The design of climate regulation might not always be easy to follow, as it covers multiple sectors and addresses industry through two different types of approaches; ETS and non-ETS. In this article we illustrate how the regulations take the industry into account.


Establishment of a regulatory framework for the achievement of the climate objectives

The creation of a regulatory framework for the climate started with a number of basic steps: first of all, it was necessary to determine exactly what had to be achieved; the conclusion was a reduction in greenhouse gas emissions. As a second step, an inventory was made of the activities that emit greenhouse gases: industrial production processes, transport, construction, waste, product use, power generation, etc. In addition, the main reasons for the emission of greenhouse gasses in these activities were identified: excessive direct emissions of greenhouse gases, excessive energy consumption and excessive use of fossil fuels. This was translated into three policy objectives: reducing the total number of greenhouse gas emissions, increasing the energy efficiency of processes and products and increasing the share of renewable energy. The third step included an inventory of who could adjust these activities to reduce greenhouse gas emissions, including the industry. A closer look at the industry showed that there a smaller group of industry was responsible for almost half of the emissions. Therefore it was decided within Europe that a division should be made between energy-intensive (55% of total emissions) and other sectors (45% of total emissions) based on their share in greenhouse gas emissions. This led to the conclusion that a separate policy on European level had to be set up for energy-intensive industry; this policy is today known as the 'emission trading system' (ETS).

 

Figure : Schematic representation of the design of the European climate legislation (Source: C.J. van der Veer - Agoria)

Determination of the climate policy objective

All scientific information available on climate has been collected by the Intergovernmental Panel on Climate Change (IPCC) since 1988. From the information gathered, it was concluded that the problem is an increase in the global temperature on earth caused by an excessive concentration of greenhouse gases in the air. Before the Industrial Revolution (around 1750), the concentration of CO2 was around 300 ppm. Today this is 400 ppm, whereas ideally it would be around 350 ppm in order to keep the temperature increase in relation to the Industrial Revolution below 2 degrees. That is why objectives have been formulated at international level, which have subsequently been laid down in a kind of contract via the United Nations between all the countries of the earth; the UNFCCC. Belgium, together with the other Member States of the European Union, has made a joint commitment to reduce 40% of greenhouse gases by 2030 compared with 1990. This target has been translated by the European Union through the '2030 climate and energy framework' into a reduction of 43% for ETS and 30% for non-ETS (compared to 2005). This classification was made on the basis of sectors and the size of their share in greenhouse gas emissions.

For more information on UN climate objectives and the functioning of the UNFCCC, click here.

ETS sectors: energy intensive industry and aviation

The ETS sectors include a small group of companies that are responsible for almost half of the greenhouse gas emissions: the energy-intensive process industry (e.g. oil refineries, steel processing, bulk organic chemistry (e.g. fuel production) and iron production), the energy-generating industry and the aeronautics sector. These companies are all obliged to participate in the 'emissions trading system'. This works broadly as follows: first, the amount of greenhouse gases that can be emitted is determined with the European reduction target (-21% in 2020 and -43% in 2030 compared to 2005) in mind. This amount of permitted emissions is then converted into a type of 'share'. The number of 'shares' a company holds determines the amount of greenhouse gases that can be emitted by that company. If a company does not have enough shares to cover the full emissions of the production process, they have to adapt their production process through innovation or optimisation. In case they cannot or do not want to, they can opt to buy additional 'shares' as an alternative. However, when many companies want to buy additional 'shares', the price of the 'shares' goes up. When these 'shares' have a high price, it may become cheaper to adapt the production process or to invest in research into low-emission solutions. This is a consideration that the company has to make. If the number of 'shares' in a company is not sufficient to cover the emission, the company can receive a fine. Supervision, the setting of penalties and the management of the transaction system for shares are the responsibility of the public authorities in each Member State. In Belgium, this responsibility lies with the Flemish, Walloon and Brussels-Capital Regions.

Energy policy agreements for industry

The emissions trading system is a system aimed at energy-intensive companies that is organised at European level. In addition to this system, Member States have the option of concluding a voluntary agreement with companies to increase energy efficiency (and thus indirectly reduce greenhouse gas emissions). These agreements have been laid down in the Flemish Region in the 'Energy Policy Agreement (EPA)' for the period 2014-2020 and in Wallonia in the 'Energy & CO2 Sector Agreement' for the period 2014-2020. By joining the agreement, a company commits itself to a regular audit of the company; this is a visit in which an expert examines what measures the company can take to save greenhouse gas emissions directly or by reducing energy consumption. In addition, the company is committed to taking measures with a certain payback period. Different energy policy agreements exist for the different sectors; for ETS companies, non-ETS companies and SMEs. The energy policy agreement for the latter group is also known as mini-EBOs. The current energy policy agreements will expire in 2020 (Flanders) and 2023 (Wallonia).

Non-ETS sectors: buildings, agriculture, transport, industry and waste

For all sectors responsible for greenhouse gas emissions and not covered by the ETS, the category ‘non-ETS’ was created. It includes the sectors construction, agriculture, transport, the remaining industry and waste. These sectors account for 55% of total greenhouse gas emissions. It was decided that the policies for these sectors would be the responsibility of each Member State and that they be supported by a European climate policy framework. This is more or less the Clean Energy Package that was introduced in 2016. The structure for the development and implementation of these policy measures is broadly as follows: the greenhouse gas reduction target for non-ETS companies is distributed among the countries that are part of the European Union. These targets for each Member State are laid down in the so-called 'Effort Sharing Regulation'. For Belgium, the target is a 35% reduction in greenhouse gas emissions compared to 2005. Each country must then indicate in the National Energy and Climate Plan (NECP) what measures it intends to take to achieve the target. The rules for this are laid down in European legislation; the regulation on the governance of the energy union. In addition to the greenhouse gas reduction target, an energy efficiency (32.5%) and renewable energy (32%) target were also set for 2030. No binding targets have been set for each country, but each country is obliged to take annual measures equal to a certain percentage for a certain period of time (for example...): 1.7% of annual energy sales and 0.8% of the average of annual final energy consumption for energy efficiency target of 2021-2030). Here, too, the manner in which measures are to be taken and reported is laid down in guidelines.

For more information on the Regulation on the Governance of the Energy Union, click here.

Accountability of measures for non-ETS sectors

In order to ensure that all Member States take sufficient measures to achieve the climate objectives, they have set up a kind of management system. This system consists of general directives and regulations with various types of measures, such as 'union measures' (e.g. Ecodesign and Energy labelling, EPB-PEB), measures that must be transposed by member states into national legislation (e.g. elaboration of a National Energy and Climate Plan (NECP) and long-term renovation strategies) and advisory measures (e.g. elaboration of the Building Renovation Passport and the Smart Readiness Indicator) (see figure 2). On the basis of their reduction commitments and public consultations, each Member State needs to put together a package of policy measures that will enable them to achieve its climate objectives. Union measures cannot be included in this package as they apply directly in each European Member States. They are intended to support national efforts. The achievement of the climate objectives is spread over several periods, which makes it possible to measure at the end of each period whether sufficient reductions in greenhouse gas emissions have been achieved. The measurement is based on a combination of Eurostat statistics (e.g. energy consumption data), a calculation methodology and the actual measurements of greenhouse gas concentrations. If it is concluded that the reductions realised are insufficient, this can be corrected in successive periods by, for example, an extra-high objective, extra measures or financial compensation. The rules on what compensation is appropriate are laid down in the climate Directives and Regulations at European level. The final period is currently set at 2050, when greenhouse gas emissions within the European Union will have to be reduced by 80-95%.

 

Figure : Schematic interpretation of the underlying idea of the European regulatory framework for climate change (Source: Agoria)

What does this mean for a manufacturer or importer?

For the different types of measures (e.g. union measures, mandatory transpositions, advice) it is important for a manufacturer or importer to be well informed about the European, national and regional regulations. In order to do this, all aspects of the operational management process must be considered. For example, measures aimed at the production process are part of the permit procedures that a company must comply with in order to be allowed to operate. When developing new products, a manufacturer must take into account the different types of regulations that prescribe product requirements, such as the Ecodesign regulations (see figure 3). But prescribing obligations is not the only thing that regulation does; it also offers opportunities for innovation, especially for products that reduce greenhouse gas emissions. For example, the use of sustainable building technology makes a positive contribution to determining the energy performance of new buildings and major energy renovations (EPB), thus encouraging the use of sustainable technologies. But also the classification of appliances on the basis of their energy efficiency in categories A++ to G via the Energy labelling regulations offers an incentive to manufacturers and importers to realise more sustainable appliances. Of course, it remains an important challenge to be well informed about the many types of initiatives and regulations that currently exist in the field of climate. According to legislation, the responsibility to be informed lies in the first place with the companies. Experts of Agoria monitor these regulations and aim to provide insight into the obligations and opportunities for innovative development and answer individual questions in the most accessible and time efficient way possible.

Figure : Illustration of climate and energy regulations applicable to heat pumps within Europe (Source: Agoria)

The next steps in climate regulation

As the article shows, there is already a fairly comprehensive European regulatory framework for achieving the climate objectives. The focus is now on the implementation and further optimization of these regulations. Both the regulations for the ETS and the non-ETS sector have been in force for a number of years. This already gives an idea of the measures that work sufficiently well to achieve the objectives and the measures that may need to be adjusted in order to have sufficient results. For example, we know that the current level of renovation is not sufficient to achieve an almost zero-energy (BEN/QZEN/NZEB) building stock, as prescribed in the Directive on the Energy Performance of Buildings. Drawing up the long-term renovation strategy required by the Directive is a regional competence in Belgium. For this reason, the Regions are currently reflecting with stakeholders on ways on optimizing the current policy measures to increase the renovation rate in a cost-effective way. For other sectors and measures a similar assessment is underway. Next year, the period 2013-2020 will end and the European Commission and it will be officially established to what extent the European Union has achieved the set objective of 20% greenhouse gas emission reduction and whether the ETS and non-ETS objectives for the next period from 2021-2030 should be tightened up.