The future European Emission Trading Scheme and its impact on biomass use

Based on research carried out within the NoE, this paper assesses possible impacts of changes to the European Emission Trading Scheme on solid and the possible future inclusion of liquid biomass use in the EU. Based on these assessments, recommendations are outlined for optimising support for solid and liquid biofuels. In December 2008 the European Council agreed on the European Energy and Climate Package. This agreement contains fundamental changes to the European Emission Trading Scheme (EU-ETS), which started in 2005. With some exceptions, emissions allowances in the power sector will be auctioned starting with the third trading period of the scheme in 2013. This may have significant impacts on the sector’s fuel mix and investment decisions. To the extent to which the EU-ETS results in a price on CO₂ emissions, it increases the competitiveness of low carbon fuels. Under current regulations no CO₂ emissions are attributed to combustion of biomass, thus it functions as a zero-carbon fuel. The paper shows that while the use of biomass is already viable under CO₂ prices that have been reached within the EU-ETS, investments in new biomass plants need a higher price level as well as more stable prices, conditions which cannot be predicted with any confidence. The road transport sector, which has significant scope to increase its use of biofuels is currently not part of the EU-ETS, and will not be included in the third trading period which begins in 2013 but may be included later. The likely consequences of including transportation fuels under the EU-ETS are considered as well as options which involve separate trading schemes for liquid biofuels. The paper also reviews other trading mechanisms which might serve as more effective vehicles for increasing the share of liquid biofuels, taking sustainability issues into account.