Scottish greenhouse gas emissions annual target report: 2016

Annex: Accounting For The EU Emissions Trading System (EU ETS)

Introduction

This annex outlines the calculation of adjusted emissions to take account of trading in the EU Emissions Trading System (EU ETS).

What is the EU ETS?

The EU ETS is a ‘cap and trade’ system. A limit (cap) is placed on the overall volume of emissions from participants in the system. Within the cap, organisations receive or buy emissions allowances which they can trade (1 emissions allowance equals 1 tCO₂e). Each year, an organisation must surrender enough allowances to cover its emissions. The cap is reduced over time so that by 2020, the volume of emissions permitted within the system will be 21 per cent lower than in 2005. The reducing cap, alongside the financial considerations of trading emissions allowances, incentivises organisations within the system to find the most cost effective way of reducing their emissions. The EU ETS operates as a number of Phases. Phase III began on 1 January 2013 and will operate until 31 December 2020.

In the greenhouse gas inventory, source emissions can be categorised into traded and non-traded. Traded emissions capture those that come from installations covered by the EU ETS, whereas non-traded emissions are those which do not fall within the scope of the EU ETS. The emissions from some sectors, such as the residential sector, are completely non-traded whereas emissions from other sectors, such as energy supply, business and industrial process emissions are a combination of traded and non-traded. For the years 2012 to 2016, CO₂ emissions from domestic and international aviation are classified as being within the traded sector.

What does this mean for the NSEA?

The figure for source emissions is comprised of emissions from both the non-traded and traded sectors. The figure for NSEA is comprised of emissions from the non-traded sector and a value for Scotland’s share of the notional EU ETS cap. The amount of emissions from the non-traded sector remains the same for both the source emissions and the NSEA.

The EU ETS element of the NSEA is calculated by replacing the number of emissions allowances surrendered from Scottish installations in a given year with Scotland’s notional share of the overall EU ETS cap. This involves taking the difference between Scotland’s notional share of the overall EU ETS cap and the number of emissions allowances surrendered from Scottish installations in a given year. This difference is then added to net Scottish emissions to get the NSEA.

The NSEA is referred to as “adjusted emissions”, as they are adjusted to take into account trading within the EU ETS and the purchase of other credits. As no units were credited to the NSEA in 2016 as a result of the purchase by Ministers of international carbon units, this adjustment takes the form of a 4-step process.

Calculation of adjusted emissions for 2016

STEP 1

Take the Scottish greenhouse gas emissions from Scottish greenhouse gas inventory (for 2016, it is 38.574 MtCO2e). This figure is comprised of:

• traded emissions units surrendered - sourced from Scottish Environment Protection Agency (SEPA) for fixed installations (12.166 MtCO2e)
• an imputed estimate of surrendered CO2 emissions from domestic aviation (0.478 MtCO2e) and international aviation (1.425 MtCO2e) - sourced from the Scottish Greenhouse Gas Inventory for 1990 to 2016.
• non-traded emissions from sources such as residential emissions (26.409 MtCO2e)

STEP 2

Remove an amount relating to surrendered emissions from fixed installations and an estimate of surrendered emissions from domestic and international aviation. This amounts to 10.262 MtCO2e + 0.478 MtCO2e + 1.425 MtCO2e = 12.166 MtCO2e.

STEP 3

Add on the value of the EU ETS cap which is outlined within The Carbon Accounting Scheme (Scotland) Amendment Regulations 2018^[33]. The cap reflects an estimate of the Scottish share of the European wide EU ETS cap that is used for emissions accounting.

The Scottish EU ETS cap for 2016 is 15.072 MtCO2e and is made up of 3 components, as shown in the table below. A methodological paper, Determining a Scottish EU ETS cap for 2016^[34], documents the calculations that determine how a notional emissions cap has been calculated.

Table 14: Total EU ETS cap for Scotland, 2016 - this is the “specified amount” for fixed installations, domestic aviation and international aviation

STEP 4

Adding on the value of the EU ETS cap gives a value of 41.481 MtCO2e. This is 2.907 MtCO2e higher than the value of estimated source emissions in 2016. Under the Climate Change (Scotland) Act, 2009, an upward adjustment to source emissions is referred to as a debit from the Net Scottish Emissions Account. This means that 2,906,763 units have been debited to the Net Scottish Emissions Account in 2016.

Chart 1: Calculation of Adjusted Emissions for Trading in the EU Emissions Trading System (EU ETS), 2016. Values in MtCO₂e