Deciding the Scope: Sectors, Gases, and Thresholds
Before an ETS can operate, you must define exactly what it covers. Which sectors? Which gases? Which facilities? These scope decisions determine how much of the economy faces the carbon price and how complex the system will be to administer.
The Scope Question
Scope refers to what the ETS covers:
- Sectors: Power generation, manufacturing, aviation, transport, buildings
- Gases: CO2, methane, nitrous oxide, fluorinated gases
- Entities: Which specific facilities or companies must participate
Broader scope means more emissions are priced, enabling cost-effective reductions across the economy. But broader scope also means more complexity, more entities to regulate, and more difficult MRV challenges.
Sector Coverage in Existing Systems
Different systems cover different sectors:
| System | Power | Industry | Aviation | Transport | Buildings |
|---|---|---|---|---|---|
| EU ETS Phase 4 | ✓ | ✓ | ✓ (EEA) | Coming | Coming |
| China national | ✓ | Planned | No | No | No |
| California | ✓ | ✓ | No | ✓ | ✓ |
| Korea | ✓ | ✓ | ✓ (domestic) | No | ✓ |
| RGGI | ✓ | No | No | No | No |
Power generation is almost always covered. Power plants are large point sources with existing monitoring, making them easy to include.
Industry is usually covered, at least for major facilities. Cement, steel, chemicals, and refining are common sectors.
Aviation is included in some systems, usually domestic flights first.
Transport and buildings are harder because they involve millions of small sources. Some systems use upstream coverage or separate instruments.
Starting with Power and Industry
Most ETS systems start with power generation and heavy industry because:
Few large point sources
A typical country has dozens to hundreds of power plants and major industrial facilities, not millions of small emitters.
Existing monitoring
Power plants and factories already monitor energy use and often emissions for air quality purposes.
Significant emissions share
Power and industry together often account for 50-70% of national emissions.
Manageable MRV
Monitoring and verification are well-established for large point sources.
The EU ETS approach:
The EU started with power plants and energy-intensive industry in 2005. Coverage expanded over phases:
- Phase 1 (2005-2007): Power, cement, glass, ceramics, steel, paper
- Phase 2 (2008-2012): Added aviation (intra-EEA)
- Phase 3 (2013-2020): Added aluminum, chemicals, expanded industries
- Phase 4 (2021-2030): Maritime shipping added; separate ETS for buildings and transport being developed
This phased approach allowed capacity building while progressively expanding coverage.
Expanding to Other Sectors
As ETS systems mature, they often expand to additional sectors:
Aviation
Aircraft emissions are concentrated at airports, making monitoring feasible. Most systems cover domestic aviation first, with international aviation being addressed through CORSIA (a separate offsetting scheme).
Maritime shipping
Ship emissions occur in ports and at sea. The EU is including maritime in its ETS starting 2024, initially for large ships on certain routes.
Road transport
Millions of vehicles make direct coverage impractical. Options include:
- Upstream coverage (taxing fuel suppliers instead of drivers)
- A separate ETS for fuel suppliers (EU's ETS II approach)
- Complementary carbon taxes
Buildings
Similar challenges to transport. The EU is developing a separate ETS for building heating fuels, covering fuel suppliers upstream.
Transport and buildings are "diffuse" sectors with many small emission sources:
The challenge:
- Millions of cars, trucks, homes, and businesses
- Direct monitoring is impractical
- Administrative burden would be enormous
Upstream solutions: Instead of regulating each car or furnace, regulate the fuel suppliers:
- Oil companies that supply gasoline
- Natural gas distributors
- Heating oil distributors
This dramatically reduces the number of regulated entities while still pricing all emissions from those fuels.
Example: California California's cap-and-trade includes transport fuels through upstream coverage. Fuel distributors hold allowances for the emissions their fuels will cause. They pass costs through to fuel prices, creating the same incentive as if each driver were regulated directly.
Trade-offs: Upstream coverage is administratively simpler but less visible to end users. Downstream coverage is more complex but creates a more direct price signal. Many systems combine approaches.
Gas Coverage
Most ETS systems focus on CO2 but may include other greenhouse gases:
Carbon dioxide (CO2)
The dominant gas, primarily from fossil fuel combustion. Always included.
Methane (CH4)
Potent greenhouse gas from natural gas systems, landfills, and agriculture. Sometimes included for specific industrial processes.
Nitrous oxide (N2O)
From fertilizer production and some industrial processes. Included in some systems.
Fluorinated gases (HFCs, PFCs, SF6)
Very potent but low-volume gases used in refrigeration and industry. Some systems include these.
| Gas | Global Warming Potential (100-year) | Common sources | ETS coverage |
|---|---|---|---|
| CO2 | 1 | Fossil fuels, cement | Universal |
| CH4 | 28 | Gas leaks, landfills | Some systems |
| N2O | 265 | Fertilizers, chemicals | Some systems |
| SF6 | 23,500 | Electrical equipment | Some systems |
| HFCs | 1,000-3,000 | Refrigeration | Some systems |
Including multiple gases allows more cost-effective reductions. Sometimes it is cheaper to reduce methane than CO2, and the climate does not care which gas is reduced. Multi-gas coverage enables this flexibility.
Thresholds: How Small Is Too Small?
Most ETS systems set size thresholds. Only facilities above the threshold must participate.
Why thresholds exist:
- Reduce administrative burden (fewer entities to monitor)
- Protect small businesses from compliance costs
- Focus regulation on largest emitters
Common threshold approaches:
Emissions-based: Facilities emitting more than X tons per year (e.g., 25,000 tons CO2e)
Capacity-based: Facilities with thermal capacity above X MW (e.g., 20 MW)
Activity-based: Facilities producing more than X units per year
EU ETS thresholds (examples):
| Sector | Threshold |
|---|---|
| Combustion (power, heat) | ≥20 MW thermal input |
| Oil refineries | All |
| Cement | Production capacity ≥500 tons/day |
| Steel | ≥2.5 tons/hour capacity |
| Glass | ≥20 tons/day capacity |
| Ceramics | ≥75 tons/day capacity |
These thresholds capture about 11,000 installations across the EU, covering roughly 40% of total emissions.
The Coverage-Complexity Trade-off
There is an inherent trade-off between coverage and complexity:
Broader coverage:
- More emissions face the carbon price
- Greater emissions reduction potential
- More cost-effective reductions (larger market)
But also:
- More entities to regulate
- More complex MRV requirements
- Higher administrative costs
- Possible inclusion of entities with limited reduction potential
Narrower coverage:
- Simpler administration
- Focus on entities with greatest reduction potential
- Lower compliance burden for smaller businesses
But also:
- Less of the economy faces carbon pricing
- Possible leakage between covered and uncovered sectors
- May miss low-cost reduction opportunities
Think of it like fishing with different size nets. A fine-mesh net catches more fish (broader coverage) but is heavier to handle (more complexity). A coarse-mesh net is easier to manage but lets smaller fish through. The right mesh size depends on your capacity and goals.
Practical Approaches to Scope
Start narrow, expand over time
Begin with sectors that are easiest to cover (power, major industry) and expand as capacity develops. This is the most common approach.
Use complementary instruments
Cover some sectors with ETS, others with carbon taxes. Many jurisdictions use this hybrid approach.
Tiered participation
Large emitters have full obligations. Smaller emitters may have simplified reporting or opt-in participation.
Upstream for diffuse sectors
Use upstream coverage for transport and buildings rather than trying to regulate millions of end users.
Key Questions for Scope Design
When designing scope, ask:
-
What share of national emissions can we cover? Aim for meaningful coverage (at least 40-50%) while keeping the system manageable.
-
Where are the largest point sources? Power plants and major industrial facilities are usually the starting point.
-
What monitoring capacity exists? Cover sectors where MRV is feasible with existing or easily developed capacity.
-
What are the competitiveness implications? Trade-exposed sectors need careful consideration of how coverage affects competitiveness.
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How will scope evolve? Plan for future expansion even if starting narrow.
Looking Ahead
With scope defined, the next crucial question is setting the cap itself. How do you decide the total quantity of emissions to allow? The next lesson explores cap-setting methodologies.