In the European Union, there are two main tools to reduce greenhouse gases, which are responsible for climate change: the EU emissions trading system (ETS) and the Climate Action Regulation (CAR), formally known as the Effort Sharing Decision (ESD).
The EU ETS covers between 40-45% of all GHG emissions and it includes most of the power sector, large industries and currently intra-EU flights. Installations under the EU ETS need to surrender allowances equivalent to their annual emissions. Allowances are either received for free, bought in public auctions or traded with other installations.On the other hand, the CAR is responsible for between 55-60% of all GHG emissions in the EU. The largest sector included in the CAR is surface transport, which is responsible for more than a third of all ESD emissions. It is followed by emissions from buildings, agriculture and other sectors. Unlike the ETS, the entities regulated by the CAR are member states. Each country has an annual reduction target for the CAR sector. If they don’t achieve it, they need to buy CAR allowances from other member states or make use of some of the available “flexibilities”. If they go beyond their allocated target for that specific year, they can save those allowances for another year or they can sell them to another member state. It is the responsibility of each member state to achieve their annual CAR target. Each member state has a different CAR target, serving as a sort of national carbon budget for the sectors included.
Sectors included in the CAR
Transport: it includes road transportation, domestic shipping, non-electric railways and other transportation (pipelines, off-road). Domestic aviation is in the ETS. International shipping and aviation are outside the scope of the CAR as they are theoretically dealt by international United Nations agencies, the International Maritime Organization and the International Civil Aviation Organization.
Buildings: energy use mostly in households and services (except electricity consumption, for which emissions are allocated to electricity producers, thereby falling under the ETS).
Agriculture: non-CO2 emissions (CH4 and NO2) from enteric fermentation (CH4 from herbivores), manure management, agricultural soils (fertilisers), among other less relevant categories.
Energy industries: energy industries not included in the ETS because they are not big enough to be included.
Waste: emissions from solid waste disposal on land, wastewater, waste incineration and any other waste management activity
Industrial processes: mostly F-gases (HFCs, PFCs, SF6) used in air-conditioning (65% in CO2-eq in 2013), fire protection, aerosols, insulating gas in high voltage switchgear.
ESD up to 2020
The current ESD (Decision No 406/2009/EC) was designed to achieve a target of -10% GHG emissions of all ESD sectors at the EU level by 2020 compared to 2005 levels. Each member state has a different target by 2020, and an annual trajectory of targets. In the current period, that runs between 2013 and 2020, some member states with high GDP per capita had to reduce their emissions by 20% while others could still increase them by 20%, as is it the case for member states with the lowest GDP per capita.
Besides having the possibility to trade with each other, member states are allowed to use international carbon credits to comply with their ESD targets. However, the overall 2020 ESD target was not very ambitious. As a result, according to most projections, almost all member states will achieve their ESD targets without the need to trade with each other or without using international carbon credits.
However, the next CAR will be different. EU leaders agreed in October 2014 that the target for non-EU ETS sectors will be -30% GHG emissions by 2030 compared to 2005. During the summer of 2016 the European Commission proposed specific targets to member states and the new rules for the ESD running between 2021 and 2030.
The Commission proposed a text that included several loopholes and a governance system that was far from being perfect or Paris compatible. It undermined the EU’s climate commitments through fine print.The CAR has the potential to be a game-changer, but it will depend on how countries use the loopholes. A reduction of 30% in these sectors requires real change and long-term thinking, at European as well as at national level. Each country will have to set up a carbon budget between 2021 and 2030 and take action to meet it. A legally binding and annual carbon budget forces governments to integrate climate into mainstream decision-making. It also helps create investment certainty for businesses, as they can confidently start developing the technologies, services and solutions needed to hit the targets. A Europe that delivers a strong CAR will be a continent with cleaner vehicles, less congestion, super energy-efficient houses, more sustainable farming, lower energy bills, and more jobs through future-oriented industries. It is also a major opportunity to save billions on oil and gas imports and safeguard the old continent’s energy security. This isn’t just about climate policy but also about smart economic policy, security, innovation and quality of life improvement.
During the co-decision process, T&E played a very active role in trying to ensure the CAR was as ambitious as possible. For a detailed analysis of the how the CAR was agreed upon, the impacts of the agreed text or the role of different parties, please read our analysis here.