4 EU climate policy and its implications for Norway

4.1 Introduction

Norway is already part of the EU Emissions Trading System (EU ETS) through the Agreement on the European Economic Area (EEA). Given an agreement on joint fulfilment of the 2030 climate target, Norway and the EU will from 1 January 2021 also cooperate on reduction of non-ETS emissions. This would also mean that the proposed EU regulations on effort sharing and on land use, land-use change and forestry become relevant to Norway. Cooperation on emission reductions between EU countries is an important part of the EU legislation for achieving the 2030 target.

4.2 The EU Emissions Trading System

The EU ETS provides flexibility for participating installations and companies, brings about cost-effective emission reductions under an overall cap on emissions, and reduces the risk of companies moving production to other countries to avoid regulation and taxation of greenhouse gas emissions. About half of all Norway’s emissions are included in the EU ETS. ETS emissions are to be reduced by 43 % by 2030 relative to the 2005 level. Norwegian installations in sectors covered by the system are playing their part in achieving this target in the same way as installations in other European countries. Norway’s participation in the EU ETS is an important element of Norwegian climate policy and strategy for achieving the 2030 emission reduction commitment.

The EU ETS applies to emissions from more than 11 000 installations, which account for a little under half of the EU’s total emissions. Emissions from the energy supply sector, manufacturing and the oil and gas sector are largely included in the ETS. In addition, emissions from aviation within the European Economic Area are regulated by the ETS. About half of all Norway’s emissions are included in the system.

Within the EU ETS, a rise in emissions in Norway must over time be offset by a corresponding reduction somewhere else in Europe. Similarly, a reduction in emissions in Norway will allow for emissions to rise elsewhere in the system over time.

The European Commission’s proposal for a directive for the period 2021–2030 further develops the existing rules for the period 2013–2020. It does not involve any major changes in the structure of the system, and its scope (the sectors and gases covered) is unchanged in the proposal.

A key mechanism of the ETS is the annual tightening of the cap, in other words the annual reduction in the number of emission allowances issued. The annual reduction is a fixed number of emission allowances, which for the current period is 1.74 % of the calculated total quantity of allowances for 2010. The linear reduction factor of 1.74 % means that the number of emission allowances issued each year will be reduced by just under 40 million from the year before. In 2013, about 2 billion emission allowances were issued and could be used by installations in the system to meet their obligations. By 2020, the number of emission allowances issued will have been reduced to about 1.8 billion.

In the Commission’s proposal for rules for the period after 2020, the reduction factor has been increased to 2.2% per year. This will mean that the number of emission allowances issued per year is reduced by about 50 million, which is roughly equivalent to Norway’s total emissions. As a result of the annual tightening of the cap, the number of allowances issued in 2030 will be 43 % lower than emissions in 2005 from the sectors covered by the ETS. If the annual reduction in the number of allowances is continued unchanged after 2030, the number of allowances available for the installations in the system will have been reduced to 365 million by 2050. This is about 86 % lower than the volume of emissions in 1990 from the sectors covered by the ETS.

The Commission’s proposal has been discussed by the Council and the European Parliament, and the three EU bodies are now seeking agreement on the final wording of the legislation in tripartite negotiations (known as trilogue meetings). It is expected that the legislation will be adopted in autumn 2017.

4.3 The Effort Sharing Regulation

4.3.1 Introduction

In the EU, greenhouse gas emissions that are not covered by the EU ETS are currently regulated through the Effort Sharing Decision. A proposal for an Effort Sharing Regulation for the period 2021–2030 has been put forward. Effort sharing applies mainly to emissions from transport and agriculture, but also includes buildings, waste, parts of the oil and gas industry and some manufacturing sectors. The effort needed to reduce these emissions is to be shared between all the EU countries. On 20 July 2016, the European Commission put forward a proposal for rules for the period 2021–2030, including proposed emission reduction targets for each country, ranging from 0 to 40 % from 2005 levels. The Commission’s proposal for the period 2021–2030 includes several forms of flexibility to ensure that national emission targets for 2030 can be achieved more cost effectively. All emission reductions will take place within the framework of the EU Effort Sharing Regulation and will count towards the common target of an EU-wide reduction of 30 % in non-ETS emissions. The rules ensure that there is a common EU ceiling for emissions under the Regulation for the entire period 2021–2030. The Commission’s proposal is being considered by the European Parliament and the Council, and the regulation is expected to be adopted towards the end of 2017 at the earliest.

4.3.2 National targets

The national targets for each country are differentiated according to gross domestic product (GDP) per capita. The countries with the highest GDP per capita must also make the largest cuts in greenhouse gas emissions. No country can be required to reduce emissions by more than 40 %. To take cost effectiveness into account to some degree, the targets have been adjusted among the countries with the highest GDP per capita. In order to be able to adjust the targets for the highest-cost countries downwards, the Commission has proposed that the targets for Germany, France and the UK should all be increased by one percentage point.

The Commission's proposal estimates that Norway would be attributed a target of 40 % for reduction of emissions covered by the Effort Sharing Regulation.

4.3.3 New rules and annual targets from 2021 onwards

According to EU climate policy, it is not sufficient for countries to achieve their emission targets for 2030; they must also meet their annual targets throughout the period 2021–2030. Countries’ emission targets are therefore to be converted into emission budgets for the period 2021–2030. Under the proposed Effort Sharing Regulation, each country will receive an annual emission allocation (AEA) free of charge for each year of the period 2021–2030. For each year, a country must transfer an emission allowance to its compliance account in the registry corresponding to each tonne of emissions in the relevant sectors. The size of a country’s AEA depends on its emission target.

Norway is likely to receive an emission allocation for the target year 2030 corresponding to 60 % of its 2005 emissions from sources to which the Effort Sharing Regulation applies. According to the Commission’s proposal, 2020 is the starting point for calculating an emission budget, and the starting level is a country’s average annual emissions in the period 2016–2018. There is to be a linear reduction trajectory from the starting point in 2020 to the end point in 2030. Thus, the annual emission allocations for the period 2021–2030 will be steadily reduced from 2021 to 2030, so that the number of emission allowances a country has available is gradually reduced year by year during the period. Since the calculated reductions begin in 2020, Norway’s allocation in 2021 would be a number of emission allowances corresponding to a little less than the country’s average annual emissions in the period 2016–2018.

To meet its obligations, a country must ensure that its emissions are matched by the number of emission allowances held in its compliance account in the registry. Countries can choose themselves whether to achieve their targets by reducing domestic emissions or to acquire a larger emission allowance by making use of the flexibility offered by the legislation. Options for using the flexibility mechanisms are further discussed in Chapters 4.3.4 and 4.5.1.

Each country is responsible for ensuring that it has enough emission allowances to meet its annual obligations. According to the Commission’s proposal, this will be followed up through two formal compliance checks, when countries must ensure that the number of emission allowances in their compliance accounts corresponds to their emissions. The first compliance check will be in 2027, and will be for emissions in each of the years 2021–2025. The second compliance check will be in 2032 and will be for each of the years 2026–2030.

Given an agreement on joint fulfilment of the emission reduction target for 2030 with the EU, the EU’s reporting requirements will also apply to Norway. In accordance with its commitments under the UNFCCC and the Kyoto Protocol, Norway reports annually to the UNFCCC secretariat, among other things on emission trends, in the same way as EU member states. To meet the EU’s reporting requirements, Norway will need to establish a formal national reporting framework. A review is in progress of whether parts of the proposed Regulation on the Governance of the Energy Union may also be applicable to Norway if an agreement on joint fulfilment of the 2030 target is reached. In this case, Norway must not automatically be bound by other targets and legislation in the climate and energy field beyond what follows from the EEA Agreement and the agreement on joint fulfilment with the EU.

4.3.4 Flexibility rules

To enable more cost effective achievement of targets, the Commission has proposed five forms of flexibility under the Effort Sharing Regulation, which to a large extent involve the continuation of existing rules:

1. Flexibility to access allowances from the EU ETS

   Nine EU countries, and probably also Norway, will be eligible for a new form of flexibility, under which they will be able to cover some emissions using an EU-wide total of up to 100 million EU ETS allowances within the effort sharing system. The total quantity will be shared between the eligible countries. Countries where costs are highest will be able to make most use of this flexibility. According to the Commission’s proposal, Luxembourg and Ireland will be able to cancel a number of EU ETS emission allowances each year that corresponds to 4 % of their non-ETS emissions in 2005. The other eligible countries, including Sweden, Denmark and Finland, will be able to cancel EU ETS allowances corresponding to 2 % per year of their non-ETS emissions in 2005. Countries will be required to notify the Commission by the end of 2019 of whether and to what extent they wish to make use of the flexibility to access allowances from the EU ETS.

2. Buying and selling

   Countries may buy and sell parts of their emission allocations to each other. These transfers will take place within an overall framework that ensures an overall cut of 30 % in emissions to which the Effort Sharing Regulation applies, and that provides for cost-effective achievement of the targets.

   There are limits to how much of its allocation a member state may transfer to other member states before the compliance checks. A country may only transfer up to 5 % of its emission allocation for each of the years in the five-year period before one of the compliance checks. However, countries are free to enter into agreements on future transfers. Under the current Effort Sharing Decision, there is a four-month interval between the date when a country’s emissions are established and the deadline for the compliance check. This means that countries will know exactly how well the number of units in their compliance accounts corresponds to their actual emissions four months before the compliance date. This is the period when it is intended that countries will able to trade in emission units. EU countries can also do this under the Effort Sharing Decision, which applies to the period 2013–2020. So far, this option has only been used once, when Bulgaria transferred allocations to Malta in 2013. The Commission will present a proposal for supplementary rules for the period 2021–2030 at a later date.

3. Banking

   Countries can bank unlimited amounts of surplus emissions during the period 2021–2030 for use later in the period. Thus, a country can use parts of its emission allocation from a specific year during this period to comply with its target in the same year or in any later year during the period. The Commission’s proposal does not include an option for banking unused emission units for use in a later period after 2030.

4. Borrowing

   The Commission has proposed that countries should be able to borrow from their emission allocation for the following year of the period, limited to 5 % of their allocation for that year. This means that if for example a country’s emissions in 2021 are higher than its allocation for that year, it can use up to 5 % of its allocation for 2022 to comply with its 2021 target.

5. Credits from the land use sector

   The Commission’s proposal permits countries to make use of CO₂ removals in forest and other land categories (credits from the land use sector, or LULUCF credits) corresponding to a total of up to 280 million tonnes CO₂-eq over the entire period to comply with their national targets under the Effort Sharing Regulation. The flexibility to access credits from the land use sector is shared between countries on the basis of their share of the emissions from agriculture that are included under the Effort Sharing Regulation. To use this form of flexibility, countries must be able to document net removals from LULUCF in line with the Commission’s proposed accounting rules. The use of LULUCF credits under the Effort Sharing Regulation is further discussed in Chapter 4.4.3.

4.4 Legislation for the land use, land use change and forestry (LULUCF) sector

4.4.1 Introduction

The LULUCF sector is very important in the context of climate change, and can potentially provide up to one third of the solution to this problem, particularly through reduced deforestation and increased afforestation. Active, sustainable forest management is therefore a key element of climate policy globally, at European level and in Norway. The European Commission has proposed separate legislation for the LULUCF sector. The regulation that has been proposed gives EU countries an obligation to ensure that their CO₂ emissions from the sector do not exceed the removals that may be included according to the accounting rules set out in the proposal.

The proposal includes accounting rules for determining how much of a country’s actual emissions and removals from the LULUCF sector to include when assessing whether it is in compliance with its commitment. There are also rules on reporting and compliance checks.

The LULUCF sector is divided into the following land accounting categories: afforested land, deforested land, managed forest land, managed cropland and managed grassland. Countries may also choose to include managed wetland on a voluntary basis. Furthermore, there are rules for ‘harvested wood products’ (HWP), in other words carbon stored in long-lived wood products.

It is necessary to determine a starting point for calculating changes in emissions and removals from the LULUCF sector. It is the changes from a defined reference level that are to be included and reflected in the accounts for the sector. Different reference levels have been proposed for the different land categories.

For managed forest land, a forward-looking forest reference level for net removals by forest is to be established. Under the Commission’s proposal, the reference level is to be extrapolated from forest management practice and intensity for the period 1990–2009. The reference level will also be adjusted for changes in removals resulting from the age-class structure of forests.1 According to the accounting rules for forest management activities, only changes from ‘business as usual’, for example achieved through reduction of harvesting, higher planting densities or fertilisation, can be included as removals in the accounts for managed forest land. In addition, a restriction has been proposed on how much of these removals can be included to ensure compliance with the ‘no-debit’ rule; no more than the equivalent of 3.5 % of a country’s total emissions from other sources in the base year 1990. The principle of using a forward-looking forest reference level in accounting for managed forest land is new and differs from the accounting rules Norway follows under the Kyoto Protocol, where annual net removals in managed forest are calculated in relation to net removals in the base year 1990.

The Kyoto Protocol accounting rules also restrict the proportion of removals that can be used to meet Norway’s emission reduction commitment; the ceiling is the equivalent of 3.5 % of total Norwegian emissions in the base year. Under this rule, Norway can include annual removals of about 1.8 million tonnes CO₂ in the forest management category under the Kyoto Protocol. According to the European Commission’s proposed accounting rules, if removals are lower than calculated using the forward-looking forest reference level, the difference will be accounted for as emissions, even if there are net removals from the category ‘managed forest land’. The EU countries have already started to use a forward-looking forest reference level during the second commitment period under the Kyoto Protocol. One of the differences for Norway is that under Kyoto rules, harvesting can be increased considerably without this having to be accounted for as emissions.

Preliminary calculations show that under the accounting rules proposed by the European Commission for the LULUCF sector, Norway is likely to have to record net emissions of 15 million tonnes over the period 2021–2030 before the category managed forest land is included, despite the large net uptake of CO₂ by forest in Norway. However, the calculations are very uncertain, and the final accounting rules may influence this figure. The reason for this situation is that the high removals in managed forest land in Norway will largely be accounted for relative to a forward-looking forest reference level. If the harvest rate turns out to be the same as assumed in this reference level, the value of this category will be set at zero. This means that the large CO₂ removals in Norwegian forest (provided they are not a result of introducing new measures)2 cannot be used to offset emissions from other LULUCF accounting categories, especially deforestation. It will be possible to include removals from afforestation for a period of 30 years. Since Norwegian forests grow slowly, the contribution from afforestation will be limited in the period up to 2030.

It should be anticipated that Norway may have to record net emissions when accounting for the category ‘managed forest land’ according to the Commission’s proposal. These emissions would be additional to the preliminary figure of 15 million tonnes mentioned above. However, this is uncertain. If the harvest rate increases beyond the historical level (for 1990–2009) used in calculating the forest reference level, reduced net removals will be accounted for as emissions. According to the Commission’s proposal, the change in the carbon stock in harvested wood products (HWP) is also to be included in the reference level for managed forest land. In the reference period proposed by the Commission (1990–2009), production in the Norwegian pulp and paper industry was largely in Norway. This resulted in an increase in the HWP carbon stock, which is counted as carbon removals. Since 2009, the industry has been restructured and a larger proportion of the timber is now processed abroad. Processing abroad will not count as removals in the accounts. Using the reference period 1990–2009, Norway’s results will be measured against a period when the carbon stock in HWP was increasing, giving net removals. This means that Norway’s annual removals in the period 2021–2030 must be higher than the reference level for the change to be accounted for as net removals. However, the carbon stock in harvested wood products produced in Norway has been reduced since 2009, and this counts as emissions.

The Commission’s proposals are being discussed in the European Parliament and the Council (June 2017), and a number of forest countries, including Norway, have advocated alternative models. Norway will work together with other European countries that have large areas of forest to promote an alternative model for the EU. The rules that are finally adopted may differ in several ways from the Commission’s proposal, and this will also influence the calculations of the consequences for Norway.

4.4.2 The ‘no-debit’ rule

The ‘no-debit’ rule applies to the sum of all accounting categories in the LULUCF sector. This obligation can be met through national measures to reduce emissions or increase removals beyond the reference level (in other words, new climate-related measures in managed forest land). For the second five-year period (2026–2030) it will also be possible to make use of any surplus LULUCF credits from the first five-year period (2021–2025) that have been banked for later use.

A country may also use LULUCF credits from other countries to meet its obligations. They may only be used to meet its obligations for the LULUCF sector, not to achieve its emission target under the Effort Sharing Regulation (see 4.4.3 below for further information).

The proposed legislation is addressed to national authorities and not to individual forest owners.

If a country fails to comply with the ‘no-debit’ rule for the LULUCF sector, it will have to compensate for the excess emissions through further measures under the Effort Sharing Regulation, which will be additional to the reductions in non-ETS emissions required under the latter.

A restriction has been proposed on the proportion of removals from managed forest land that can be included towards compliance with the ‘no-debit’ rule if net removals are higher than the reference level. The proposed limit is the equivalent of 3.5 % of a country’s total emissions in 1990, which for Norway is roughly 1.8 million tonnes CO₂. If removals in managed forest land turn out to be lower than the reference level, for example as a result of increased harvesting, the whole of the reduction in net removals will under the Commission’s proposal have to be accounted for as emissions.

4.4.3 Use of LULUCF credits under the Effort Sharing Regulation

If countries have a surplus of removals in the LULUCF sector, they will on certain conditions be able to use these removals to comply with their national targets under the Effort Sharing Regulation. According to the Commission’s proposal, the EU countries will be able to use a maximum quantity of 280 million tonnes CO₂-eq of removals in the LULUCF sector towards their commitments under the Effort Sharing Regulation during the period 2021–2030. This amount will be divided between the member states on the basis of their shares of the emissions from agriculture that are included under the Effort Sharing Regulation.

The European Commission has proposed criteria that must be met before LULUCF removals can be credited against a country’s own emissions under the Effort Sharing Regulation:

• Compliance with the ‘no-debit’ rule. This rule applies to all accounting categories in the LULUCF sector, including managed forest land.

• Only net removals from the accounting categories afforested land, deforested land, managed cropland and managed grassland may be used towards compliance with obligations under the Effort Sharing Regulation. This means that removals as a result of measures in addition to those included in the reference level for managed forest, for example increased CO₂ removals from fertilisation or higher planting densities, may not be used to compensate for emissions under the Effort Sharing Regulation.

Since Norway according to preliminary calculations may have to record net emissions when accounting for the LULUCF sector, it should be anticipated that the Commission's proposal may mean that it is not possible to access this form of flexibility.3 The reasons why Norway may end up with net emissions from the sector are further explained in Chapter 4.4.1. The rules for calculating a reference level for managed forest land and for the use of LULUCF credits under the Effort Sharing Regulation are being discussed by the EU in connection with consideration of the Commission’s proposals by the European Parliament and the Council.

4.5 Flexibility in order to ensure that targets are achieved

4.5.1 Flexibility available to Norway under the Effort Sharing Regulation

4.5.1.1 Introduction

The flexibility mechanisms under the Effort Sharing Regulation provide assurance that Norway can meet its binding emission budget, and will make it possible to achieve Norway’s emission target for 2030 cost effectively. As shown in Chapter 4.3.4, these mechanisms make it possible for countries to cooperate on emission reductions. According to the Commission’s proposal, Norway will be able to access flexibility mechanisms on the same terms as EU member states. The most important of these for Norway are the flexibility to access a limited number of allowances from the EU ETS, and the opportunity to trade emission units with other countries.

4.5.1.2 Flexibility to access allowances from the EU ETS

Given an agreement with the EU on joint fulfilment, Norway will probably be placed on an equal footing with the nine EU countries4 that will be eligible to use the flexibility to access allowances from the EU ETS to cover some of their emissions. The countries in question will be able to use EU ETS emission allowances corresponding to between 2 and 4 % of their non-ETS emissions in 2005. Assuming that Norway will be eligible for a similar level of flexibility, it will probably be able to use emission allowances corresponding to between 5.5 and 11 million tonnes CO₂ over the whole period 2021–2030. To ensure that Norway complies with its emission budget, the Government will make full use of the flexibility Norway can achieve by using emission allowances from the EU ETS.

Any flexibility Norway is given to access EU ETS allowances will be independent of agreements with other countries under the Effort Sharing Regulation. These allowances will be taken from a country’s auctioning volume, which will be reduced each year by a number of allowances equivalent to one tenth of the total volume of allowances the country has chosen to access from the EU ETS. Thus, the cost of utilising this form of flexibility will in practice be a loss of potential auctioning income throughout the period 2021–2030. The cost will therefore depend on developments in the price of emission allowances in the ETS. Projections of the prices of emission allowances vary widely. The projected price of allowances to be cancelled in December 2020 has recently fluctuated around EUR 5.

4.5.1.3 Buying and selling

Preliminary and very uncertain calculations by the Norwegian Environment Agency indicate that a group of about 15 EU countries are likely to have a total surplus of about 420 million emission units for the period 2021–2030. These calculations are based on the Commission’s reference scenario. The projections differ somewhat from the countries’ own projections of their emissions. It is to be expected that most of these countries will wish to sell their emission units. There is also reason to believe that these countries will take steps to reduce their emissions further if they can sell emission units at a price that is higher than the cost of the measures they introduce. On the other hand, there will be about 13 EU countries that have an overall deficit of about 608 million emission units. These countries will have to obtain emission units from other EU countries and/or carry out measures to reduce their emissions. The Environment Agency’s calculations are based on policy measures that had been adopted by summer 2016. The effects of policy adopted or under consideration by the EU after July 2016 have not been incorporated into the analysis, and the effects of the unilateral measures that some countries have announced have not been analysed. Price trends for purchases of emission allowances from other countries are very uncertain.

Even if national policy instruments are strengthened there may be a need for more flexibility than will be offered by the expected maximum quantity of allowances that may be accessed from the EU ETS. If it is necessary and proves to be cost-effective, the Government therefore also plans for Norway to be able to make use of flexibility in the form of direct purchases of emission allowances from other countries. It is anticipated that Norway will be able to meet its need for flexibility even if the process in the EU results in stricter rules for effort sharing than those proposed by the Commission and Norway turns out to need flexibility corresponding to more than 11 million tonnes.

4.5.1.4 Banking and borrowing

As described in Chapter 4.3.4, there are restrictions on transfers of emission allowance between years within the period 2021–2030. According to the Commission’s proposal, Norway will be eligible to bank and borrow emission units on the same terms as EU member states. This provides greater flexibility in implementing the Norwegian emission target.

4.5.1.5 Credits from the land use sector

The number of LULUCF credits that can be used towards commitments under the Effort Sharing Regulation is limited to a total of 280 million at EU level. This total will be divided between the EU countries on the basis of their agricultural emissions. According to preliminary calculations by the Norwegian Environment Agency, Norway will, on the basis of its agricultural emissions, be eligible to use credits corresponding to about 3.3 million tonnes CO₂-eq over the whole ten-year period (2021–2030). This figure is uncertain. It will depend among other things on whether the ceiling of 280 million tonnes in LULUCF credits is increased when Norway is included in the system, or whether the available credits are simply redistributed. To use LULUCF credits in this way, countries must be able to document net removals in the LULCF sector when removals in managed forest are excluded. Since Norway according to preliminary calculations may have to record emissions when accounting for this sector, it should be anticipated that it may not be possible to use this form of flexibility.

4.5.2 Norway’s eligibility for flexibility mechanisms for the LULUCF sector

Preliminary calculations for the LULUCF sector

It is possible to comply with the requirement for the LULUCF sector that emissions must not exceed removals (the ‘no-debit’ rule) either through national measures or by compensating for emissions by buying LULUCF credits from other countries. Alternatively, a country’s emission allocation under the Effort Sharing Regulation will be reduced by an amount corresponding to its recorded emissions from the LULUCF sector. In this case, its obligation under the Effort Sharing Regulation will be increased by the same amount as its net LULUCF emissions. If Norway ends up recording net emissions from the LULUCF sector, this will mean that without any purchases of LULUCF credits from other countries, Norway will have to reduce non-ETS emissions by more than the proposed 40 % target. It will only be possible to buy LULUCF credits if other countries have a surplus of credits that they wish to sell. According to the Commission’s impact assessment of the proposed LULUCF regulation, there will be a surplus of credits in Europe as a whole, even after countries have made full use of the flexibility to access LULUCF credits to meet their obligations under the Effort Sharing Regulation. However, these calculations are uncertain. The final design of the accounting rules is also very uncertain, and this may influence the size of the surplus and the proportion of the surplus that is available for other countries to buy. A surplus of LULUCF credits that has been acquired through the purchase of credits from another country may not be used to compensate for emissions under the Effort Sharing Regulation.