in significant quantities and energy efficiency requirements; e) amendment of the energy efficiency requirements of the Building Regulations to raise performance standards, including new requirements for non-domestic buildings for lighting, air conditioning, space heating and meters; and f) the proposed EC F-gas Regulation which will contain measures to further reduce emissions of HFCs, PFCs and SF 6 resulting from their use in refrigeration, air conditioning and fire protection equipment and will introduce some marketing restrictions on certain products containing HFCs, PFCs and SF 6, indirectly leading to reduction in emissions as consumption of these products is reduced and then banned There are four main policies for improving energy efficiency in the residential sector: a) the Energy Efficiency Commitment (EEC) is an obligation on domestic energy suppliers to assist electricity and gas customers to take up energy saving opportunities. Under the first EEC, which runs from April 2002 until March 2005, each supplier has an energy saving target, which they can meet by assisting householders to install energy saving measures. The UK confirmed in the Energy White Paper that it would consult on an expansion of the EEC to run from 2005 to at least 2008, at possibly twice the current level of activity; b) the Community Energy Programme to promote community heating through grants to install new schemes, and to refurbish obsolete infrastructure and equipment; c) although the primary goal of the New Home Energy Efficiency Scheme (New HEES) is to alleviate fuel poverty, it could generate additional carbon savings by Equivalent schemes in Scotland - the Central Heating Programme and the Warm Deal - will provide additional savings; and 20 For further information on the Climate Change Agreements, see Appendix D. 21 For further information on the UK Emissions Trading Scheme, see Appendix D. 22 Council Directive 96/61/EC concerning integrated pollution prevention and control which was transposed by the Pollution Prevention and Control Regulations 2000 (S.I, 2000/1973). 13

14 d) in addition, various enabling or supporting policies include the work of the Energy Saving Trust (EST), and the product policies of the Market Transformation Programme (MTP) The non-eu ETS sector with the largest emissions is transport, which in 2001 was responsible for about 18.3% of the UK s greenhouse gas emissions and about 21.5% of CO 2 emissions. The European Commission s voluntary agreements with car manufacturers, backed up by consumer information and fiscal incentives are integral to the UK s key policies to reduce emissions from this sector. These are the 10 Year Plan for Transport 23, passenger car labelling, changes to vehicle excise duty and reform of company car taxation The public sector is subject to the same pressures as others to improve its energy efficiency. The climate change levy applies to this sector, together with energy reduction targets for buildings in the Government estate, schools and hospitals Emissions of methane and nitrous oxide from agriculture are projected to fall by about 6.6 MtCO 2 between the base year and Changes to the Common Agricultural Policy and the shift away from production related subsidies should mean that livestock numbers continue to fall; agrienvironment schemes will continue to encourage more extensive farming; implementation of the EC Nitrates Directive 24 will help to limit the amount of nitrogen applied to the land; and implementation of the IPPC Directive, which will apply to larger intensive pig and poultry farms, should also reduce emissions of nitrous oxides and methane In relation to emissions from waste, increased collection of landfill gas for energy recovery and environmental control have resulted in lower methane emissions from UK landfill. In 2000, 1750kt of methane was abated by energy recovery or flaring. This capacity is forecast to increase to 2465 kt of methane in In addition, implementation of Article 5 of the EC Landfill Directive 25 restricting the amount of biodegradable municipal waste disposed of in landfill from 2010, will result in further reductions of methane production of between 7 kt and 15 kt of methane in 2010 with increasing reductions until The emissions reductions which it is estimated that the Climate Change Programme measures described below will achieve are summarised in Appendix D together with the details of how these estimated reductions have been derived. These reductions have been incorporated into the updated emissions projections discussed at paragraphs 1.7 and 1.8 above. 23 For further information on the 10 Year Plan, see Appendix D. 24 Council Directive 91/676/EEC concerning the protection of waters against pollution caused by nitrates from agricultural sources. 25 Council Directive 1999/31/EC on the landfill of waste. Article 5 of the Directive, which sets targets for the reduction of biodegradable municipal waste sent to landfills was transposed by the Waste and Emissions Trading Act

15 Will use be made of the flexible mechanisms of the Kyoto Protocol? If so, to what extent and what steps have been taken so far (e.g. advancement of relevant legislation, budgetary resources foreseen)? 1.32 Given that the projections set out above show that the UK is on course to meet its Kyoto Protocol target, it is not intended that any use will be made of the flexible mechanisms by the UK government to meet its Burden Sharing Agreement target. How has national energy policy been taken into account when establishing the total quantity of allowances to be allocated? 1.33 As mentioned in paragraph 1.2, the Energy White Paper, published in February 2003, set out the overall goals for UK energy policy for the long-term and set four new goals for energy policy. Amongst these is a commitment to put the UK on a path to cut CO 2 emissions by some 60% by about 2050, with real progress by These longer-term commitments build on the UK s existing goal to move towards a 20% reduction in CO 2 emissions below 1990 levels by The Energy White Paper stated that the EU ETS will be the central plank of our future emissions strategy National energy policy has been further incorporated within the updated energy and emission projections through inclusion within the projections of the impact of the Government s firm Climate Change Programme measures (see Appendix D and specifically Table D1) and, for projections, through the use of the DTI energy model which assumes cost-minimisation behaviour in line with the emphasis of energy policy on competitive markets The UK has not set targets for the share of total energy or electricity supply to be met from different fuels. The UK prefers to create a market framework, reinforced by long term policy measures, which gives investors, business and consumers the right incentives to find the balance that will most effectively meet our overall goals. However, recognising that specific measures were needed to stimulate growth in renewable energy, specific policies were developed (see paragraph 1.23) above Nuclear power is currently an important source of carbon-free electricity in the UK, but its share of the generating mix will decline markedly in the latter years of the current decade as existing nuclear power stations reach the end of their licensed lifetimes. The Energy White Paper concluded that its current economics make nuclear power an unattractive option for new, carbon-free generating capacity. It did not contain any specific proposals for building new nuclear power stations, nor did it rule out the possibility that at some point in the future new nuclear build might be necessary. 26 The other three goals are: maintaining the reliability of energy supplies; promoting competitive markets in the UK and beyond; and ensuring that every home is adequately and affordably heated. 15

16 Is the total quantity of allowances intended to be allocated consistent with a path towards achieving or overachieving the Member State s target under Decision 2002/358/EC or under the Kyoto Protocol (as applicable)? 1.37 Given that the projections set out in paragraphs 1.8 and 1.10 demonstrate that the UK will over-achieve its Burden Sharing Agreement target as a whole, the UK may decide (a) what level of over-achievement its policies will aim to achieve and (b) the time by which any level of emissions reductions below the Burden Sharing Agreement target will be reached (provided that the total takes into account national energy policies and is consistent with the national climate change programme) As indicated at paragraph 1.11 above, the UK has decided that the level of allowances to be allocated for the first phase of the Scheme should be based on the projections of UK emissions set out in paragraph 1.8 above less an additional 5.5 MtCO 2 reduction by The total quantity of allowances to be allocated is therefore consistent with a path towards over-achieving the UK s Burden Sharing Agreement target (see Chart 1 above). How is it ensured that the total quantity of allowances to be allocated is not more than is likely to be needed for the strict application of the criteria of Annex III? 1.39 The total number of allowances is based on projections which take into account the effects of policies and measures designed to secure delivery of the UK s Burden Sharing Agreement target and to move towards the more stringent domestic goal. As explained in Appendix B, the total number allowances allocated in Phase 1 is 5.5 MtCO 2 less than the projected emissions from the installations covered by the Directive and this requirement is therefore satisfied. How is consistency with the assessment of actual and projected emissions pursuant to Decision 93/389/EEC ensured? 1.40 The 2003 Report from the Commission under Council Decision 93/389/EEC as amended by Decision 99/296/EC for a monitoring mechanism of Community greenhouse gas emissions 27 concluded that in 2001 the UK was on track towards reaching its specific target under the Burden Sharing Agreement Since the total quantity of allowances is not more than would be necessary taking into account actual and projected emissions contained in the 2003 and earlier Reports, the UK considers that the total quantity of 27 COM(2003) 735 final 16

17 allowances that it has decided to allocate in the first phase is consistent with the assessments provided under the Monitoring Mechanism Decision. If the Member State intends to auction allowances, please state the percentage of the total quantity of allowances that will be auctioned, and how the auction will be implemented The UK only intends to use auctioning as a mechanism for the distribution of un-issued allowances in the new entrant reserve (see Appendix C). 17

18 2. DETERMINATION OF THE QUANTITY OF ALLOWANCES AT ACTIVITY LEVEL By what methodology has the allocation been determined at activity level? Has the same methodology been used for all activities? If not, explain why a differentiation depending on activity was considered necessary, how the differentiation was done, in detail, and why this is considered not to unduly favour certain undertakings or activities within the Member State. 2.1 The UK has decided to use a two stage approach to allocate allowances to EU ETS participants. First, the total number of allowances has been allocated to the sectors. The sector level allocations have then been further distributed to individual installations in those activities (see Section 3 below). 2.2 The UK government has decided that the allocation of allowances to the sectors 28 covered by the EU ETS will be determined as follows: all sectors covered by the scheme will be allocated allowances equivalent to their projected emissions; save for the Power Station sector which will be allocated 5.5 MtCO 2 less than that sector s projected emissions during the first phase (the rationale for this is set out at paragraph 2.12 below and paragraph of Appendix B). 2.3 The UK government has also decided to create a New Entry Reserve (NER) of allowances for new entrant installations that join the scheme during phase 1. Estimated allocations to the new entrants in each sector are taken off the estimated total emissions from that sector before allocating allowances from the sector total to existing installations. This process is designed to ensure that the total allowances allocated to the new and existing installations are in line with the total projected emissions in that sector. See Appendix C for more details on how allocations to new entrants have been calculated. 2.4 The UK government has decided to allocate allowances in three equal annual instalments for the first phase of the EU ETS. Hence, for each sector the average annual sector level allocation is estimated. 2.5 To estimate the projected emissions from the EU ETS covered sectors, the UK has used its energy model ( UEP ) as described in paragraph 1.7 to 1.9 above. The projected emissions for each EU ETS sector are calculated after incorporating the effects of current Climate Change Programme policies and measures on that sector. 28 The term sector has different meanings in relation to the updated energy projections (UEP), the Climate Change Agreements (CCAs) and the EU ETS To minimise confusion, references in this Appendix to sector means the relevant EU ETS sector(s). Where UEP or CCA sectors are meant, that will be expressly specified. 18

19 2.6 Further details of the different methodologies used to calculate the sector total for each EU ETS sector are presented in Appendix B. The methodology described above is intended to provide each sector with an allocation based on need, taking into account existing policy commitments. On this basis, the UK government believes, that, although the methodology of calculation varies between sectors, the calculation for any individual sector should not unduly favour certain undertakings or activities within the UK. 2.7 The UK has yet to make a final decision on whether the particular characteristics of the electricity supply industry in Northern Ireland (and possibly the Scottish islands) make it appropriate to split the power station allocation prior to distribution to installations. We are considering this issue further and a final decision will be made shortly. 2.8 In addition, as mentioned in paragraph 1.9 above, further research is underway to consider the appropriateness of growth rates assumed for the ETS sectors within the updated energy projections, and to consider the case for further division of some sectors. The results of this research will feed into revised sector and installation allocations which we aim to produce in late July/early August The sector totals which derive from the methodology set out in Appendix B are summarised in Table 1 below. These figures are subject to further revision in light of ongoing work. In particular, they will be revised in light of the following: (a) the completion of the ongoing work on the UK s energy projections (see paragraph 1.9 above); (b) the receipt of revised data on historic emissions from individual installations either as a result of clarification of the emission points covered by the Scheme in the permits to be issued by the relevant regulators and/or as a result of the verification of the historic emissions data. This process is likely to continue over the summer; (c) the review of the Climate Change Agreement targets on which some of the activity level calculations were based. The sector totals set out below are calculated on the basis the proposed starting point for the re-negotiations of these targets (see further Appendix B); (d) for the iron and steel sector, the allocation is based on energy intensity data for We are examining further how this intensity may change to 2006; and (e) the identification of additional installations. 19

20 Table 1 - Comparison of historic emissions and annual allocations 1. Average annual emissions ( ) 2. Annual emissions (2002) 3. Annual allocation before subtracting NER 4. % of sector total allocated to New Entrant Reserve (NER) 5. Annual allocation to existing installations (i.e. after NER) MtCO 2 MtCO 2 MtCO 2 % MtCO 2 Power stations non-cca % Refineries non-cca % 18.9 Refineries CCA % 0.1 Onshore gas distribution non-cca % 1.5 Offshore non-cca % 18.3 Cement CCA % 9.2 Lime CCA % 2.3 Ceramics non-cca % 0.0 Ceramics CCA % 1.7 Glass CCA % 1.9 Pulp & Paper non-cca % 0.0 Pulp & Paper CCA % 4.1 Food & Drink non-cca % 1.2 Food & Drink CCA % 2.7 Chemicals non-cca % 3.6 Chemicals CCA % 7.1 Non-Ferrous CCA % 2.6 Iron & Steel CCA % 16.8 Engineering & Vehicles non-cca % 0.4 Engineering & Vehicles CCA % 0.6 Others Total non-cca % 1.5 Others Total CCA % 0.0 TOTAL TOTAL %

21 Notes to Table 1: (a) The emissions figures in columns 1 and 2 are based on data provided by operators of installations and are therefore subject to change as those data are refined. (b) The allowance allocations set out in the table are provisional and are subject to further changes as a result of ongoing work to improve emissions data and the projections used to calculate the sectoral allocations, as well as the outcome of consultation on the NER contributions from the sectors. (c) The NER percentage shown in column 4 above is the average NER contribution over Phase 1 as a whole. (d) The emission totals in columns 1 and 2 reflect only emissions from installations still operational at the start of Phase 1. They exclude emissions from installations that have since ceased operations. (e) There appears to be an inconsistency in the relationship between emissions and GVA growth for the engineering and vehicles and ceramics UEP sectors. This results in an unexpected relationship between allocations to installations with and without CCAs in these sectors. We are continuing to explore this apparent inconsistency as the UEP modelling is finalised. If the potential, including the technological potential, of activities to reduce emissions was taken into account at this level, please state so here and give details in Section 4.1 below The potential of different sectors to achieve emissions reductions by using technologies which are cost-effective has been taken into account in setting the sector totals. Further details are set out in section 4.1 below. If Community legislative and policy instruments have been considered in determining separate quantities per activity, please list the instruments considered in Section 5.3 and state which ones have been taken into account and how See section 5.3 below. If the existence of competition from countries or entities outside the Union has been taken into account, please explain how Power stations are being required to deliver the additional emissions trading savings referred to in paragraph 1.11 above because this sector faces limited international competition and is thought to have a relatively large scope for low cost abatement opportunities. For example, electricity imports in 2002 amounted to only around 2% of total electricity supplied. Exports of 21

22 electricity were considerably lower than that. This trade is also concentrated in the EU market, all of which is affected by the EU scheme. There will be possibilities for changing the relative utilisation of existing gas fired and coal fired power stations. For some years it has been clear that gas fired plant is the electricity generators' commercial preference for new generating capacity. Over time, the continued introduction of new gas-fired plant and retirement of older coal fired plant, will help to reduce emissions. Generators are not subject to competition from firms outside the EU ETS. Thus, this sector may be better placed to incorporate the marginal cost of carbon to reflect the higher marginal costs of generation from fossil fuels resulting from the scheme. Once the EU ETS comes into force, we expect the value of carbon to be reflected in electricity prices across Europe. 22

23 3. DETERMINATION OF THE QUANTITY OF ALLOWANCES AT INSTALLATION LEVEL By what methodology has the allocation been determined at installation level? Has the same methodology been used for all installations? If not, please explain why a differentiation between installations belonging to the same activity was considered necessary, how the differentiation by installation was done, in detail, and why this is considered not to unduly favour certain undertakings within the Member State. 3.1 The determination of sector level allocations is set out in Section 2 and Appendix B. This section describes the methodology used to determine the distribution of those sector allocations to individual installations. 3.2 The starting point for calculating allocations for installations will be to calculate each installation s relevant emissions during the baseline period from 1998 to In most cases, an installation s relevant emissions will be the average annual emissions for the years in the baseline period when the installation was in operation after excluding the lowest year s emissions. In other words: (a) for installations commencing operation 30 in or before 1998, the average of the highest 5 years from 1998 to 2003; (b) for installations commencing operation in 1999, the average of the highest 4 years from 1999 to 2003; (c) for installations commencing operation in 2000, the average of the highest 3 years from 2000 to 2003; (d) for installations commencing operation in 2001, the average of the highest 2 years from 2001 to 2003; and (e) for installations commencing operation in 2002, the higher of 2002 and The figures for relevant emissions of both the sector and each installation are then used to determine the share of the sector s allowances that each installation will receive. The calculation of the total Phase 1 allocation for an individual installation can be expressed as: Installation's relevant emissions * Total sector allowance = Total Phase 1 Sum of relevant emissions allocation installation level of all installations in the sector allocation 3.5 Where an installation is made up of a number of technically distinct units for which separate emissions data are available and some of those units 29 Following responses to consultation on the draft NAP, the UK is proposing to extend the baseline period until The approach set out in this section reflects the current proposed approach. A final decision will be made shortly after a brief period of further consultation 30 For this purpose, an installation is considered to have commenced operations when it begins to carry out the relevant Annex I activity. 23

24 commenced operations in 1999 or later, the UK has proposed to stakeholders that the installation s relevant emissions may be calculated on a unit by unit basis. The UK is consulting on this proposal and will make a final decision shortly. This is best explained by an example. An installation consists of three units (A, B and C); Units A and B were in operation throughout the baseline period; Unit C (e.g. a new boiler or CHP plant, or a CHP scheme replacing an existing boiler) commenced operations in In this case, the installation s relevant emissions would be the sum of the results of (i) applying paragraph 3.3(a) to the emissions from Units A & B and (ii) paragraph 3.3(c) to the emissions from Unit C. This can be represented graphically as follows: Unit A B C Apply (a) Apply (c) Installation's baseline is the sum of these 3.6 An allocation methodology based on historic emissions has been chosen to allocate at the installation level due to the complexity of projecting installation level emissions consistently and accurately across installations in all sectors. The use of an historic average provides some compensation to potentially stranded assets. Emissions data from 1998 onwards were chosen on the basis that they are more accurate, available and able to be verified than data from before that date. The exclusion of the lowest year s emissions is intended to minimise the impact where an installation has had an anomalous year with unusually low emissions. 3.7 However, it has become clear during consultation on the draft NAP that there are three situations in which the general approach for calculating relevant emissions is not appropriate. The UK has not yet made a final decision and is consulting further on how to address these situations. The following represents the current proposed solution and a final decision will be made shortly after a brief period of further consultation: (1) Commissioning 3.8 Firstly, installations which underwent commissioning during the baseline period will be disadvantaged if commissioning was carried out in more than one calendar year. For such installations, the UK is proposing that any emissions data relating to commissioning should be excluded from the calculation of relevant emissions i.e. the installation will only be treated as being in operation for the purpose of paragraph 3.3 above once commissioning has been completed. We are consulting further on sectorspecific definitions of commissioning. (2) Inter-site Rationalisation 3.9 Secondly, the general approach would have disadvantaged an installation (Installation X) to which the same operator has switched production from another installation (Installation Y) during the baseline period, where Installation Y has since closed and will not receive an allowance 24

25 allocation. The UK is proposing that, for the purpose of calculating the relevant emissions of Installation X, any emissions data relating to the period before the transfer of production took place should be excluded from the calculation i.e. Installation X will only be treated as being in operation for the purpose of paragraph 3.3 above after the transfer of production has taken place. This rule only applies where both installations manufacture transferable products 31 and are operated by the same operator. For the purposes of this rule, production is deemed to be transferred only when there has been 100% cessation of operations at Installation Y and Installation Y has not been permitted for the purposes of the EU ETS (and thus will not receive an allowance allocation). Operators wishing to be treated in this way must apply for special treatment and will be required to provide supporting evidence (e.g. of ownership of the installations, of the transferability of the products in question and of complete cessation of production at Installation Y). This rule may apply to where production has been transferred to more than one EU ETS installation, provided that the above tests are satisfied. The Government will consider applications for special treatment under this rule on a case-bycase basis. (3) Installations commencing operations in Thirdly, there are a small number of installations that commenced operations in These installations are considered existing installations for the purposes of the NAP, although they will have less than one full year s historic data available. Given the wide variation in seasonal fluctuations in demand in the industries covered by the scheme, a simple pro-rata adjustment to partial data would be likely to create an unfair advantage or disadvantage for the installation concerned. Therefore, the allocation for these installations will be calculated in line with the methodology to be used for new entrants (see Appendix C) and will be taken off the sector allocation before this is distributed to other existing installations Once the total allocation of allowances for each installation has been calculated for the entirety of the first phase, it will be divided into three equal parts and issued to the relevant operator by 28 February in each year of the Scheme, provided that the installation is considered to be operational and is not deemed to have ceased to carry out an Annex 1 activity. Where an installation is deemed to have ceased to carry out an Annex 1 activity, no further allocations will be issued in the years following cessation. Un-issued allowances arising in this way will be added to the new entrant reserve (see further Appendix C) Installations which have commenced operations after 31 December 2003 will be allocated allowances from the new entrant reserve (see further Appendix C). 31 For the purpose of this proposed rule, the generation of electricity is not considered to be the manufacture of a transferable product. 25

26 3.13 The UK is submitting at Annex A a list of installations covered by the Directive. However, it has not been possible to produce a list of installationlevel allocations at this time. The UK hopes to produce a revised list of installations with individual allocations by late July/early August If historical emissions data were used, please state whether they have been determined in accordance with the Commission s monitoring and reporting guidelines pursuant to Article 14 of the Directive or any other set of established guidelines, and/or whether they have been subject to independent verification Historical emissions data submitted for the development of the National Allocation Plan were collected and calculated in accordance with several established guidelines including the Commission's EU ETS Monitoring and Reporting Guidelines, the Guidelines for the Measurement and Reporting of Emissions by Direct Participants in the UK Emissions Trading Scheme, the Climate Change Agreement Guidance on Monitoring Data : Performance Data and Auditing for the First Milestone and some industry best practice protocols. Basic checks indicate that these guidelines give rise to comparable emissions data when using emission factors for UK fuels The UK is currently developing a system for independently verifying historic emissions data to ensure that they have been appropriately collected and calculated and are free from material errors and misstatements. Much of the data collected for other schemes has already been verified and audited, so we envisage a less stringent verification than for annual monitoring and reporting. This verification process will start shortly with operators required to ensure that all data is verified before the final allocation decision is made. To promote good quality and consistent baseline data verifications, the verifiers will need to be accredited by the UK Accreditation Service in accordance with their updated CIS 5 Guidance for the Application of ISO/IEC Guide 65 Document. If early action or clean technology were taken into account at this level, please state so here and give details in Sections 4.2 and/or 4.3 below On early action, see section 4.2 below and on clean technology see section 4.3 below. If the Member State intends to include unilaterally installations carrying out activities listed in Annex I below the capacity limits referred to in that Annex, please explain why, and address, in particular, the effects on the internal market, potential distortions of competition and the environmental integrity of the scheme. 26

27 3.17 The UK does not propose to include unilaterally installations carrying out activities listed in Annex I below the capacity limits referred to in that Annex as provided for in Article 24 of the Directive. If the Member State intends temporarily to exclude certain installations from the scheme until 31 December 2007 at the latest, please explain in detail how the requirements set out in Article 27(2)(a)-(c) of Directive 2003/87EC are fulfilled The UK is applying to exclude from the first phase of the Scheme some installations that are covered by the UK Emissions Trading Scheme, or by Climate Change Agreements. Separate applications are being made for installations covered by these domestic schemes, reflecting the differences in the two schemes. These applications for temporary exclusion are being submitted to the Commission alongside this National Allocation Plan to be considered by the Comitology Committee scheduled for June The applications detail the basis on which equivalence of environmental effect, monitoring, reporting and verification requirements and the penalties for non compliance can be demonstrated. 27

28 4. TECHNICAL ASPECTS 4.1 Potential, including technological potential Has criterion (3) been used to determine only the total quantity of allowances, or also the distribution of allowances between activities covered by the scheme? Please describe the methodology (including major assumptions made) and any sources used to assess the potential of activities to reduce emissions. What are the results obtained? How is it ensured that the total quantity of allowances allocated is consistent with the potential? Please explain the method or formula(e) used to determine the quantity of allowances to allocate at the total level and/or activity level taking the potential of activities to reduce emissions into account The potential of different sectors to achieve emissions reductions by using technologies which are cost-effective has already been reflected in the policies and measures set out in the UK Climate Change Programme. The UK Climate Change Programme is based on a number of principles, including taking a balanced approach, with all sectors and all parts of the UK playing their part, and focusing on flexible and cost effective policy options that work together to form an integrated package. The review of the Climate Change Programme which will take place during 2004 will take into account the potential of different sectors to achieve reductions The updated emissions projections which have been used as the basis for calculating the total quantity of allowances to be issued and the distribution of those allowances between sectors incorporate the current estimates of CO 2 savings for each measure described in the Climate Change Programme. These projections reflect the costs faced by the different sectors in adopting alternative measures to reduce emissions. Please refer to paragraphs 1.7 to 1.9 for more details on UEP The Climate Change Agreements were designed with the feasibility of emissions reductions in each sector in mind. The CCA target review in 2004 is aimed at ensuring that the targets continue to reflect the potential for cost effective energy savings. Thus, the use of the CCA targets as the basis for calculating sectoral allocations means that feasibility and overall potential of sectors to reduce emissions is reflected in distribution of allowances at that level The decision to place the responsibility for achieving the remaining savings anticipated from emissions trading on the power generation sector reflects in part that sector s potential for low-cost abatement opportunities. There will be possibilities for changing the relative utilisation of existing gas fired and coal fired power stations. For some years it has been clear that gas fired plant is the electricity generators' commercial preference for new 28

29 generating capacity. Over time, the continued introduction of new gas-fired plant and retirement of older coal fired plant, will help to reduce emissions As a result, the potential to reduce emissions has been taken into account in determining both the total quantity of allowances and the distribution of those allowances at the activity/sector level. If benchmarking was used as a basis for determining the intended allocation to individual installations, please explain the type of benchmark used, and the formula(e) used to arrive at the intended allocation in relation to the benchmark. What benchmark was chosen, and why is it considered to be the best estimate to incorporate achievable progress? Why is the output forecast used considered to be the most likely development? The standardised allocation methodology being developed for new entrants and installations which commence operations in 2003 may incorporate benchmarks (for details see paragraph 3.8 above and Appendix C). 4.2 Early action If early action has been taken into account in the allocation to individual installations, please describe in which manner it is accommodated. Please list and explain in detail the measures that were accepted as early action and what the criteria accepting them were. Please demonstrate that the investments/actions accommodated led to a reduction of covered emissions beyond what followed Community or national legislation in force at the time the action was taken Criterion (7) of Annex III of the Directive gives Member States discretion about whether or not to take early action into account. The UK considers that it is very difficult to identify instances of early action other than those undertaken either (a) in compliance with relevant legislation or other policies - which the Commission guidance states is not covered by the definition of early action or (b) for economic reasons for which there would appear to be little justification for additional reward. Therefore, the UK does not consider that it is appropriate to reward early action more specifically in the NAP However, the use of averaged emissions information from 1998 to 2003 to distribute allowances to individual installations (see Section 3 above) takes account of major decreases in later years, by incorporating higher emissions data from earlier years, thereby rewarding an operator who has taken significant early action during this period. It also avoids the penalty for earlier action which would result from using a single recent year (e.g or 2003) or from basing allocations on forecasts of emissions. In addition, the proposed approach to plant closure during the baseline period set out in 29

30 paragraph 3.9 above will ensure that operators who have taken early action by rationalising production are not penalised. 4.3 Clean technology How has clean technology, including energy efficient technologies, been taken into account in the allocation process? If at all, which clean technology has been taken into account, and on what basis does it qualify as such? Have any energy production technologies intended to be taken into account been in receipt of approved State aid for environmental protection in any Member State? Please state whether any other industrial technologies intended to be taken into account constitute best available techniques as defined in Council Directive 96/61EC, and explain in what way it is particularly performing in limiting emissions of covered greenhouse gases The UK considers that one of the principal effects of establishing the EU ETS will be to provide an incentive for clean, energy efficient technologies by putting a price on emissions of carbon. Therefore, the UK has not considered it necessary to take any express steps to take account of clean technologies in the allocation process to existing installations However, the use of benchmarks to allocate to new entrants, where possible, will encourage investment in clean technology and energy efficiency Equally, the establishment and operation of the ring-fenced reserve of free allowances for investment in new Good Quality Combined Heat and Power (CHP) installations ensures the incentive for new investment in this type of clean technology is secured. The size of the CHP set-a-side will be based on the UK s assessment in the UEP of the likely new Good Quality CHP installations coming on line during phase one of the EU Emissions Trading Scheme. 30

31 5. COMMUNITY LEGISLATION AND POLICY 5.1 Pooling (Competition policy) If the competent authority has received an application from operators wishing to form a pool and if it is intended to allow it, please attach a copy of that application to the National Allocation Plan. What percentage of the total allocation will the pool represent? What percentage of the relevant sector s allocation will the pool represent? The UK s general position is that the establishment of pools of installations as provided for under Article 28 of the Directive is unnecessary and may hinder the development of a transparent and liquid market in allowances However, the UK does consider that operators of smaller installations (specifically those carrying out combustion activities that fall within the scope of the EU ETS due to the requirement to aggregate several activities which fall within the same heading in Annex I of the Directive if they are carried out by the same operator on the same site) should be offered the opportunity to apply to form a pool. This would allow these operators of smaller installations to coordinate the carrying out of the administrative tasks associated with trading. The UK implementing regulations therefore permit operators of installations which are carrying out activities which do not fall within the scope of Annex I of the IPPC Directive to make a joint application to the appropriate authority to form a pool 32. In practice therefore, the ability to form a pool is limited to operators of combustion installations with a rated thermal input of less than 50MW Since pooling will only be available to smaller operators with relatively low levels of emissions, the UK does not consider that pooling as provided for in the UK transposing legislation will raise any competition issues. However, the UK will of course submit any pooling application received to the Commission in accordance with Article 28(5) Treatment of new entrants (Internal Market Policy) The UK has decided to set aside a quantity of allowances to be distributed for free to installations that commence operation after 31 December 2003 but before the end of 2007 and that are eligible as new entrants for a free allocation of allowances from the New Entrant Reserve (NER). The total size of this reserve will be 56.8m allowances (roughly 7.7% of the total allowances to be issued). 32 Regulation 21 of the Greenhouse Gas Emissions Trading Scheme Regulations 2003 (SI 2003/3311). 33 See also regulation 21(4) of the ETS Regulations. 31

32 5.2.2 The details of how the NER was calculated and how it will operate are set out in Appendix C. 5.3 Community legislative and policy instruments considered Please list other Community legislation or policy instruments that were considered in the establishment of the National Allocation Plan and explain how each one has influenced the intended allocation and for which activities The energy projections which form the basis for determining the total quantity of allowances and the distribution of those allowances at sectoral level (see sections 1 and 2 above) incorporate the emission reductions which are projected to take place as a result of a wide variety of Community and domestic legislation and policy instruments. Table 2 below sets out an indicative list of Community instruments that have been taken into account in those projections, together with a brief summary of their effect on emissions. Table 2: Community Legislative and Policy Instruments Considered Legislative or policy instrument Directive 96/61/EC concerning Integrated Pollution Prevention and Control Directive 96/92/EC on ambient air quality assessment and management Directive 1999/13/EC on the limitation of emissions of volatile organic compounds due to the use of organic solvents in certain activities and installations Directive 1999/30/EC relating to limit values for sulphur dioxide, nitrogen dioxide and oxides of nitrogen, particulate matter and lead in ambient air. Directive 1999/32/EC relating to the reduction of the sulphur content of certain liquids fuels and amending Directive 93/12/EEC Impact on emissions Requires installation-specific emission limit values on greenhouse gases where these are likely to be emitted in significant quantities. Also requires efficient use of energy by installations. Establishes a framework for the protection of public health and the environment from a range of air pollutants, particularly sulphur dioxide, nitrogen dioxide and oxides of nitrogen, and particulate matter from combustion sources. Requires certain installations using organic solvents to take steps to reduce emissions of volatile organic compounds to air. Encourages the more efficient, and hence more energy efficient, use of solvents. The need to comply with limit values can reduce the emissions of these pollutants from combustion sources, which limits the use of combustion sources and their associated CO 2 emissions. Requires petrol and diesel fuels to comply with tighter requirements regarding sulphur levels, thereby increasing CO 2 emissions from refineries (see paragraph above). 32

33 Legislative or policy instrument Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market Directive 2001/80/EC on the limitation of emissions of certain pollutants into the air from large combustion plants Directive 2001/81/EC on national emission ceilings for certain atmospheric pollutants Directive 2001/91/EC on the energy performance of buildings Directive 2003/30/EC on the promotion of the use of biofuels or other renewable fuels for transport Directive 2003/96/EC on the restructuring of the Community framework for the taxation of energy products and electricity Voluntary agreements with motor manufacturers on fuel efficiency of new cars Impact on emissions Promotes an increase in the contribution of renewable energy sources to electricity production, thereby reducing emissions from combustion of fossil fuels for electricity production. From 2008, limits emissions of sulphur dioxide, oxides of nitrogen and dust from combustion plants with a net rated thermal input of 50MW. Effect on CO 2 emissions: may have marginal impact in encouraging use of abatement systems such as Flue Gas Desulphurisation and Selective Catalytic Reduction which would allow higher coal-burn giving rise to increases in CO 2 emissions. May also result in lower running hours reducing CO 2 emissions. Sets national emission ceilings for pollutants causing acidification and eutrophication and for ozone precursors. Effect on emissions of CO 2 limits the emissions of sulphur dioxide and nitrogen oxides from combustion sources, which limits the use of combustion sources and their associated CO 2 emissions. Sets minimum requirements for the energy performance of all new buildings and existing large buildings subject to major renovation and provides for energy certification of all buildings. Requires Member States to set targets for biofuel sales for 2005 and 2010 Widens the scope of the EU s minimum rate system for energy products, previously limited to mineral oils, to all energy products. 34 Commits the automotive industry to improving average new car fuel efficiency to 140 g/km CO 2 by 2008/9 (a 25% improvement on the 1995 level). Has any particular new Community legislation been considered to lead to an unavoidable decrease or increase in emissions? If yes, please explain why the change in emissions is considered to be unavoidable, and how this has been taken into account. 34 The introduction of the Directive has had no impact on the climate change levy rates because, as with excise duty rates on oils, the UK s rates are above the minimum levels in the Directive. 33

34 5.3.2 The only policy that has been incorporated in UEP that leads to an unavoidable increase in CO 2 emissions is the Liquid Fuels Directive. The Directive requires refineries to produce sulphur free fuel as a consequence of which refineries have unavoidable increases in emissions of carbon dioxide. This effect has already been incorporated in the UEP projections and therefore is reflected in the allocation to the refineries sector (see Appendix B). 34

35 6. PUBLIC CONSULTATION 6.1 How is this national allocation plan made available to the public for comments? This National Allocation Plan has been published on the Defra website, together with a consultation paper 35 which draws stakeholders attention to particular issues on which their views are sought. 6.2 How does the Member State provide for due account to be taken of any comments received before a decision on the allocation of allowances is taken? As explained in the text above and the relevant Appendices to this document, there are a number of issues relating to the allocation methodology on which the UK has yet to reach a final decision. The UK recognises that final decisions on these issues will need to be submitted for approval by the Commission. A number of these are subject to further public consultation as explained the consultation paper published alongside this National Allocation Plan The issues on which final decisions have yet to be taken include the following: (a) the possible sub-division of the power station sector to address the special characteristics of the Northern Ireland electricity supply industry (see paragraph 2.7); (b) the growth rates to be used for particular sectors and subsectors (including the differences between CCA and non-cca growth rates) (see paragraphs 1.9 and 2.8 and Appendix B); (c) extension of the baseline period for calculating relevant emissions to 2003 (see footnote to paragraph 3.2); (d) treatment of installations including technically distinct units which began operations in 1999 or later (see paragraph 3.5); (e) treatment of installations which underwent commissioning in during the baseline period (see paragraph 3.8); (f) treatment of installations which underwent inter-site rationalisation during the baseline period (see paragraph 3.9); (g) treatment of installations which commenced operations during 2003 (see paragraph 3.10); (h) the detailed issues relating to the rules for new entrants, closures and auctioning including the balance between growth from incumbents and true new entry (see Appendix C); (i) the outcome of the review of the Climate Change Agreement targets for 2006; See accompanying consultation paper published at 35

36 (j) for the iron and steel sector, the allocation is based on energy intensity data for We are examining further how this intensity may change to Following final decisions on some of the above issues, operators of affected installations may be required to submit additional data (e.g. on commissioning) required to put the approaches chosen into effect In addition, as pointed out in paragraphs 1.13 and 2.9 above, the figures for the total number of allowances are subject to change as a result of a number of factors, including the finalisation of the energy projections, the receipt of revised data from operators as a result of verification, the review of the Climate Change Agreement targets for 2006 and the identification of additional installations. Stakeholders will have the opportunity to comment on the updated energy projections before they are finalised. A working paper on the projections will be published in May A revised set of sector allocations and individual level allocations will be published in late July/early August 2004 which will incorporate: (a) final refinements to the proposed approaches for distributing sector totals to installations resulting from comments from stakeholders and the additional data provided by installations required to put those approaches into effect; (b) the finalised updated energy projections (including sub-sector growth rates if it is concluded that these should be used); (c) final refinements to the sector contributions to New Entrant Reserve; (d) the re-submission of baseline emissions data by operators following the permitting of installations; and (e) revised CCA sector targets for 2006 where negotiations have been successfully concluded by that time In accordance with the Directive, stakeholders will have an opportunity to comment on the list of installation level allocations and the accompanying explanatory documents. However, given the opportunities for comments already offered, these will be limited to issues of fact (e.g. correction of errors) rather than comments on allocation methodology Following the receipt of further comments on the list of indicative allocations, the final allocation decision will be taken which will set out the allocation of allowances to all existing installations and will incorporate: (a) any amendments proposed by the Commission to the NAP or refinements to the approach set out in that document subsequently notified to them; (b) verified baseline emissions data for individual installations; (c) corrections to the installation list published in late July/early August; and (d) revised CCA sector targets for 2006 for the remaining sectors. 36

37 6.3 If any comments from the public received during the first round of consultation have had significant influence on the national allocation plan, the Member State should summarise those comments and explain how they have been taken into account? In August 2003, the UK undertook a consultation on the allocation methodologies to be used for the purposes of developing the National Allocation Plan for the first phase of the EU ETS ( ). 37 At the same time, the UK also requested views on several other issues including: the treatment of new entrants; the treatment of installations on closure; banking between the first and second phases of the Scheme; auctioning allowances; temporary exclusion; and the interpretation of the Directive. A summary of the responses to this consultation is available at The UK developed its policy on the National Allocation Plan in light of the responses received to the August consultation. In January 2004 the UK published a draft of this National Allocation Plan and provisional list of installation-level allocations for consultation. 38 Stakeholders were asked to express views in particular on: the allocation methodologies; the feasibility of the arrangements proposed for managing new entrants; the proposals for dealing with plant closures; the proposals for making use of the auctioning provision During this consultation, a wide range of issues were raised in sector meetings and consultation responses, including among other issues the following: a. representations on the updated energy projections, including underlying input assumptions and whether it will be possible to divide some sectors into sub-sectors and use sub-sectoral rates where appropriate; b. treatment of combined heat and power (CHP) plants; c. allocation of sector totals to installations: i. treatment of installations which underwent commissioning or where rationalisation of production took place during the baseline period ( ); ii. treatment of installations opening in 2002/3; iii. varying the baseline period (e.g. to include 2003); and iv. contribution of sectors to the New Entrant Reserve; 37 Available at 38 Available at Appendix C of the consultation document includes a summary of how the responses to the August consultation were incorporated into the January draft NAP. 37

38 d. the classification of particular installations as parts of particular sectors and the need to sub-divide particular sectors; and e. corrections to the list of installations and emissions data used for preparing the indicative list of allocations This National Allocation Plan sets out the UK s current proposed solutions to the issues raised during the consultation on the draft NAP, which have been developed in light of the comments made during consultation. A detailed explanation of how those decisions were reached is set out in the accompanying consultation document CRITERIA OTHER THAN THOSE IN ANNEX III TO THE DIRECTIVE Have any criteria other than those listed in Annex III to the Directive been applied for the establishment of the notified National Allocation Plan? If yes, please specify which ones and how they have been implemented. Please also justify why any such criteria are not considered to be discriminatory. 7.1 No other criteria have been applied. 39 Available at 38

39 Appendix A ANNEX III OF THE DIRECTIVE (1) The total quantity of allowances to be allocated for the relevant period shall be consistent with the Member State's obligation to limit its emissions pursuant to Decision 2002/358/EC and the Kyoto Protocol, taking into account, on the one hand, the proportion of overall emissions that these allowances represent in comparison with emissions from sources not covered by this Directive and, on the other hand, national energy policies, and should be consistent with the national climate change programme. The total quantity of allowances to be allocated shall not be more than is likely to be needed for the strict application of the criteria of this Annex. Prior to 2008, the quantity shall be consistent with a path towards achieving or over-achieving each Member State's target under Decision 2002/358/EC and the Kyoto Protocol. (2) The total quantity of allowances to be allocated shall be consistent with assessments of actual and projected progress towards fulfilling the Member States' contributions to the Community's commitments made pursuant to Decision 93/389/EEC. (3) Quantities of allowances to be allocated shall be consistent with the potential, including the technological potential, of activities covered by this scheme to reduce emissions. Member States may base their distribution of allowances on average emissions of greenhouse gases by product in each activity and achievable progress in each activity. (4) The plan shall be consistent with other Community legislative and policy instruments. Account should be taken of unavoidable increases in emissions resulting from new legislative requirements. (5) The plan shall not discriminate between companies or sectors in such a way as to unduly favour certain undertakings or activities in accordance with the requirements of the Treaty, in particular Articles 87 and 88 thereof. (6) The plan shall contain information on the manner in which new entrants will be able to begin participating in the Community scheme in the Member State concerned. (7) The plan may accommodate early action and shall contain information on the manner in which early action is taken into account. Benchmarks derived from reference documents concerning the best available technologies may be employed by Member States in developing their National Allocation Plans, and these benchmarks can incorporate an element of accommodating early action. (8) The plan shall contain information on the manner in which clean technology, including energy efficient technologies, are taken into account. (9) The plan shall include provisions for comments to be expressed by the public, and contain information on the arrangements by which due account will be taken of these comments before a decision on the allocation of allowances is taken. (10) The plan shall contain a list of the installations covered by this Directive with the quantities of allowances intended to be allocated to each. (11) The plan may contain information on the manner in which the existence of competition from countries or entities outside the Union will be taken into account. 39

40 Appendix B METHODOLOGY FOR CALCULATING SECTOR TOTALS 1. Introduction Mapping the NAP sectors Sectoral allocations for NAP sectors that match UEP sectors Power stations Refineries Offshore Sectoral allocations for NAP sectors that do not match UEP sectors and are covered by Climate Change Agreements NAP sectors that are covered by relative CCA targets Average annual direct emissions Average annual process emissions Average annual allocation NAP sectors that are covered by absolute CCA targets Sectoral allocations for NAP sectors not directly modelled in UEP and not covered by any CCAs Introduction 1.1. The UK government has decided that the allocation of allowances to the sectors 40 covered by the EU ETS will be determined as follows: all sectors covered by the scheme will be allocated allowances equivalent to their projected emissions; save for the Power Station sector which will be allocated 5.5 MtC0 2 less than that sector s projected emissions during the first phase (see further paragraph below) The UK government has also decided to create a New Entry Reserve (NER) of allowances for new entrant installations that join the scheme during Phase 1. Estimated allocations to the new entrants in each sector are taken off the estimated total emissions from that sector before allocating allowances from the sector total to existing installations. This process is designed to ensure that the total allowances allocated to new and existing installations are in line with the total projected emissions in that sector. See Appendix C for more details on how allocations to new entrants have been calculated. 40 The term sector has different meanings in relation to the updated energy projections (UEP), the Climate Change Agreements (CCAs) and the NAP. To minimise confusion, references in this Appendix to sector means the relevant NAP sector(s). Where UEP or CCA sectors are meant, that will be expressly specified. 40

41 1.3. The UK government has also decided to allocate allowances in three equal annual instalments for the first phase of the EU ETS. Hence, for each sector the average annual sector level allocation is estimated To estimate the projected emissions from the EU ETS covered sectors, the UK has used its energy model ( UEP ) as described in paragraph 1.7 to 1.9 of the NAP. The projected emissions for each EU ETS sector are calculated after incorporating the effects of current Climate Change Programme policies and measures on that sector Work on the UEP projections is continuing. In particular, we will be examining the consistency of projections between CCA and non-cca sectors, and looking to improve projections of process emissions in UEP. 2. Mapping the NAP sectors 2.1. The UEP cover all CO2 emissions in the UK (other than for Land Use Change which are estimated separately). However, the Directive covers installations with a capacity above a certain threshold (set out in Annex I). Since not all installations in each UEP sector are at a capacity above the Directive s threshold, only three UEP sectors are fully covered by the EU ETS. For those UEP sectors that are fully included in the scheme, the projected emissions are taken directly from UEP. These sectors are: a) Power Stations; b) Refineries; and c) Offshore (covering offshore platforms and terminals) In order to ensure consistency between NAP sectors projections and those in UEP, it has been assumed that the growth rates for the installations covered by the EU ETS will follow the growth trends for each corresponding UEP sector. The UEP sectors for which at least a proportion of emissions are covered by the scheme are: d) Iron and Steel; e) Minerals (This UEP sector covers glass, ceramics/bricks, cement and lime); f) Non Ferrous Metals; g) Paper; h) Food, Drink and Tobacco; i) Chemicals; j) Other oil and gas (covering onshore gas distribution); and k) Services 2.3. Projections from UEP are made on a 5 yearly basis. The relevant projections for the first phase therefore relate to the years 2005 and To estimate emission for 2006 and 2007, a straight-line interpolation between 2005 and 2010 has been assumed. This is the case where UEP projections 41

42 are used directly (for NAP sectors that match UEP sectors) or indirectly (where NAP sectors do not match UEP sectors) through UEP growth rates Sectors (d) to (i) are also covered in part or in full by sector-specific UK Climate Change Agreements (CCAs). These are voluntary agreements with government at a CCA sector level whereby each sector takes on a target for reductions in energy use (including both direct and indirect energy use). The sectors that meet their targets get 80% discount on the Climate Change Levy 41. The CCA sectors are at a more disaggregated level than the UEP sectors CCA targets generally require relative reductions to be made i.e. reductions in energy use per unit of output. But there are some CCAs which require absolute reductions in energy use to be made Table B 1 below maps the EU ETS activities listed in Annex I of the directive sectors. Column (ii) shows the UEP sector in which these installations are modelled. Column (iii) list the relevant CCA sectors that apply to the installations modelled in that sector and used to calculate the allocation to installations that hold a CCA. 41 For more details on Climate Change Agreements and Climate Change Levy, please see the sources referred to in Appendix D. 42

43 Table B 1: Mapping of EU ETS activities into sectors included in the NAP in the UK (i) (ii) (iii) (iv) EU ETS activities Relevant UEP sectors Relevant CCA sectors Sectors included in the NAP Combustion activities Power stations 1. Power stations Offshore Onshore gas distribution 2. Offshore Aluminium Aluminium Federation (ALFED) 4. ALFED Food, Drink and Tobacco (FDT) Food & Drink Federation (FDF) 3. Onshore gas distribution 5. FDF Dairy Industry Association Ltd (DIAL) Maltsters Association Spirits Energy Efficiency Company (SEEC) 6. DIAL 7. MAGB 8. SEEC British Beer & Pub Association (BBPA) UK renderers association (UKRA) Chemical Industries Association (CIA) 9. BBPA 10. UKRA 11. CIA Chemicals Chemical Industries Association (CIA) 13. CIA Engineering and Vehicles (E&V) Society of Motor Manufacturers & Traders (SMMT) British Rubber Manufacturers (BRMA) 12. FDT non CCA 14. Chemicals non CCA 15. SMMT 16. BRMA-T Society of British Aerospace Companies (SBAC) 17. SBAC 18. E&V non CCA Services 19. Services Textiles British Apparel & Textile Confederation (BATC) 20. BATC British Leather Confederation (BLC) 21. BLC 22. Textiles non CCA Refineries Refineries Chemical Industries Association (CIA) 23. CIA 24. Refineries Iron and Steel Iron and Steel United Kingdom Steel Association (UKSA) 25. UKSA Target 2010 (Foundries) 26. Target 2010 Cement Mineral British Cement Association (BCA) 27. BCA Lime Mineral British Lime Association (BLA) 28. BLA UK Steel Association (UKSA) Glass Mineral British Glass Manufacturer s Confederation (BGMC) 29. UKSA 30. BGMC British Ceramic Confederation - Refractories and Industrial (BCC-R) British Ceramic Confederation - Materials (BCC- M) Mineral Wool (EUR) Ceramics Mineral British Ceramic Confederation Non fletton (BCC-N) 31. BCC-R 32. BCC-M 33. EUR 34. BCC-N British Ceramic Confederation - Fletton (BCC-F) 35. BCC-F 43

44 (i) (ii) (iii) (iv) EU ETS activities Relevant UEP sectors Relevant CCA sectors Sectors included in the NAP British Ceramic Confederation - Refractories and Industrial (BCC-R) British Ceramic Confederation - Whitewares (BCC-W) British Ceramic Confederation - Materials (BCC- M) 36. BCC-R 37. BCC-W 38. BCC-M 39. Ceramics non CCA Paper Paper The Paper Federation (TPF) 40. TPF Non-metallic minerals Mineral Wood Panel (WPIF) 41. WPIF 42. Paper non CCA 43. Other Non-metallic non- CCA Sectors directly modelled in the UK energy model Sectors with relative Climate Change Agreements Sectors with absolute Climate Change Agreements Sectors with no Climate Change Agreements Sectors marked in grey: these sectors cover only a small number of installations which had not submitted sufficient data in time for a sector total to be calculated. Consequently, detailed information is not provided for these sectors in the text Sectors marked in italics: this highlights instances where a majority of the installations covered by a given CCA fall in another NAP sector. In these cases, the calculations detailed in the text are for the combination of NAP sector and CCA into which a majority of installations fall. 3. Sectoral allocations for NAP sectors that match UEP sectors 3.1. Power stations Installations modelled as electricity generators in UEP covered by the EU ETS have been assigned to the NAP power station sector (sector 1 in Table B 1 above). This includes all installations that generate electricity for export to the transmission and distribution networks, plus some CHP plants that export a large proportion of their electricity output The UK government has decided that the power generation sector will be responsible for the additional emissions trading savings which it expects the EU ETS to deliver beyond the with CCP projections. To calculate the NAP sector s allocation, this saving is deducted from the projection of annual average emissions from power stations (illustrated in Figure 1). The power stations sector contribution to the NER has then been subtracted from this to derive the total number of allowances to be allocated to the relevant installations. Table B 2 below shows this calculation. 44

45 Figure 1 - Power station contribution to EU ETS saving Annual phase 1 power stations allocation before adjusting for new entry 2.75MtCO2 UEP 'with measures' power stations projection UEP 'with measures' power stations projection less EU ETS NAP sector Table B 2: Power station allocation calculation UEP emissions projection Calculation input Sector allocation Total Average Total NER Total Phase Average Phase 1 annual ETS contribution 1 allocation annual emissions Phase 1 saving to existing Phase 1 emissions installations allocation to existing installations =(i)+(iii)+(iv) =(v)/3 =[(v)-(vii)]*[1- (viii)] =(ix)/3 (i) (ii) (iii) (iv) =(v) =(vi) (vii) =(viii) =(ix) =(x) UnitsMtCO2MtCO2MtCO2MtCO2 MtCO2 MtCO2 MtCO2 % Allowances Allowances 1. Power % Stations Power stations are being required to deliver the additional emissions trading savings referred to in paragraph above because this sector faces limited international competition and is thought to have a relatively large scope for low cost abatement opportunities. For example, electricity imports in 2002 amounted to only around 2% of total electricity supplied. Exports of electricity were considerably lower than that. This trade is also concentrated in the EU market, all of which is affected by the EU scheme. There will be possibilities for changing the relative utilisation of existing gas fired and coal fired power stations. For some years it has been clear that gas fired plant is the electricity generators' commercial preference for new generating capacity. Over time, the continued introduction of new gas-fired plant and retirement of older coal fired plant, will help to reduce emissions. Generators are not subject to competition from firms outside the EU ETS. Thus, this sector may 45

46 be better placed to incorporate the marginal cost of carbon to reflect the higher marginal costs of generation from fossil fuels resulting from the scheme. Once the EU ETS comes into force, we expect the value of carbon to be reflected in electricity prices across Europe The UK has yet to make a final decision on whether the particular characteristics of the electricity supply industry in Northern Ireland (and possibly the Scottish islands) make it appropriate to split the power station allocation prior to distribution to installations. We are considering this issue further and a final decision will be made shortly Refineries The refineries sector includes refineries and CHP plant providing power and heat to these installations. The installations included in this NAP sector are the same as those modelled as the refineries sector in UEP. A subset of these installations are also covered by a relative CCA. In order to take into account the revised CCA targets 42, the proportion of emissions corresponding to these CCA sites has been subtracted from the UEP refineries projection and the revised CCA target 43 has been applied to their emissions A contribution towards the NER for expected new entrants to this sector during the first phase has then been taken off the UEP emissions projection for this sector, to derive the number of allowances to allocate to the existing refineries installations. The calculations are shown in Table B 3 below. 42 CCA targets are bi-annual targets. The relevant target for the first phase of the scheme is therefore the target for The 2006 targets are being re-negotiated under the terms of the CCAs. The agreed revised targets will feed into the calculations of the allocations in the Final Allocation Decision later in the year. For the calculations here, the proposed starting points for the re-negotiations of the CCA targets have been used. 43 See section for 4.3 for an explanation of how the adjustment for relative CCAs has been made. 46

47 Table B 3: Refinery sector allocation calculation NAP sector 2002 total emissions UEP emissions projection CCA target Calculation input Sector allocation 2002 Actual achievement Estimated 2006 target Total Phase 1 emissions Average annual Phase 1 emissio ns NER contribu tion Total Phase 1 allocation to existing installati ons Average annual Phase 1 allocation to existing installations =[(ii)+(iii)+(i v)]*[(b)/(a)] =(v)/3 =(v)*[1- (vi)] =(viii)/3 Units MtCO2 (i) (ii) (iii) (iv) (a) (b) =(v) (vi) =(vii) =(viii) =(ix) MtC O2 MtC O2 MtCO2 EER EER MtCO2 MtCO2 % Allowan ces Allowance s Refineries Refineries % CCA 24. Refineries n/a n/a % Offshore Offshore platforms and terminals are modelled separately in UEP and hence the model results can be used directly for the allocation calculation 44. The UEP emissions projection for these installations has been used and the sector contribution for the NER subtracted. This gives the total number of allowances allocated to the existing installations in this sector. The calculations are shown in Table B 4 below. Table B 4: Offshore sector allocation calculation NAP sector UEP emissions projection Total Phase 1 emissions Calculation input Average annual Phase 1 emissions NER contributio n Sector allocation Total Phase 1 allocation to existing installations Average annual Phase 1 allocation to existing installations =(i)+(iii)+(iv) =(v)/3 =(v)*[1-(vi)] =(viii)/3 (i) (iii) (iv) =(v) =(vi) (vii) =(viii) =(ix) Units MtCO2 MtCO2 MtCO2 MtCO2 MtCO2 % Allowances Allowances 2. Offshore % This is a change from the January draft NAP, where Offshore platforms, terminals and other oil and gas were included in the same sector. The UEP modelling approach to these installations has since been developed, and therefore the EU ETS offshore sector now only includes platform and terminals. The methodology used for onshore gas distribution can be found at section 5 below. 47

48 4. Sectoral allocations for NAP sectors that do not match UEP sectors and are covered by Climate Change Agreements 4.1. For those sectors that do not match the UEP sector definitions, a different methodology has been applied in calculating their allocation. This group of sectors has been split depending whether they are covered by a CCA agreement or not Emission projections and therefore sector allocations for those sectors which are covered by relative CCA targets are derived differently than for those covered by absolute CCA targets (see paragraph 4.4 below). The calculations are explained below NAP sectors that are covered by relative CCA targets In general, CCAs cover both direct emissions and indirect emissions. The EU ETS usually only covers a proportion of the direct emissions covered by CCAs. The EU ETS also covers process emissions that in most cases are not covered by the CCAs. Hence, calculations for projections for direct emissions incorporate CCA targets but the calculations for projections of process emissions do not Therefore, for these sectors, Average annual emissions covered by EU ETS = Estimated average annual direct emissions + Estimated average annual process emissions Average annual direct emissions The CCA targets that apply to the direct emissions from these sectors (highlighted in yellow in Table B 1 above) are relative targets typically denominated in energy use per unit output (Specific Energy Consumption, or SEC). The direct emissions projections for these sectors are calculated by applying the relevant CCA target and the projected output growth rate to the sectors emissions in These calculations are based on 2002 emissions data as the UK government has not yet collected 2003 data. For the Final Allocation Decision, if feasible, then the sector totals will be based on 2003 data. For each EU ETS sector where a CCA target is being used: Average annual direct emissions during the first phase = 2002 direct emissions X projected output growth rate between 2002 and the first phase X change in energy per unit output required by relevant CCA target between 2002 & the first phase 45 Please note that all the calculations of total sector allocation to the CCA sector are based on the assumption that fuel mix remains the same over time. The UK government is exploring this whether this is a reasonable assumption. 48

49 The 2002 direct emissions are those provided by the operators of the relevant EU ETS installations. These have been provided on a voluntary basis but will be verified in the summer and any changes will be incorporated in the final allocation decision later this year The output growth rates are taken from UEP, which incorporates either actual gross value added (GVA) or physical output data up to 2002, depending on the sector CCA targets are bi-annual targets. The relevant target for the first phase of the scheme is therefore the target for The 2006 targets are being re-negotiated under the terms of the CCAs. The agreed revised targets will feed into the calculations of the allocations in the Final Allocation Decision later in the year. For the calculations here, the proposed starting points for the re-negotiations of the CCA targets have been used The CCAs do not currently distinguish between targets for indirect and direct emissions. Therefore, it has been assumed that that CCA targets will be achieved proportionately on both direct and indirect emissions. Sectors will have the opportunity to agree on alternative splits as part of the re-negotiation of their 2006 targets if they can provide evidence that the approach used here regarding target apportionment is not appropriate The calculations for the direct emissions projections are shown in Table B5 below: 49

50 Table B 5: Input to calculations of combustion emissions projections for NAP sectors covered by relative CCA targets NAP sector Actual 2002 combustio n emissions CCA targets 2002 target 2002 actual achievement Estimated 2006 target Units of target Relevant UEP GVA/Output growth index Average annual Phase 1 combustion emissions =II*[V/VI]*[VII+VIII+IX]/3 (I) (II) (III) (IV) (V) (VI) (VII) (VII) (VIII) Units MtCO2 See (V) 2002=1 MtCO2 4. Aluminium Federation (ALFED) ALFED kwh(p)/tonne Food & Drink Federation (FDF) FDF kwhp/t Dairy Industry Association LtD (DIAL) DIAL kwhp/t Maltsters Association MAGB kwhp/t Spirits Energy Efficiency Company (SEEC) SEEC kwhp/lpa British Beer & Pub Association (BBPA) BBPA kwhp/hl UK renderers association (UKRA) UKRA kwhp/t Chemical Industries Association (CIA) CIA EER Society of Motor Manufacturers & Traders (SMMT) SMMT kwhp/veh British Rubber Manufacturers (BRMA) BRMA-T kwhp/t British Leather Confederation (BLC) BLC kwhp/m British Cement Association (BCA) BCA kwhp/kg British Lime Association (BLA) BLA kwhp/t British Glass Manufacturer s Confederation (BGMC) BGMC MWhp/t Mineral Wool (EUR) EUR kwhp/t British Ceramic Confederation Non fletton (BCC-N) BCC-N kwhp/t British Ceramic Confederation - Fletton (BCC-F) BCC-F kwhp/ British Ceramic Confederation - Refractories and BCC-R kwhp/t I British d t i Ceramic l (BCC Confederation R) - Whitewares (BCC- BCC-W kwhp/t W) British Ceramic Confederation - Materials (BCC-M) BCC-M kwhp/t The Paper Federation (TPF) TPF kwhp/t Wood Panel (WPIF) WPIF kwhp/m

51 Average annual process emissions As explained in paragraph above, the EU ETS includes process emissions for some sectors including the minerals sectors, iron and steel, and pulp and paper. The EU ETS does not include process emissions from sectors which are covered by the scheme simply due to the inclusion of combustion installations, for example, food and drink or chemicals. For each EU ETS sector that has process emissions Average annual process emissions during the first phase = 2002 process emissions X projected process emission growth rate between 2002 and the first phase The 2002 process emissions are those provided by the operators of the relevant EU ETS installations. These have been provided on a voluntary basis but will be verified in the summer and any changes will be incorporated in the Final Allocation decision later in the year The calculations of process emissions are shown in Table B 6 below: Table B 6: Calculations of process emissions projections for NAP Sectors NAP sector Actual process emissions UEP process emissions (MtC02) Process emissions projections Relevant UEP process emissions growth index Average annual Phase 1 process emissions =(i)*[(v)+(vi)+( vii)]/3 (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Units MtCO2 MtCO2 MtCO2 MtCO2 2002=1 2002=1 2002=1 MtCO2 4. Aluminium Federation (ALFED) ALFED n/a n/a 5. Food & Drink Federation (FDF) FDF n/a n/a 6. Dairy Industry Association Ltd DIAL n/a n/a (DIAL) 7. Maltsters Association MAGB n/a n/a 8. Spirits Energy Efficiency SEEC n/a n/a Company (SEEC) 9. British Beer & Pub Association BBPA n/a n/a (BBPA) 10. UK renderers association UKRA n/a n/a (UKRA) 13. Chemical Industries Association CIA n/a n/a (CIA) 15. Society of Motor Manufacturers SMMT n/a n/a & Traders (SMMT) 16. British Rubber Manufacturers (BRMA) BRMA-T n/a n/a 47 There appears to be an inconsistency in the relationship between emissions and GVA growth for the engineering and vehicles and ceramics UEP sectors. This results in an unexpected relationship between allocations to installations with and without CCAs in these sectors. We are continuing to explore this apparent inconsistency as the UEP modelling is finalised. 51

52 NAP sector Actual process emissions UEP process emissions (MtC02) Process emissions projections Relevant UEP process emissions growth index Average annual Phase 1 process emissions =(i)*[(v)+(vi)+( vii)]/3 (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Units MtCO2 MtCO2 MtCO2 MtCO2 2002=1 2002=1 2002=1 MtCO2 21. British Leather Confederation BLC n/a n/a (BLC) 27. British Cement Association BCA (BCA) 28. British Lime Association (BLA) BLA British Glass Manufacturer s BGMC Confederation (BGMC) 33. Mineral Wool (EUR) EUR British Ceramic Confederation BCC-N Non fletton (BCC-N) British Ceramic Confederation - BCC-F Fletton (BCC-F) 31. British Ceramic Confederation - BCC-R Refractories and Industrial (BCC-R) 37. British Ceramic Confederation - BCC-W Whitewares (BCC-W) 32. British Ceramic Confederation - BCC-M Materials (BCC-M) 40. The Paper Federation (TPF) TPF n/a n/a 41. Wood Panel (WPIF) WPIF n/a n/a Average annual allocation As explained in paragraph above, the total projected emissions from each sector are the sum of the sector s projected combustion and process emissions. A contribution to cover allowances required by new entrants in each sector during the first phase of the scheme is then taken off before allocating to the existing installations in that sector. This ensures that existing and new installations will receive allocations in line with the total projected emissions from installations in that sector. Average annual allowance allocation = (Total Phase 1 emissions Phase 1 NER contribution) Therefore, the allocations of allowances to existing installations in these sectors are calculated by taking the projections from Table B 5 and Table B 6 above and deducting the appropriate NER contribution. The specific calculations are shown in Table B 7 below: 52

53 Table B 7: Calculation of sectoral allocations to NAP sectors with relative CCAs 47 NAP sector Projected average annual Phase 1 combustion emissions Projected average annual Phase 1 process emissions Projected average annual Phase 1 emissions Sector Allocation NER Contribution Total Phase 1 allocation to existing installations Average annual Phase 1 allocation to existing installations (i)+(ii) =(iii)*3*(1-iv) =(v)/3 (i) (ii) = (iii) (iv) =(v) =(vi) Units MtC02 MtCO2 MtCO2 % Allowances Allowances 4. Aluminium Federation ALFED 2.62 n/a % (ALFED) 5. Food & Drink Federation FDF 1.64 n/a % (FDF) 6. Dairy Industry Association DIAL 0.32 n/a % Ltd (DIAL) 7. Maltsters Association MAGB 0.10 n/a % Spirits Energy Efficiency SEEC 0.25 n/a % Company (SEEC) 9. British Beer & Pub BBPA 0.31 n/a % Association (BBPA) 10. UK renderers association UKRA 0.04 n/a % (UKRA) 13. Chemical Industries CIA 7.43 n/a % Association (CIA) 15. Society of Motor SMMT 0.40 n/a % Manufacturers & Traders (SMMT) 16. British Rubber Manufacturers BRMA-T 0.12 n/a % (BRMA) 21. British Leather Confederation BLC 0.00 n/a % (BLC) 27. British Cement Association BCA % (BCA) 28. British Lime Association BLA % (BLA) 30. British Glass Manufacturer s BGMC % Confederation (BGMC) 33. Mineral Wool (EUR) EUR % British Ceramic BCC-N % Confederation Non fletton (BCC-N) 35. British Ceramic BCC-F % Confederation - Fletton (BCC-F) 31. British Ceramic BCC-R % Confederation - Refractories and Industrial (BCC-R) 37. British Ceramic BCC-W % Confederation - Whitewares (BCC-W) 32. British Ceramic BCC-M % Confederation - Materials (BCC-M) 40. The Paper Federation (TPF) TPF 4.03 n/a % Wood Panel (WPIF) WPIF 0.23 n/a % NAP sectors that are covered by absolute CCA targets As can be seen in Table B 1, there are two sectors in the EU ETS that are covered by absolute CCA targets. Like relative targets, absolute CCA targets are bi-annual and cover both direct and indirect emissions. The principle on which the projections of emissions from these sectors are based 53

54 is similar to those with relative CCA targets. The change in energy use required by the CCA target for the first phase relative to 2002, is applied directly to the historic 2002 emissions data provided by operators covered by the EU ETS. For each EU ETS sector that has an absolute CCA target Estimated annual average emissions during phase 1 = 2002 emissions X change in energy use between 2002 and the first phase required by its CCA The 2002 emissions are those provided by the operators covered by the EU ETS. These have been provided on a voluntary basis but will be verified in the summer and any changes will be incorporated in the Final Allocation decision in September Again, since climate change targets 48 are bi-annual, the relevant target for the first phase of the scheme is the target for Once the emissions projection for these sectors during the first phase of the scheme are calculated, a contribution to cover allowances required by new entrants in each sector during the first phase of the scheme is then taken off before allocating to the existing installation in that sector. This ensures that existing and new installations will receive allocations in line with the total projected emissions in that sector. The calculation of the total number of allowances to be allocated to these sectors are given in Table B The 2006 targets are being re-negotiated and the finalised revised targets will feed into the calculations of the allocations in the Final Allocation Decision at the end of September For the calculations here, estimated starting points for the negotiations of the CCA targets are used. 49 In addition to the installations in the Iron and Steel NAP sector that are covered by the absolute UKSA CCA, there is also another installation covered by this CCA that is classified in the Lime NAP sector. If we were to treat this installation in the same way as described here, its treatment would be very different to that of the other installations in the Lime sector. As an interim approach, for this site, we have applied the emissions growth rate for the Lime sector without applying any adjustment for CCA. We are considering further the most appropriate methodology for this site. 54

55 Table B 8: Calculation of sectoral allocations to NAP sectors with absolute CCA targets Sector Allocation NAP sector 2002 total Average NER CCAs 50 emissions annual Phase 1 contribution 2002 target CCA 2002 Actual achieveme nt Estimated 2006 target CCA Units of CCA target emissions Total Phase 1 allocation to existing installations Average annual Phase 1 allocation to existing installations 17. Society of British Aerospace Companies (SBAC) 25. United Kingdom Steel Association (UKSA) =(i)*(iv)/(iii) =(vi)*3*[1-(vii)] = (vi)*[1- (vii)] (i) (ii) (iii) (iv) (v) =(vi) (vii) =(ix) =(viii) MtCO2 See (v) See (v) See (v) See (v) MtCO2 % Allowances Allowances SBAC GWhp % UKSA PJp % Sectoral allocations for NAP sectors not directly modelled in UEP and not covered by any CCAs 5.1. In addition to the NAP sectors covered by CCAs, there are also some additional sectors which form a sub-set of the relevant UEP sector and are not covered by CCAs. For these sectors, appropriate UEP sector emissions growth rates have been applied to the installations historic emissions to calculate these sectors projections. Because these NAP sectors are not covered by CCAs, emissions trends for the corresponding sector do not include the effect of CCAs. For each EU ETS sector not covered by CCAs and not directly modelled as a UEP sector Estimated annual average emissions during phase 1 = 2002 emissions X projected emissions growth rate between 2002 and the first phase 5.2. The 2002 emissions are those provided by the operators of the relevant EU ETS installations. These have been provided on a voluntary basis but will be verified in the summer and any changes will be incorporated in the Final Allocation decision in September In addition to the installations in the Iron and Steel NAP sector that are covered by the absolute UKSA CCA, there is also another installation covered by this CCA that is classified in the Lime NAP sector. If we were to treat this installation in the same way as described here, its treatment would be very different to that of the other installations in the Lime sector. As an interim approach, we have applied the growth rate used for all other installations in the lime sector (which fall under the BLA relative CCA) without applying any adjustment for CCA. We are considering further the most appropriate methodology for this site. 51 As mentioned above, these calculations are based on 2002 emissions data as the UK government has not yet collected 2003 data for the Final Allocation Decision, if feasible, then the sector totals will be based on 2003 data. 55

56 5.3. These sectors include Onshore gas distribution (including compressors on the National Transmission System, gas storage facilities, liquefied natural gas facilities and interconnectors) 52 ; Services; Installations that are in sectors where some installations are covered by a CCA, but which are not themselves covered by a CCA as detailed in Table B Once the total emissions projections to these sectors are calculated, a contribution to cover allowances required by new entrants in each sector during the first phase of the scheme is then taken off before allocating to the existing installation in that sector. This ensures that existing and new installations will receive allocations in line with the total projected emissions from installations in that sector. The inputs to this calculation are shown in Table B8 below. 52 Growth for this sector is based on UEP gas demand growth projections, plus an element to allow for more energy intensive sources of gas supply. 56

57 Table B 9: Calculation of sectoral allocations to NAP sectors with no CCAs 53 NAP sector 2002 total combustion emissions UEP emissions growth rate (2002=1) Average annual projected combustion emissions for total process emissions UEP process emissions Average annual growth rate (2002=1) projected process emissions Average annual Phase 1 emissions NER contribution Sector Allocation Total Phase Average 1 allocation annual to existing Phase 1 installations allocation to existing installations =(vi)*3*[1- =(viii)*3 (vii)] (i)*[(ii)+(ii)+(iv)]/ (i)*[(ii)+(ii)+(iv)]/3 =(v)+(e) (i) (ii) (iii) (iv) =(v) (a) (b) (c) (d) =(e) =(vi) (vii) =(viii) =(ix) Units MtCO2 % % % MtCO2 MtCO2 % % % MtCO2 MtCO2 % Allowances Allowances 3.Onshore gas distribution n/a % FDT non CCA n/a % Chemicals non CCA n/a % E&V non CCA n/a % Services n/a % Textiles non CCA n/a % Ceramics non CCA % Paper non CCA n/a % Other Non-metallic non- CCA n/a % There appears to be an inconsistency in the relationship between emissions and GVA growth for the engineering and vehicles and ceramics UEP sectors. This results in an unexpected relationship between allocations to installations with and without CCAs in these sectors. We are continuing to explore this apparent inconsistency as the UEP modelling is finalised. 57

58 Appendix C NEW ENTRANTS, CLOSURES AND AUCTIONING How will new entrants be able to begin participating in the EU emissions trading scheme? 1. The UK has decided to set aside a quantity of allowances to be distributed for free to installations that commence operations (i.e. begin carrying out an Annex I activity) after 31 December 2003 but before the end of 2007 and that are eligible as new entrants for a free allocation of allowances from the New Entry Reserve (NER). Certain existing permitted installations deemed to be 'new entrants' for the purposes on the NAP will also be eligible for a free allocation from the NER (see paragraph 13 below). The total size of this reserve will be 57 MtC02 over Phase 1 of the EU ETS which is around 7.7% of the total Phase 1 allocation. Cessation of Production 2. To facilitate consistency with the rules on treatment of new entrants, the permit holder of an installation that ceases to carry out a Schedule 1 activity will retain allowances issued in respect of the whole year in which the activity ceases, but will not be issued with further allowances in the years of Phase 1 after cessation. Allowances that are not issued in respect of installations that cease a Schedule 1 activity will be added to the NER. 3. If an operator partially ceases to carry out a Schedule 1 activity (for example, an installation that carries out more than one Schedule 1 activity ceases to carry out one or more (but not all) of those Schedule 1 activities), she will be issued with and retain her full allocation of allowances in the year of partial cessation. In the years following the partial cessation, the issue of allowances to the operator will be reduced as appropriate to reflect the true scope of the Schedule 1 activity carried out at the installation. 4. An operator of an installation that demonstrates to the regulator that it is temporarily (rather than permanently) ceasing a Schedule 1 activity will retain all the allowances that have been issued for the year in which the temporary cessation begins. The issue of the allocated allowances will commence again in the year that the Schedule 1 activity re-starts but the number of allowances will be reduced as appropriate to reflect the period in that year in which the Schedule 1 activity is carried out. 58

59 In the case that there will be a reserve for new entrants, how has the total quantity of allowances to set aside been determined and on what basis will the quantity of allowances be determined for each new entrant? How does the formula to be applied to new entrants compare to the formula applied to incumbents of the relevant activity? Please also explain what will happen to any allowances remaining in the reserve at the end of the trading period. What will apply in case the demand for allowances from the reserve exceeds the available quantity of allowances? Quantifying the reserve 5. The total quantity of allowances to be set aside for new entrants in the industrial sectors has been determined on the basis of the following methodology: estimate the amount of net new entry that underlies the UEP growth rates by sector. This gives an indication of the net requirement in each sector from all categories of sources of new entry and closure. these estimates are refined, where possible, using information on plans already underway in the ETS sectors, and on expected closure. estimates will also be refined using information and data from sectors on the split of growth between new entrants and existing installations. 6. Government has commissioned a research project to develop a robust set of output projections covering sectors included in EU ETS. Data and information received from sector representatives will be fed into this research. This will ensure consistency as between sub-sector definitions and growth, growth rates used in UEP and overall UK manufacturing growth projections. 7. For the ESI, Offshore and onshore gas distribution sectors, the focus has been on estimating the NER using a bottom-up approach, and ensuring these are consistent with UEP forecasts. The long-term nature of many investments in these sectors is one reason why a bottom up approach for them is more appropriate. The disaggregated approach takes account of scheduled closures of existing plant (including some nuclear plant) during Phase 1 and incorporates judgements about the extent and type of new generating capacity needed. For the offshore sector, estimates of new entry are based on known new plant, plus estimated emissions from new investment from tiebacks. Estimates of new entry for the onshore gas distribution sector are based on known planned installations. 8. Estimates of the size of the NER in the ETS sectors are shown in Table C1 below. 59

60 Table C1: Estimated NER in the ETS sectors, Total Phase 1 NER (Thousand tc02) % of total sectoral allocation Sector CCA Sector Generators non-cca Refineries non-cca Refineries -- CIA CIA Offshore non-cca Onshore gas distribution non-cca Iron & Steel UKSA Cement BCA Lime BLA Lime -- UKSA UKSA Ceramics -- Non-fletton BCC-N Ceramics -- Fletton BCC-F Ceramics -- Refractories BCC-R Ceramics -- Whitewares BCC-W Ceramics -- Materials BCC-M Ceramics -- non-cca non-cca Glass BGMC Glass -- BCC-M BCC-M Glass -- BCC-R BCC-R Mineral Wool EUR Pulp & Paper TPF Pulp & Paper -- non-cca non-cca Food & Drink FDF Rendering UKRA Dairies DIAL Malting MAGB Brewing BBPA Spirits SEEC FDT -- CIA CIA FDT -- non-cca non-cca Chemicals CIA Chemicals -- non-cca non-cca Foundries T Non-Ferrous AFED Services non-cca Other Non-metallic -- non-cca non-cca Vehicle Manufacture SMMT Aerospace SBAC Rubber BRMA-T Engineering & Vehicles -- non-cca non-cca Textiles BATC 0 - Textiles -- non-cca non-cca Leather BLC Wood Board WPIF TOTAL

61 Notes to Table C1: (a) Totals may not sum owing to rounding. (b) (-) indicates sectors where no baseline data were available (c) Estimates for ESI include an element for uncertainty. 9. Work on estimating the size of the NER is continuing. We expect the estimates of eligible new entrants to be refined: in the light of results of research we have commissioned to examine growth rates in the industrial sectors of ETS; in response to feedback we receive from sectors during consultation on the NAP, both on new entrants and growth needed for expansion under existing capacity; in the light of final decisions on which categories of new entrants should be eligible for a free allocation (see paragraph 13 below); and as the benchmark methodology for allocation to new entrants develops. 10. Due to the nature of the above estimates, and that because any projections into the future are inherently uncertain, we have incorporated an allowance to cover uncertainty in the above estimates. The size of this element is 4MtC02 pa or 1.6% of annual sector allocation across all sectors. This element is included in the new entrant estimates shown in table C1 above, and covers all types of risks associated with the estimates. This element will be for use by any sector, but will be taken from the power station sector allocation. This reflects that the electicity supply industry faces limited international competition and is thought to have a relatively large scope for low cost abatement opportunities (see also paragraph 2.12 of the NAP). 11. A portion of the NER will also be set aside for good quality CHP projects that qualify as new entrants (because the UK Government has a target for 10GW installed CHP capacity by 2010). The size of the CHP set aside will be based on the UK s assessment of the likely new good quality CHP capacity coming on line during phase one of the EU ETS. This will use the Cambridge Econometric s projection of good quality CHP. 12. The allocation to a new entrant will be issued in advance, and a new entrant should receive a partial allocation of allowances from the NER for the first calendar year in which operations commence, and a full allocation for subsequent years in Phase 1. Eligibility 13. Decisions have been made about the eligibility of certain types of new entrants; further consideration is being given to a number of other types. Some of these types of new entrant (decided and undecided) may involve allocating allowances to installations which are already in operation. It has been decided, so far, that the following will be eligible types of new entrant: new installations that commence a Schedule 1 activity after 31 December 2003 (either brand new plant or where an 61

62 increase in output capacity means an existing plant then falls within the scope of the scheme); extensions to existing installations that result in an increase in the nameplate output capacity for the Schedule 1 activity; installations that recommence commercial operations (after 31 December 2003) following temporary closure (before 31 December 2003). changes in offshore installations reflecting new tiebacks serving new sources of oil and gas Calculating the allocation 14. It is envisaged that the allocation to a new entrant is calculated through application of a standardised allocation methodology. This methodology should reflect technology, load and fuel specific factors. The methodology being developed is expected to take into account various criteria, including the need to: a) be transparent; b) be simple; c) be feasible to implement; d) gives certainty to industry; e) be consistent with other Member States (in areas particularly exposed to international competition); f) be verifiable; g) incentivise clean/energy efficient technology; h) meet need, i.e. what the new entrant would use if they had to buy in the market (subject to any adjustments to ensure consistency with incumbents); i) minimise risk of over allocation; j) be defensible vis-à-vis allocation to similar incumbents (i.e. those in the National Allocation Plan); k) maintains the attraction of the UK for investment l) reinforce security of supply; m) be consistent with the operation of the ETS as a market based instrument; n) not be subject to ex post adjustment of allowances once the new entry has commenced. 15. The allocation to new entrant generators shall also incorporate the EU ETS carbon savings to be delivered by the generation sector (in accordance with the carbon savings that existing generators are delivering). 16. A new entrant installation will be eligible for an allocation from the NER once it has: been issued with a valid permit; and has had an allocation agreed and determined by the Minister (see paragraph 18 below for further detail on the process of calculating this allocation). Commissioning 62

63 17. It is considered appropriate to allocate to new entrants at the full, commercial rate of operation except in cases where commissioning is expected to take a lengthy period of time (a reduced allocation would be issued in relation to that commissioning period). The ESI will be treated slightly differently to take account of the extra demands being made of that sector. There will be no adjustment to allocations to reflect decommissioning unless that decommissioning is expected to take a lengthy period of time (and again, a reduced allocation will be issued for that decommissioning period). Allocation process 18. The allocation to the new entrant installations will be determined via the following process: the operator provides the regulator with information on how the standardised allocation methodology should be applied to its new entrant installation; the regulator and operator agree an appropriate allocation of allowances to the new entrant, on the basis of the application of the standardised allocation methodology if no agreement can be reached, the operator would be entitled to submit its proposal directly to the Minister for determination; and having checked there are sufficient allowances left in the NER, the Minister determines the allocation (presuming there are sufficient allowances remaining) by either: o approving the agreement reached between the operator and regulator; o determining an allocation if the agreement between the operator and regulator is deemed to be inappropriate; o or determining an appropriate allocation, taking suitable account of the operator s proposal for the allocation (if no agreement was reached between the operator and the regulator). The allowances would then be issued to the operator when appropriate. Auction or Sale 19. The Government intends to have an auction or sale of surplus allowances remaining in the NER in each year of the first phase. Any such auction or sale would be open to all. It is proposed that the NER will be divided into yearly amounts and that a decision on the quantity to be sold or auctioned in respect of the 2005 compliance year could be taken by mid The amount to be auctioned or sold will be based on updated information about flows of new entrants and closed installation, both in the year in question and in any remaining years of Phase 1, and if updated estimates of demand for new entrant allowances are expected to be close to, or greater than, the remaining NER (adjusted for updated expectations of allowances not being issued to closing plant), then it may be decided that no auction should be held in that year. 20. It is however, envisaged that there may be two auctions or sales in the final year of Phase 1: the first to release the bulk of any surplus allowances in 63

64 good time for operators to take the auction or sale into account in their plans for abatement in that final year; and the second to release any surplus allowances once allocations have been made to new entrants that are eligible for an allocation from the NER late in The amount of allowances to be auctioned shall not exceed the limit set in the Directive (i.e. 5% of allowances). If there were any allowances remaining in the NER after the final auction of the first Phase, these allowances would be cancelled. 22. The Government will consult later in 2004 on proposed methodologies for such an auction or sale. That consultation will include proposals on: when the auction/sale will take place; what will be auctioned/sold including the size of batches to be sold; how the auction/sale will run; who will carry out the auction/sale; 23. If the demand for allowances from the NER exceeds the supply in the NER, those new entrants that do not receive an allocation will have to buy allowances from the market. Is information already available on the number of new entrants to expect (through applications for purchase of land, construction permits, other environmental permits etc.)? Have new or updated greenhouse gas emission permits been granted to operators whose installations are still under construction, but whose intention it is to start a relevant activity during the period 2005 to 2007? 24. Permit applications from new entrants are being processed by the regulators and permits are being issued where appropriate (that is, where the regulator is satisfied that: the installation will fall within the definition of installation ; the applicant will be the operator; and the installation will be operated so as to comply with the conditions in the permit) 64

65 Appendix D ESTIMATED SAVINGS FROM CLIMATE CHANGE PROGRAMME SECTION 1 - SUMMARY OF CARBON SAVINGS 1.1 The Climate Change Programme measures detailed at Table D1 below are broadly allowed for in our projection of emissions in For the first 2 measures shown the Climate Change Levy and the Renewables Obligation the measure is directly modelled (in the first case by inclusion within the UEP model run of the tax rates; in the second case by imposing the achievement of 10% renewables generation by 2010). In the other cases, carbon savings estimated outside the model have been imposed on model outputs. 1.2 In some cases, current estimates of carbon savings are below the estimate that was made for the measure in the November 2000 Climate Change Programme 54. The derivation of latest estimates is explained further at Section 2 below. SECTOR (1) Business Table D1: Climate Change Programme measures incorporated within projections for 2010 CARBON SAVING MEASURE Climate Change Levy, including exemption for CHP and renewables Business Renewable Obligation to 10% Current estimated saving in 2010 in UEP MtC Incorporated in model Incorporated in model Business Climate Change Agreements (CCAs) 2.4 Business Existing CCAs extra (2) 0.9 Business (3) New CCAs 0.5 Business Carbon Trust 0.5 Business UK ETS 0.5 Business Business (3) TOTAL BUSINESS SECTOR Building Regulations (England & Wales only) 2002 Building Regulations (England & Wales only) Transport Transport Voluntary Agreement Climate Change: The UK Programme, DETR, November

66 Current estimated saving in 2010 in UEP SECTOR (1) CARBON SAVING MEASURE Backed up by changes to company car taxation and vehicle excise duty Transport 10 Year Plan 1.1 Transport Sustainable distribution in Scotland & Wales 0.1 Transport Fuel Duty Escalator to 1999 TOTAL TRANSPORT SECTOR Incorporated in model 3.8+ Domestic EEC1 (2002-5) 0.4 Domestic (3) EEC2a (2005-8) and 2b ( ) 1.4 Domestic Building Regulations (England & Wales only) Domestic (3) Building Regulations (England & Wales only) Domestic Community Energy 1 (2002-5) 0.1 Domestic (3) New HEES/Warm Front 0.3 Domestic (3) Other: Decent Homes, Boiler and Appliance standards 0.1 TOTAL DOMESTIC SECTOR (4) 4.0 Afforestation Afforestation 0.7 Public Sector New central Government, schools and NHS targets 0.5 Building Regulations, new Scottish central estate target, and NHSiS Executive target 0.1 TOTAL OTHER 1.3 TOTAL ALL SECTORS Notes to Table D1: 14.5 (53 MtCO 2 ) (1) Estimated savings have been attributed to the main sector to which they apply. (2) This estimate has been based on the over-achievement of CCA sectors in relation to previous targets. New targets will be the subject of further 66

67 discussion with sectors, which will then be incorporated in final allocation decisions. (3) These measures are not directly incorporated within UEP, but the carbon savings attached to these measures are allowed for in our view of overall UK CO2 emissions in For the sectors covered by the EUETS the impact of these measures should be minimal in the period Further work to clarify this point will be carried out prior to the making of final allocations. (4) Total may not appear to add up because of rounding. 1.3 Since publication of the Climate Change Programme in November 2000, consideration of requirements for further measures has continued. Much of this consideration has related to energy efficiency requirements and has been brought together in the Energy Efficiency Implementation Plan published in April There are therefore a number of measures which the Government expects to progress, but which require funding or are not fully developed to the extent that they can be directly included within UEP. These measures are summarised in Table D2 below. 1.4 The carbon savings attached to these measures are uncertain. Overall they could provide up to around 0.7MtC further savings in SECTOR Table D2: Climate Change Programme measures not incorporated within UEP CARBON SAVING MEASURE Business Carbon Trust extra 0.5 TOTAL BUSINESS SECTOR Domestic Community Energy extended Potential saving in 2010 Status MtC Dependent on agreed funding Domestic Additional Warm Front 0.1 Domestic TOTAL DOMESTIC SECTOR (1) Other Extra: Decent Homes, Boiler and Appliance Standards Dependent on agreed funding Dependent on agreed funding Dependent on agreed funding 67

68 TOTAL ALL SECTORS 0.7 (2.7MtCO 2 ) Notes to Table D2: (1) Totals may not appear to add up because of rounding SECTION 2 - DERIVATION OF CARBON SAVINGS BUSINESS Climate change levy agreements (CCAs) with energy intensive sectors- 3.8MtC Derivation of figure 2.1 Negotiations with energy intensive industries have resulted in those industries signing up to challenging targets to improve energy efficiency and reduce carbon dioxide emissions over the next decade. In return, these industries will be eligible for a reduced rate of Climate Change Levy. 2.2 The original negotiations were based around estimates of "all cost effective" energy efficiency investment, which had been developed by FES for the DETR. For the sectors involved, FES estimated that "all cost effective" investment should result in carbon savings of around 4 MtC in When practical considerations such as constraints on management time and limited capital availability were factored into the negotiations, the original savings were expected to be about 2.5 MtC. The latest modelling by DTI indicates that the original agreements would deliver 2.4MtC. However, at the first 2- yearly milestone in 2003, most sectors exceeded their interim targets by a sufficiently generous margin that Defra is now negotiating revised targets with industry for 2010, to take effect from Defra expects additional savings of up to 0.9MtC by Eligibility was originally defined using the scope of the Pollution Prevention and Control (PPC) Regulations, but in Budget 2004 the Chancellor announced new eligibility criteria for the Climate Change Agreements, to be introduced once EU state aid approval is obtained. Businesses currently eligible for CCAs will remain eligible but, in addition, we intend to extend CCAs to businesses in sectors that pass an energy intensity threshold, and can in some cases demonstrate the existence of international competition issues. Consultations with potential new entrants to the CCAs are currently underway covering a number of processes which could generate savings of up to 0.5 MtC by

69 Sources of further information: Further information on Climate Change Agreements can be found on In particular, details of the analysis behind the sectoral targets is contained in the report Climate Change Agreements Sectoral Energy Efficiency Targets at Energy efficiency measures under the climate change levy package - 1.0MtC Derivation of figure 2.4 The original carbon saving was derived from the effects of two separate measures: a system of 100 per cent enhanced capital allowances (ECAs) for energy saving investments; and a 50m energy efficiency fund aimed at stimulating carbon savings in the business and public sectors. Since then, the Carbon Trust (CT) has come into being and developed several programmes targeted at these sectors, as well as managing and updating the list of measures eligible for ECAs. The Carbon Trust, through Action Energy, provides direct advice to industrial companies on how to reduce emissions cost-effectively through carbon management, site visits, design advice, events, information and case studies. 2.5 Following a detailed assessment of the savings arising so far from Action Energy, the Carbon Trust has estimated mean annual savings by 2010 of around 1MtC, although with some uncertainty because of (as yet unknown) possible overlaps with savings from companies under CCAs. Other CT programmes, including loans for small businesses, its Innovation Programme, and the administration of the ECAs, could raise this figure substantially. However, for the moment, Defra has taken a very conservative approach and assumed a net total saving of only 1MtC from all CT activity - 0.5MtC of which is firm and included in Table D1 and 0.5MtC of which is dependent on additional resources, but could rise when more detailed monitoring and evaluation becomes available (as Defra has requested). Sources of further information: The latest figures from the Carbon Trust can be found in their Annual Review on 69

70 Voluntary reduction targets through first stage of an emissions trading scheme MtC (CO 2 reductions only) Derivation of figure 2.6 The UK Emissions Trading Scheme is a voluntary scheme with 31 participants from a wide range of private and public sector organisations. The Scheme began in The Climate Change Programme envisaged emissions trading would deliver CO 2 emissions reductions of 2 MtC (equivalent to 7.3 MtCO 2 ) by The Direct Participant element of the UK Emissions Trading Scheme which is included in the with CCP projections, is expected to lead to CO 2 reductions of about 1.8 MtCO 2 or 0.5 MtC (together with non-co 2 savings of roughly 2.2 MtCO 2 e). Sources of further information: - Further details on the UK Emissions Trading Scheme can be obtained at Upgrading of building regulations (England and Wales only), 2002 & MtC Derivation of figure 2.8 Minimum standards for both new build and buildings undergoing major refurbishment, applying to insulation of the fabric and the efficiency of heating, lighting and air-conditioning equipment, were raised in Detailed assessments of the consequential carbon savings were made by BRE for ODPM, and indicated savings by 2010 of some 0.42MtC/y. These assessments take account of the improvements against the previous standards for each of the items, and of the expected market activity. However, non-compliance reduces this figure. A further tightening of these standards is planned for the end of 2005, discussions are currently underway with the building industry and other interested parties and formal consultation is expected to take place early in Detailed figures are not yet available but similar rates of improvement would be expected to produce further savings by 2010 of around 0.2MtC. The total effect of both revisions should be savings of at least 0.6MtC. The revised Regulations will also enable the Energy Performance of Buildings Directive to be implemented, with the possibility of some additional savings. However, no figure has been put on these. Sources of further information: See references under the Domestic section 70

71 TRANSPORT Voluntary agreements on CO 2 from cars and impact of changes to company car taxation and vehicle excise duty 2.6MtC Derivation of figure 2.9 The figure of 2.6MtC represents the estimated carbon savings in 2010 from the voluntary agreements with car manufacturers, the reforms to company car tax and to vehicle excise duty. The figure has been produced by the Department of Trade and Industry consistent with current Department for Transport assumptions on expected improvements in new car fuel efficiency in the UK. Sources of further information: For further details of the Voluntary Agreements, please see: 10 Year Plan for Transport 1.1 MtC Derivation of figure 2.10 This figure (using the low end of the 1.1 to 1.4MtC range estimated) was produced using the Department for Transport s National Transport Model (NTM). It is the difference between a baseline forecast and a forecast that takes into account the impact of the Plan on traffic, congestion and public transport use. The main policies behind the savings are assumed improvements in the efficiency of HGVs and soft policies such as travel awareness. It comprises a 1.4 to 1.7 MtC saving in road traffic emissions, partially offset by a 0.4 MtC increase in rail emissions. The carbon savings estimated are additional to those estimated for the voluntary agreements on CO 2 from cars. Sources of further information: - The government's first report on progress towards delivery of the Government s 10 Year Plan for Transport Delivering Better Transport: Progress Report - appears on the DfT website at: hcsp - Further details on the modelling and forecasts can be found on the DfT website at: 71

72 strat_ hcsp#p189_33140 DOMESTIC Energy Efficiency Commitment - 1.8MtC Derivation of figure 2.11 The Energy Efficiency Commitment (EEC), together with the Building Regulations, is the principal policy mechanism driving increases in the efficiency of existing homes 55. Under EEC, electricity and gas suppliers are required to achieve targets for installing energy efficiency measures in the household sector. These targets do not prescribe how suppliers should attain these improvements, and they can fulfil their obligations by carrying out any combination of approved measures including installing insulation or supplying low-energy light bulbs, high efficiency appliances or boilers. The only constraint on the suppliers activity is that they must achieve at least half of their energy savings in households on income-related benefits and tax credits. Costs fall on the suppliers and are expected to be passed on (at least partly) to their customers: given the competitive nature of the market, this provides a strong incentive on the suppliers to minimise costs The current EEC (2002-5) is expected to achieve carbon savings in the region of 0.4 MtC by 2010, relative to the Climate Change Programme baseline. In order to achieve the significantly increased activity required by EEC after 2005, we recognise the need for business confidence in the longterm demand for the key measures delivered by EEC, to allow appropriate investment by manufacturers and others. We therefore intend to extend EEC for six years, to March 2011, at a level roughly double that of the present EEC. This will enable both suppliers and industry to benefit from opportunities for long-term contractual arrangements and encourage new business opportunities. The periods and will be separately targeted. A firm target for the first three-year period, will be set later this year following public consultation. The target for the second period, , will be set in 2007, taking account of the need for continued cost effectiveness in relation to other carbon abatement options and the value for money for consumers Over , we expect EEC to deliver carbon savings of around 0.7 MtC a year. The assumptions underlying this are of costs of around 8.50 per fuel per customer per year, assuming suppliers pass on the full costs. Like the current EEC, this is expected to be highly cost-effective. For the moment, we have assumed similar savings for the period The Energy Efficiency Commitment applies in England, Scotland and Wales. 72

73 2.14 Carbon savings have been calculated for individual measures (e.g. Cavity Wall Insulation, Condensing Boilers, Compact Fluorescent Lamps) then summed. For each measure, these depend on: The "total improvement" per household, (i.e. the energy savings assuming no comfort taking by occupants) (data provided by BRE - see 'Sources of further information'); The "slippage" to comfort or rebound - which varies: (1) between disadvantaged households (i.e. on income or health related benefits) and others; (2) between measures (most for fabric insulation, less for condensing boilers and heating controls and none for electrical appliances such as fridges or washing machines); (3) over time, since as incomes rise householders can afford to use as much fuel as they need and therefore have less need to take part of any improvement in energy efficiency as comfort.; and The number of additional installations beyond Business as Usual - this is always difficult to gauge but increasing experience from the current phase of EEC, and from the predecessor EESOPs (Energy Efficiency Standards of Performance) schemes provides a useful guide. Particularly for cavity wall insulation, constraints on the rate of expansion of current markets are built in All of these considerations are pulled together in a set of tables which define an Illustrative Mix of measures, showing numbers of installations in different tenure and income groups, with the corresponding costs, energy and carbon savings. Sources of further information: The EEC (2002-5) Consultation Document can be found at The EEC (2005-8) Consultation Document will be on the Defra website from late May The detailed analysis is contained in the BRE report for Global Atmosphere division of Defra - Carbon emission reductions from energy efficiency improvements to the UK housing stock. L D Shorrock, J Henderson, J I Utley and G A Walters. BRE Report BR435. Dec A technical overview paper, at summarises the general analysis. 73

74 Upgrading of building regulations (England and Wales only), 2002& MtC Derivation of figure 2.16 There are two components to this figure: (a) raised standards for new buildings and (b) new minimum standards for replacement boilers and windows in existing buildings Raised New Build Standards: For the 2002 revision, the National Home Energy Rating (NHER) Evaluator v3.4 domestic energy model was used to assess the impact of the proposed amendments in a number of key dwelling types. The national figure was calculated on the basis of the proportion of these dwelling types built in 1997 and 1998 (data obtained from National Home Building Council (NHBC) quarterly statistics bulletin) and the average annual rate of construction of new dwellings in England & Wales from 1989 to 1998 (data obtained from government Housing & Construction Statistics). Annual savings of 0.25MtC/y by 2010 were estimated. There is inevitably some uncertainty, including the degree of non-compliance and whether this changes over time. In the White Paper, we committed to work with Local Authorities to see whether and how enforcement of the Building Regulations can be cost-effectively improved to achieve better correlation between design and as built performance The NHER Evaluator model is produced by National Energy Services Ltd. and uses an annual calculation method to produce a robust estimate of a dwelling's energy use and potential energy savings, given relevant information about the dwelling characteristics and the behaviour of the occupants. As its basis the model uses BREDEM-12 (see reference below). The NHER Evaluator model also produces an output which conforms to the Standard Assessment Procedure (SAP) for energy rating schemes for dwellings in the UK (see reference below) The government plans to upgrade the standards again later in 2005 and will be consulting formally early in Precise details are not yet available but a similar rate of improvement to the previous one will give further savings of around 0.1MtC/y by So the total from raising new build standards is around 0.35MtC/y Minimum standards for boilers and windows: These were introduced for the first time in 2002, and boiler savings dominate the impact. From June 2002, replacement gas boilers must be rated at least D on the SEDBUK scale (minimum efficiency 78%), except for back boilers, because of unusually high cost, and in very small dwellings (floor area less than 50m2). Previously, the average efficiency of new boilers was in the low 70s (%). Some 1.4M gas boilers are replaced each year, and the carbon saving by 2010 was estimated to be around 0.6MtC/y. 74

75 2.21 From the same date, all replacement windows were required to be good quality double-glazed, with a maximum U-value of 2.0 W/m 2 /K. 56 Savings were calculated from the expected number of window replacements over the period to 2010 and the typical savings per window using the average U value for previous replacements, and the average heat loss per house. The overall savings were around 0.1MtC/y The government plans to raise the minimum boiler standard for most applications to a B from April 2005 and will be consulting in summer Given the annual number of replacements, it is straightforward to calculate the maximum carbon savings resulting from all replacements being at the lowest part of the B range, i.e. 86% efficient, rather than the bottom of the D range at 78%. There are several uncertainties: the number of exemptions to the new standards; possible comfort-taking by households afterwards, i.e. taking part of the improvement as comfort rather than reduction in consumption; non compliance with the regulations; possible substitution of repair for immediate replacement by householders; lifetimes of current boilers, which affects the annual number of replacements (which have been rising recently). An overall figure of 0.7MtC lies in the middle of the range. No savings are assumed for tighter window standards at present The total savings from minimum boiler and window standards over both revisions is 1.4MtC The grand total from building regulations in the household sector is 1.75MtC/y; 0.95MtC in 2002 and 0.8MtC in Scottish Building Regulations 2.25 The Building Standards system in Scotland is undergoing a review at present. The primary legislation is in place and its scope now includes furthering the achievement of sustainable development. This review will also assist with the implementation of the EU Energy Performance of Buildings Directive. Once secondary legislation is in place, the new system will allow expeditious updating of energy efficiency measures for buildings. The new system will become operational in The current Technical Standards introduced in March 2002 require some of the most demanding levels of thermal insulation for building fabric in the UK and these will be maintained (by a level transposition) with the introduction of the new system. At the first amendment of the new system the energy requirements will be reviewed and changes will be broadly in line with any improvements/revisions effected in England and Wales. No savings have been included at this stage. The 0.06 MtC projected savings from the 2002 changes to the Scottish building regulations have been incorporated in Table D1, under the Sector entitled Scottish Executive W/m 2 /K for glazing in metal frames. 75

76 Sources of further information: - BREDEM-12 Model Description. B R Anderson, P F Chapman, N G Cutland, C M Dickson and L D Shorrock. Building Research Establishment Report. BR The Government's Standard Assessment Procedure for Energy Rating of Dwellings edition. BRECSU, BRE Details of the analysis are given at g_ hcsp Community Energy programme MtC Derivation of figure 2.26 Community Energy is a UK-wide programme part-funded by the Government to encourage and enable the installation, extension or refurbishment of community heating schemes which are mainly based on CHP. Savings are estimated from (1) a leverage factor for external funding, which gives the total budget available; (2) typical installation costs per kw of installed CHP capacity, which, with (1), gives the capacity likely to be installed; and (3) agreed rules of thumb, based on detailed analysis of a range of CHP schemes, relating carbon savings to capacity. The current programme is now expected to deliver some 0.07MtC pa over a 5-year period. Defra is hoping to continue the programme at this reduced annual level up to 2010, with additional savings of a similar order, subject to additional resources becoming available. Sources of further information: More details of the Community Energy programme are given at Fuel Poverty Programmes MtC Derivation of figure 2.27 The principal policy directed specifically at fuel poverty is the Warm Front grant scheme in England and its equivalents in the Devolved Administrations. The schemes install a range of heating and insulation measures, helping to take households out of fuel poverty and to improve the energy efficiency of their homes. Where houses are poorly heated before assistance is given, much of the efficiency improvement tends to be taken in terms of improved comfort, rather than reduced energy use. The number of 76

77 households in fuel poverty is reasonably well known from the English House Condition Survey and the corresponding DA ones, as are the required numbers of central heating systems, cavity and loft insulation installations etc. Carbon savings are calculated in similar fashion to those for EEC, but with much higher comfort factors, ranging from 75% to 100% (i.e. little or no energy saving, but potentially still carbon savings e.g. due to fuel switching, and certainly financial savings). The programmes cannot achieve 100% accurate targeting of fuel poor households, but those other low income households which benefit from Warm Front do contribute higher carbon savings since they are assumed to have rather lower comfort factors, around 45% (as in EEC). A Fuel Poverty Implementation Plan, setting out detailed plans for meeting our fuel poverty targets for England, will be published later this year The Decent Homes standard is designed to ensure that social landlords tackle the worst housing conditions across a range of criteria. By ensuring that homes are warm, dry and have reasonably modern facilities, the delivery of the decent homes target will help to make homes more energy efficient, as well as contributing to other cross-government commitments to reduce health inequalities and tackle fuel poverty. The target is to ensure all social homes are decent by There is also a decent homes target for the private sector. Savings are calculated in the same way as for Warm Front, although allowance must be made for overlaps with EEC Over the decade to 2010, we estimate that all the fuel poverty programmes could save MtC per annum by A small fraction of this is dependent on additional resources. Sources of further information: BREDEM-12 Model Description. B R Anderson, P F Chapman, N G Cutland, C M Dickson and L D Shorrock. Building Research Establishment Report. BR The Government's Standard Assessment Procedure for Energy Rating of Dwellings. - see The Physically-based Model BREHOMES and its Use in Deriving Scenarios for the Energy Use and Carbon Dioxide Emissions of the UK Housing Stock. L D Shorrock and J E Dunster. Energy Policy. Vol 25, No The latest Domestic energy fact file: England, Scotland, Wales and Northern Ireland, J I Utley, L D Shorrock and J H F Bown, can be found at 77

78 Other Savings MtC Derivation of figure 2.30 Further savings are expected from market transformation, probably stimulated by support policies such as minimum appliance standards, compulsory labelling, voluntary agreements with industry groups, and the various activities of the Energy Saving Trust and Carbon Trust, and by one or more of the programmes already described above, but not formally attributed to them. For example, the market for household appliances has transformed considerably in the past 2-3 years, with well over twice as many A-rated appliances sold as are credited to the current phase of EEC Another instance is expected to arise with condensing boilers once the new building regulations standards are in place in England and Wales. The savings we have attributed to the regulations per se are based on all condensing boilers installed reaching only the minimum efficiency prescribed (86%). EEC will stimulate the installation of higher efficiency boilers, up to 91-92%, and be attributed with the marginal savings. But the current market average efficiency for condensing boilers is close to 91%, since manufacturers are keen to achieve the top rating. When the regulations change, it is expected that the only way the large increase in demand can be met initially will be for most boilers just to qualify at 86%. But over time, increasing numbers are likely to become A rated, i.e. over 90% efficient. Those above 86% but not counted in EEC will provide additional carbon savings, which are accounted for here 2.32 Finally, there is inevitably some overlap amongst programmes, particularly between EEC and fuel poverty programmes. In estimating the overall savings, it has been very conservatively assumed that there is almost complete overlap between EEC and Decent Homes, whereas in practice, every effort will be made to maximise the synergy between the programmes and hence the total net savings Overall, there is quite a range of savings. Additional work, particularly by EST, funded by additional resources, is likely to consolidate these, and quite possibly towards the upper end of the range. Sources of further information: - To find out more about the Market Transformation Programme and the scenarios that it has produced, visit its web-site at: 78

79 AGRICULTURE, FORESTRY AND LAND USE CHANGE Afforestation - 0.7MtC Derivation of figure 2.34 The projected carbon saving for expansion in UK forest area between 1990 and 2010 was obtained using the dynamic model CFLOW that allows estimation of rates of uptake by carbon of trees at different stages of growth The model performs separate calculations for conifers and broadleaves, areas of which are assumed to expand at 57 kha and 130 kha per year respectively in line with recent planting rates. It allows for carbon storage in woody biomass, soils and litter. There are no associated timber products before The figure has been revised from the 0.6MtC presented in the UK 3rd National Communication Sources of further information: - R Milne, T Brown, T Murray, 1998: The effect of geographical variation of planting rate on the uptake of carbon by new forests of Great Britain Forestry vol 71 pp R Dewar, M Cannell, 1992: Carbon sequestration in the trees, products and soils of forest plantations; an analysis using UK examples. Tree Physiology vol 11 pp R. Milne, R. Tomlinson, & T. D. Murray, 2003: Land Use Change and Forestry: The 2001 UK Greenhouse Gas Inventory and projections to pdf PUBLIC SECTOR Central and Local Government, Schools and NHS target - 0.5MtC Derivation of figure 2.37 Overall savings estimates have been based on a similar share of the "All Cost-Effective" (ACE) potential to that in the business sector overall, i.e. just under 50%. In terms of how energy is used (e.g. primarily building services plus IT, a few large estates, large numbers of small users), the public sector is much more like the commercial sector than industry, so the share of ACE might be similarly rather lower than 50%. However, since the public sector is expected to set an example, it is likely that the outcome will be higher than for the commercial sector, but not as high as for heavy industry. 79

80 Sources of further information: Not applicable. 80