Analysis of the Emissions Trading Directive
Analysis of the Emissions Trading Directive
Index Page No.
Abbreviations Used 2
Introduction 3
Background 4
Reasons for the Directive 7
Summary of Directive 8
National Allocation Plan 10
Interlinking Of Directive 11
Practical side 13
Problems (Implementation gap) 16
Conclusion 19
Reference 20
Abbreviations Used
BCA -British Cement Association
CCA -Climate Change Agreements
CDM-Clean Development Mechanism
CHP- Combined Heat and Power
DEFRA- Department of Environment Food and Rural Affairs
EEA -European Environment Agency
ERU -Emission Reduction Units
ETS -Emissions Trading Scheme
IPPC -Intergovernmental Panel on Climate Change
JI -Joint Implementation
NAP -National Allocation Plan
UNFCC -UN Framework Convention on Climate Change
UKOOA-United Kingdom Offshore Operators Association
UNFCCC- United Nations Framework Convention on Climate Change
Introduction
Air is intangible, ignored and easily damaged by pollution. Atmospheric emissions can upset the earth's fundamental ecological basis. Scientific effect on the greenhouse effect is based on concern over increasing atmospheric levels of carbon dioxide resulting from the combustion of fossil fuels and emissions of other greenhouse gases such as methane from decomposing waste, chlorofluorocarbons and nitrous oxides.
The Intergovernmental Panel on Climate Change (IPPC) reported in 1990 that up to one third of world grain production would be lost, the homes and livelihoods of 300m people set at risk from rising sea levels, and widespread desertification could flow from such an ecological imbalance which would result from global warming consequent on the green house gases trapping within the earths atmosphere. Weather patterns will also become more unpredictable. The IPPC recommended an immediate cut in greenhouse gas emissions of 60% but effective international action is still awaited.
If "business as usual" emissions continue, by 2030 mean global surface air temperatures are likely o be 1.4 degrees higher than currently, carbon dioxide concentrations will have further increased from 350 parts per million by volume to 450, and global mean sea levels could be 20 cm higher than today, with consequences for agriculture, coastal areas, animal species and indeed all sectors of human activity. A most worrying aspect of the problem is the climatic uncertainty consequent on global warming and this has led for the application of precautionary principles nationally and internationally in the formulation of laws and policies.
In 1990, governments began to negotiate on what to do about the climatic uncertainty and in the mid -1990s they started to debate more substantive commitments. The result of international negotiations that followed resulted in the Kyoto Protocol. It sets specific binding targets for the emissions of greenhouse gases from industrialized countries, together with an array of complex mechanisms to give flexibility in how they are implemented and to assist in global efforts towards more sustainable development.
In this essay an attempt has been made to describe and discuss the impact of emissions trading directive which was introduced to meet the UK and EU's greenhouse gas reduction targets agreed under the Kyoto protocol.
(Environmental Law fourth edition by David Hughes et al (2002) In: Atmospheric pollution, The overall problem) pp. 543
The Kyoto Protocol A guide and assessment by Michael Grubb 1999 In: Chapter 1 analytical foundations.
Background
The most important decision for the climate change convention was taken at Kyoto, Japan in 1997 resulting in the Kyoto protocol. The Kyoto protocol to the UN Framework Convention on Climate Change (UNFCC) defines the basic structural efforts upon which global efforts to tackle climate change in the twenty first century will rest. The protocol if ratified, implemented and expanded for subsequent periods offers effective international framework for tackling climate change.
The Kyoto Protocol is noted for the range of measures agreed in order to tackle the global warming issue. The initial vision of significant reduction in greenhouse gases by the year 2000 has been reformulated with industrialised states agreeing to a minimum legally binding cut of 5% below 1990 levels in their CO2 emissions between the years of 2008 -12.The UK has an 8% target imposed .The UK has adopted a voluntary target of 12.5%reduction of greenhouse gases, and a 20% reduction of CO2, currently standing at 14%.
(Environmental Law fourth edition by David Hughes et al (2002) In: Atmospheric pollution, The legal response) 556
Since the United States, which emits around one third of the emissions covered by Kyoto, pulled out of the pact last year, the EU has positioned itself as saviour of the treaty. All other major countries have now ratified and the pact can come into force once Russia does so.
An indication of the inevitability of its ratification occurred in October 2001, when the Commission proposed a Council decision on the issue of ratification by the EC and the member states of the Kyoto Protocol. The proposal states that the legal base should be Arts
174 (4) and 300 of the Treaty that permits the EC's conclusion of international environmental agreements and the enabling procedure respectively. The member states should first inform the Commission of their decision to ratify the protocol (by 2002) and to permit the simultaneous deposit of the ratification instruments (14 June 2002).
The EC considered a system of greenhouse gas emission allowance trading. A Green Paper on greenhouse gas emission trading was adopted by the Commission in March 2000(COM (2000)87) and resulted in the publication of a proposed Directive (COM (2001)581 final).The Green Paper and subsequent meetings convened within the ECCP (European Climate Change programme), on the issue, elicited positive responses from the member states and other stake holders. the proposal does not apply legally binding emission reduction targets for the member states within the preliminary period 2005 to 2007.The proposed system should link in with existing EC environmental legislation ,and the scheme would apply to most significant greenhouse gas emitting activities that are already covered by the IPPC Directive .In principle the scheme will cover all of the gases in Annex 2 of the Kyoto Protocol, but in the first instance it will only cover carbon dioxide .The EC's preferred regime is somewhat different to the UK's own approach. They share the fact that both will precede the Kyoto Protocol's commitment period and thus gain an advantage in terms of the experience of emissions trading before the commencement of the international scheme due in 2008
In the UK level control of green house emissions was considered explicitly in Climate Change: The UK programme, which discussed a variety of means by which emissions reductions could be delivered. The government introduced legislation to establish a Climate Change Levy by virtue of the Finance Act 2000, Part2 and Sch 6.The levy applies to the industrial and commercial use of energy. The levy is payable by energy suppliers of primary and secondary fuels. The energy suppliers will recover the levy from customers in the way a landfill operator will recover the landfill tax from those disposing of waste at landfills. A further legislative development is the planned emissions trading scheme.
The U.K will launched its scheme in April 2002.The emissions trading scheme will be one of the worlds first country-wide schemes which will allow UK businesses and other organisations to get early expertise on emissions trading. A draft frame work document was published in May 2001 with the objective of assisting in the reduction of greenhouse gases. The government is looking to the Scheme to deliver a two million tonne per annum carbon reduction by the year 2010.
The scheme as conceived is voluntary and to participate in the scheme organisations will accept a specific reduction target that is determined by their use of energy. Three options arise for participants on the selling of their standard. They may meet their target by reducing their own emissions, reduce their emissions below their target and sell or bank the excess emissions "allowances" or in the case of failure to meet their targets, have to buy in emissions allowances from other participants. Those who opt to participate in the scheme can enter in the following ways.
Direct entrants or agreed entrants.
The lesser forms of involvement with the scheme are open to organisations undertaking emissions reduction projects with the ability to sell any resulting credits back to the scheme and the other envisages a trading only basis whereby a party who does not enter the scheme on the basis of an emissions target or reduction project can open an account with the registry to buy and sell allowances.
(Environmental Law fourth edition by David Hughes et al (2002) In: Atmospheric pollution, Legal Response) 555-559
(The Kyoto Protocol A guide and assessment by Michael Grubb (1999 )In: Summary and Conclusions )
The UK emissions trading scheme is the world's first economy-wide greenhouse gas emissions trading scheme. 31 organisations 'direct participants' in the scheme have voluntarily taken on a legally binding obligation to reduce their emissions against 1998-2000 levels, delivering nearly 4 million tonnes of additional carbon dioxide equivalent emission reductions in 2006.
The scheme is also open to the 6,000 companies with Climate Change ...
This is a preview of the whole essay
(Environmental Law fourth edition by David Hughes et al (2002) In: Atmospheric pollution, Legal Response) 555-559
(The Kyoto Protocol A guide and assessment by Michael Grubb (1999 )In: Summary and Conclusions )
The UK emissions trading scheme is the world's first economy-wide greenhouse gas emissions trading scheme. 31 organisations 'direct participants' in the scheme have voluntarily taken on a legally binding obligation to reduce their emissions against 1998-2000 levels, delivering nearly 4 million tonnes of additional carbon dioxide equivalent emission reductions in 2006.
The scheme is also open to the 6,000 companies with Climate Change Agreements (CCA's). These negotiated agreements between business and Government set energy-related targets. Companies meeting their targets will receive an 80% discount from the Climate Change Levy, a tax on the business use of energy. These companies can use the scheme either to buy allowances to meet their targets, or to sell any over-achievement of these targets. Anyone can open an account on the registry to buy and sell allowances
(http://www.defra.gov.uk/environment/climatechange/trading/ukets.htm)
Key provisions on EU's Emissions Trading Draft Directive
Many features of this draft are seriously at odds with the UK scheme. The three major contrasts with the UK scheme. Participation is mandatory, the scope is much narrower, and electricity generators are included.
Mandatory trading
The Commission wants an EU scheme in place in 2005 and participation would be mandatory for several sectors. They are combustion plant of 20 mega watts or more, oil refining, coke ovens, iron and steel, ore processing and sintering, cement, glass, ceramics, pulp and paper. The Commission estimates that 4000-5000 installations, accounting for around 40% EU's CO2emissions would be caught by this regime. It justifies the exclusion of other major energy users on the ground that they would greatly add to administrative complexity.
Gases
Trading would initially be restricted to CO2 which accounts for over 80% of EU's green house gas emissions.
Allocating allowances
The draft would not impose any specific method of allocating emission allowances to business but the Commission would be in a position to influence national approaches in two ways. One would be through its role as police man of the state aids rules. The second would be through a duty on member states to submit plans of their intended methods two months before they are implemented
Projects
The draft does not provide for sale s of project based emission credits into the EU scheme. The Commission says they w ill be later covered by a legal instrument.
IPPC
The trading proposal is without prejudice to the energy efficiency requirements of the IPPC (Integrated Pollution Prevention and Control) directive since these provide a common level of effort that must be undertaken by its regulated activities.
Permits and public participation
Installations required to enter the trading scheme would need to apply for greenhouse gas emission permits. The permitting requirements would not be very different from the process that direct participants would need to go through under the UK scheme in compiling lists of emission sources and committing to monitoring, verification and reporting of emissions. But there would be one important difference. The Commission envisages that permitting would be a public process with the public being given early and effective opportunities to participate. This would be backed by provisions on access to information, including the nature of possible decisions or where there is one, the draft decision on a permit application, as well as the main reports and advice issued to the competent authority in connection with the taking of the decision
Information
The proposal also goes further than the UK scheme in requiring information on participant's emission base lines and annual emissions to be publicly available.
Sanctions
Two types of sanctions are proposed for firms missing their annual emission targets. Their allowances for the following year would be reduced by the amount of the over shoot and they would also have to pay a minimum financial penalty of 200 euros per tonne of CO2 -10 ten times the expected average market price of allowances. This is a hefty penalty, but the commission says that US sulphur trading scheme has an excellent compliance record in part because of the heavy fines imposed on firms breaching their targets.
(Towards the brave new world of carbon trading Ends Report 319, Aug 2001)
Reasons for the introduction of Emissions Trading Directive
The European Union's proposed Emissions Trading scheme established under the emissions trading directive offers hope it can still meet its international obligations. Without it, there is little prospect the EU will be able to meet its greenhouse gas reduction targets. The scheme's approval would also set an important example to other countries and encourage similar initiatives. The scheme will cover more than 40% of European carbon dioxide emissions, creating assets worth an estimated £6.33 bn a year. The EU proposal would help to set a global standard and open the way for the larger system envisaged from 2008 under the Kyoto Protocol. According to Margot Wallstrom, the EU Environment Commissioner the proposed emissions trading scheme will be the most cost-effective way of meeting Kyoto targets.
(http://www.unep.org/Documents)
Summary of the Directive
Emissions trading is emerging as a key instrument in the drive to reduce greenhouse gas emissions. The rationale behind emission trading is to ensure that the emission reductions take place where the cost of the reduction is lowest thus lowering the overall costs of combating climate change.
Emissions trading is particularly suited to the emissions of greenhouse gases, the gases responsible for global warming, which have the same effect wherever they are emitted. This allows the Government to regulate the amount of emissions produced in aggregate by setting the overall cap for the scheme but gives companies the flexibility of determining how and where the emissions reductions will be achieved. By allowing participants the flexibility to trade allowances the overall emissions reductions are achieved in the most cost-effective way possible.
The EU Emissions Trading Directive 2003/87/EC were finally agreed on 22nd July 2003, following discussions between the European Commission, the European Parliament and the European Council. The Directive came into force on 25 October 2003 when it was published in the EU's Official Journal. The EU ETS (Emissions Trading Scheme) was established under the Emissions Trading Directive.
The EU ETS is one of the policies being introduced across Europe to tackle emissions of greenhouse gases and combat the serious threat of climate change. The emission limits are fixed under the Kyoto Protocol, the international agreement on tackling climate change. It covers six industrial gases: carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons and sulphur hexafluoride.
The scheme will commence on 1 January 2005. The first phase runs from 2005-2007 and the second phase will run from 2008-2012 to coincide with the first Kyoto Commitment Period. Further 5-year periods are expected subsequently.
The scheme will work on a "Cap and Trade" basis. EU Member State governments are required to set an emission cap for all installations covered by the scheme. Each installation will then be allocated allowances for the particular commitment period in question. The number of tradable allowances each installation will receive in any given period will be set down in a document called the National Allocation Plan. The plan shows the overall amount of allowances to be allocated for the EU ETS in that country for any given phase of the scheme, and how those allowances will be allocated to all installations participating in the EU ETS in that country.
Member States' National Allocation Plans must be submitted to the European Commission by 31st March 2004 at the latest.
Anyone who is not covered by the scheme will be able to open an account on the registry to be launched buy 1st January 2005) and buy and sell allowances.
Operational aspects of the scheme
Member states must ensure that by 31st March 2004, each installation covered by the scheme holds a licence to operate and emit greenhouse gases or the installation should have emissions trading permit Each permitted installation will receive an allocation of allowances. The number of allowances allocated to each installation will be based on the Member State's National Allocation Plan and will be confirmed no later than 30 September 2004
* Member states must allocate allowances to installations by 28 February each year. Installations will therefore receive their first allocation by 28 February, 2005.
* Member States must ensure that by 30 April each year at the latest, the operator of each installation surrenders a number of allowances equal to the total emissions from that installation during the preceding calendar year. These allowances are then retired. Installations will therefore have to surrender allowances for the first time by 30 April 2006 equal to their emissions during 2005.
* Installations will be required to have their annual emissions verified. A verification opinion verifying the amount of emissions for the previous calendar year must be submitted to the relevant regulator by the end of March each year. Allowances equal to these verified emissions will then be retired.
DEFRA has appointed four regulators who are responsible for permitting installations, registry administration and compliance
England and Wales - Environment Agency
Scotland - Scottish Environment Protection Agency
Northern Ireland - Department of Environment Northern Ireland
Offshore installations (in the whole of the UK) - Department of Trade and Industry
(http://www.defra.gov.uk/environment/climatechange/trading/eu/intro.htm)
National Allocation Plan (NAP)
Each participating country in the EU ETS must produce a National Allocation Plan (NAP). The plan shows the overall amount of allowances to be allocated for the EU ETS in that country for any given phase of the scheme, and how those allowances will be allocated to all installations participating in the EU ETS in that country
Allocation of allowances to installations
The following decisions have been taken on allocation of allowances to installations in Phase 1:
* UK has decided to use a two-stage approach to allocate allowances from the overall "cap".
* First, the total number of allowances have been allocated to the activities and sectors covered by the EU ETS. The activity and sector level caps have been calculated by using projected level of UK emissions from the installation in each activity and sector, taking into account policies and measures set out in the UK Climate Change Programme. For sectors with Climate Change Agreements, these caps will be consistent with the emissions reductions required under those agreements.
New entrant reserve
* The Government has decided that there should be a free quantity of allowances reserved for allocation to new entrants. Final rules are still to be determined.
* A proportion of the new entrant reserve will be ring-fenced for new Combined Heat and Power (CHP) plants. This will help ensure that the EU ETS will not act as a barrier to new build in this sector.
* Auctions will be held each year to use up any surplus allowances from the new entrant reserve. This auction will be open to all sectors in the scheme.
Plant closure
Plants that close will retain the allowances that have already been issued to them, up to the year of closure. Closed plants will not be entitled to any future allocations and those future unallocated allowances will be added to the new entrant reserve.
Temporary exclusion
The Government has decided that:
* Holders of Climate Change Agreements (CCAs) and participants of the UK emissions trading scheme will be given the option of applying to "opt-out" of the Scheme for the first phase.
* Any installation that applies to opt-out must have their application approved by the Commission and other member states, who will test that certain "equivalency" conditions are met.
* The Government is consulting on the options for temporary exclusion. One consideration is that in order to satisfy the emissions reductions equivalency test, it may be necessary to adjust the targets under both the UK ETS and the CCAs before installations covered by those measures meet the test and would thus be eligible for temporary exclusion. Operators will be required to agree to these changes before they are included in the UK application for temporary exclusion.
* The draft NAP includes provisional allocations for all installations covered by the EU ETS, including those which are currently covered by a direct participant agreement under the UK ETS or covered by a CCA. However, no allowances will be issued to operators of installations which are subject to a successful application for temporary exclusion.
Banking of allowances between Phase 1 (2005-7) & Phase 2 (2008-12)
The Government has decided not to allow surplus allowances held at the end of the Phase 1 to be carried over into Phase 2. Banking between subsequent phases is mandatory. The Government considers that (a) allowing unlimited banking would place unacceptable risks on the UK's Kyoto Protocol Assigned Amount and (b) any mechanism for limiting banking could not be guaranteed to deliver meaningful benefits
(http://www.defra.gov.uk/environment/climatechange/trading/eu/nap.htm)
Interlinking of Directive
The European Commission recently published its proposal for a "linking directive. This will amend the EU Emissions Trading Directive to allow for credits from emission reduction projects in other countries to be used to meet targets
Joint Implementation (JI) and the Clean Development Mechanism (CDM), together with international emissions trading, are innovative instruments provided for in the KyotoProtocol1. These "Kyoto flexible mechanisms" enable Parties to meet part of their Kyoto targets by taking advantage of opportunities to reduce greenhouse gas emissions in other countries at lower cost than at home. The rationale is that, from the global environmental point of view, the place where the emission reduction takes place is of secondary importance provided that real emission reductions are achieved. Guidelines for implementation of the Kyoto Protocol's mechanisms were agreed at the 7th Conference of the Parties to the UNFCCC as part of the so-called "Marrakech Accords".
This proposal of European Commission for a linking directive will boost JI and the CDM by providing additional incentives for business to engage in these mechanisms. It thereby promotes technology transfer to industrialised countries, for example Russia, and to developing countries while reducing the costs of meeting commitments under the EC emissions allowances trading scheme (EU ETS). At the same time, industrialised countries have a responsibility to reduce their emissions of greenhouse gases through domestic measures, given their historic levels of emissions and current higher per capita emissions than developing countries. This underpins the principle of supplementarity, that industrialized countries are to take significant action at home to meet their reduction commitments and use the Kyoto Protocol's mechanisms to meet only part of these commitments.
This principle is enshrined in the Marrakech Accords and the EU has always defended this principle. This proposal finds a balance between the goal of promoting JI and CDM on the one hand and the concern for their supplementarity to domestic emission reduction measures on the other, taking into account that this measure by itself cannot guarantee supplementarity as it does not affect the use that Member States may make of the Kyoto flexible mechanisms, i.e. JI, CDM and emissions trading between Parties.
JI and the CDM are project-based, and allow the generation of credits when projects achieve emission reductions that are additional to what would have occurred in the absence of the project
JI projects are to be undertaken in developed countries or countries with economies' in transition (Annex I Parties to the UNFCCC). They involve at least two countries that have accepted an emission target, i.e. their emissions are limited. They are the host country and the investor country. Emission reductions from JI projects are called emission reduction units (ERU) and issued by the country in which the project is implemented or the host country.
The implementation of a JI project results in a transfer of ERUs from one country to the other, but the total emissions permitted in the countries remains the same (a zero sum operation). The host country benefits from minimising the part of its assigned amount to transfer, while the investor country benefits from maximising the number of assigned amount units it acquires. It is expected that both countries will strike a fair balance. JI is expected to be a good vehicle for the transfer of advanced environmentally sound technologies, in particular in Russia where there is a great potential for JI investments in the energy sector.
(http://europa.eu.int/eur-lex/en/com/pdf/2003/com2003_0403en01.pdf)
The Practical Side
Member states were required to submit NAP's to the commission by 31 March setting on how they will allocate CO2 emission rates for the first phase of trading scheme which starts in January 2005.Significant number are expected to miss the deadline by many months. The UK will meet the deadline by deferring key details to a latest stage. The Government has come under strong pressure from industry to set less stringent caps particularly in the second phase of the scheme.
The Confederation of British Industry, in its response to the draft NAP argued that no other member state has yet demonstrated how its NAP will meet Kyoto Protocol targets while UK is the only member state pledging to go beyond its Kyoto commitment. The member states are also under pressure from their industries and employee's organisation wrote to environment ministers expressing major concern about the EU's unilateral action in light of the continuing doubts over the fate of Kyoto protocol. The coalition of EU trade bodies representing energy intensive industries such as cement paper, ceramics, and glass, lime steel and non ferrous metals warned that they will be doubly penalised because of the increase in electricity prices arising from the trading scheme.
They claim that this may ultimately lead to deindustrialisation in Europe. The big energy users claim that they face added annual costs of 2 billion pound because many power generators stand to make exorbitant wind fall profits with no environmental or economic justification. They call for an intermediary body to be set up to provide a clear and transparent separation between the CO2 market and the power market.
(DEFRA lowers sites on allocation as EU struggles on emissions trading-ENDS report Feb 2004.)
The UK's draft allocation plan issued in January 2004 sets provisional caps on CO2 emissions for nearly 1000 installations. One of the industry's main concerns has been the potential impact on electricity prices. Some analysts say this has been overplayed. The other concern is over the government's decision to use the allocation process to go beyond its Kyoto Protocol target.
DEFRA insists that in the schemes first phase from 2005-7,manufacturing industry will be given all the allowances it needs under business as usual .For the moment only the power generators are expected to deliver additional savings .All the other sectors are likely to face a squeeze in the second phase from 2008-12.
The Governments assurances failed to calm industry nerves. The plan offered no historic or baseline data to compare with proposed sectoral allocations.DEFRA stressed that all figures are likely to change in the light of the Department of Trade and Industry's ongoing work on revised energy projections, improved data from operators and comments from industry sectors.
Table from: ENDS Report 349: Bulletin - Feb 2004
Offshore oil and gas operators claim that the proposed allocation would cause irreparable damage to the sector. The draft plan envisages a particularly hefty cut emissions from the offshore industry of 37.6% from average levels in 1998_2002.
The industry accepts that its emissions will fall steeply after 2010 - but argues that they will increase in the short term because of the need to increase pressure in maturing oil and gas fields. UKOOA also complains that its sector allocation includes some onshore installations, overlooks some installations and double counts others
Cement: The British Cement Association (BCA) complained that the decision to go beyond the Kyoto target represents the biggest single piece of 'gold plating' from the Government." It claims that its proposed allocation is "too low" and will damage the industry's competitiveness. With many sectors, the proposed cap is based on existing climate change agreement (CCA) targets. This can create problems for the cement industry and may jeopardise its chances of securing a temporary opt-out from the trading scheme.
Over half of the cement industry's emissions arise from the calcining process and are not covered by the existing CCA. The BCA claims that DEFRA has failed to take account of these unavoidable emissions. The sector is relying heavily on the use of alternative fuels to meet its CCA target. However, the European Commission insists that tyres and solvent-based wastes are not classed as carbon-neutral under the trading scheme. It is unclear whether DEFRA made allowance for this in deriving the proposed sector cap. Similar issues arise in the aluminium industry.
Pulp and paper: The Confederation of Paper Industries expressed concern whether mills have got enough allowances. They also voiced concerns over the plan to use a renegotiated CCA target as the basis for allocation.
Iron and steel: The iron and steel industry has been granted the most room for expansion. UK Steel is of the opinion that the use of 1998-2002 emissions as the basis for comparison is misleading because it coincided with a deep trough in the industry's production. Two steel mills formerly owned by Allied Steel and Wire have come out of liquidation, and Corus a giant in the industry is now more optimistic about its prospects for increased output.
Refining industry: The UK Petroleum Industry Association has complained that two refineries have been allocated significant increases in emissions, out of line with the general decrease expected from the sector.
New entrant reserve: DEFRA reserves 5.7% of allowances to distribute free to new entrants. Most sectors are expected to surrender 2% of allowances to the reserve, in line with official forecasts of manufacturing growth. No new entrants are expected in the refining sector.
Electricity generators' allocation has been reduced by 8.2% .This is more than needed for expected new entry in the sector. The Government argues that the generators face limited international competition, and should carry the risk of unexpectedly high levels of new entry across all sectors.
Progress on permits: The Environment Agency had received about 500 applications by the end of January, the informal deadline designed to allow permits to be issued before the final allocation plan is submitted at the end of March. The figure had risen to about 615 by mid-February, still way short of the expected 1,000 installations in England and Wales.
The Agency expects operators to submit a monitoring and reporting plan, in line with guidance from the European Commission. Operators emitting more than 500,000tCO2 will be expected to submit plans by the end of June, with smaller operators being given until the end of September.
(ENDS Report 349: Bulletin - Feb 2004 )
Emissions Trading in US
Just over a decade ago, the United States Government set up a scheme to reduce acid rain by allowing companies to trade credits for reducing sulphur dioxide emissions. This has led to sulphur dioxide levels falling much faster than anyone had predicted, and at significantly lower cost.
Observations of Emissions Trading in US
* Emission trading depends on liquidity to be effective. Interventions which affect liquidity will have negative effects on market.
* Extra emission reductions represent a concrete economic asset and only occur in the absence of any government action to restrict the saving or transfer of allowances.
* Enforcement of legislation is the backbone of any successful emissions trading market. This can be achieved by creating economic incentives for industry to reduce its emissions of a pollutant.
* When enforcement tools are limited it is essential to create a limited but effective form of buyer liability" to create incentives in favour of compliance". Market success occurs when there are clear consistent rules that emphasises transparency, accountability, accuracy of emissions monitoring and market performance.
* To promote compliance, there should be automatic deduction of excess emissions from an operator's subsequent allowance as done in the US's acid rain SO2 trading programme.
* There must be provisions and sufficient penalties to preserve the environmental and economic integrity of any trading scheme. Parties and firms must not be permitted to avoid their obligations to reduce emissions.
(Environment Information Bulletin, Jan2002)
Problems
Critics say Emissions Trading Scheme will simply allow highly-polluting members to shuffle off their responsibilities.
Emissions trading works by allowing countries to buy and sell their agreed allowances of greenhouse gas emissions. So highly-polluting countries can buy unused "credits" from those which are allowed to emit more than they actually do. The polluters gain by not having to reduce their own emissions. The frugal countries have a handy source of revenue. The EU emits about 24% of industrialised countries' emissions of the green house gases. At present the protocol imposes limits only on industrialized countries' emissions, though there are plans to extend it.
Critics insist that emissions trading is flawed because the protocol's limits are unrealistic. For example countries in Eastern Europe were given allowances which they cannot conceivably use. The contraction of their economies means they cannot afford anything like the quantities of fossil fuel they are allowed to burn by Kyoto. So emissions trading, the critics say, is all smoke and mirrors: buying and selling rights to purely notional emissions.
The European Environment Agency (EEA) says latest projections provided by member states show existing policies will achieve a total cut of only 4.7% by 2010.
The EU aims to cut emissions of the greenhouse gases to an average of 8% below their 1990 levels by between 2008 and 2012. Each of the 15 member states has its own limits within this overall target. And most of that decrease would be won by Germany, Sweden and the UK cutting their emissions by more than they need to, though there is no guarantee they will. If the member states decide not to "over-comply", the EU's overall emissions decrease by 2010 would be a mere 0.6%.According to EEA the EU and most of its members are planning additional ways to limit emissions, though their effects are impossible to predict.
(http://www.unep.org/Documents)
With 25 countries, multiple industrial sectors, and the mixture of a cap-and-trade structure with project-level offsets, the EU ETS has many new issues to address. The timeframe for starting up the program is short, particularly considering the number of installations that will participate in the program and the lack of experience in most European countries with emissions trading. With the exception of emissions trading experiments in the United Kingdom and Denmark (for CO2) and Slovakia and the Netherlands (for NOx), most Member States are still coming up to speed on the fundamentals of emissions trading.
Thus, there may be some bumps in the road as the EU goes through its "warm-up" phase starting in 2005. These may include delays by some Member States in meeting various deadlines, controversy over different Member State Allocation schemes, significant inconsistencies in compliance and enforcement provisions across Member States, and volatile allowance markets.
EU officials have stated openly that they expect significant "learning by doing" in the initial years of the program and the EU Directive explicitly sets up a process that could result in recommendations for changes and fine tuning. In June 2006, the Commission will submit a report assessing key elements of the program and making recommendations for change. To the extent there is a rocky start to the program, this assessment of the first phase will undoubtedly be critical for turning the pilot phase into an effective program.
Three major areas of concern are equity, enforcement, and efficiency.
The biggest challenge facing the EU ETS in the first two areas is simply the heterogeneous, multijurisdictional nature of the European Union. Coupled with the particularly tight timetable, it is unclear what will happen as countries with weaker environmental institutions, both to allocate allowances and to enforce compliance, are brought into the program. The deadlines may need to be delayed for some or all countries.
The main challenge regarding efficiency is to avoid the kinds of shortages and price spikes .There is little in the science of climate change to suggest that short-term targets are worth an exorbitant expense when the real challenge is the long-term trend.
Besides the implementation challenges of the EU ETS, Members States face the daunting political and economic challenges of meeting their Kyoto burden-sharing targets. EU officials continue to express a strong commitment to the Kyoto process, and meeting the Kyoto targets has been a driving force behind the EU ETS. Several aspects of the structure and process inherent in the Kyoto agreement will make it more difficult to implement the EU ETS. For example, the CDM Executive Board process could be a bottleneck for the project-level reductions that will help reduce costs in the EU system. The current directive also precludes linking the EU ETS to domestic trading programs of countries such as the U.S. and Australia who are not parties to the Kyoto Protocol.
In addition, concerns about meeting the Kyoto commitment could constrain banking from the first to the second compliance phase. This could also undermine longer-term mitigation plans because firms may have little incentive to implement strategies that create extra emissions reductions beyond their allocated levels. Although firms may trade excess allowances to other firms for use within the first compliance period, the inability to bank these "early reductions" could be a significant disincentive if prices are low in the first period and high in the second.
Moreover, some firms may fear that reducing emissions beyond the levels of their allocations could lead to lower baselines (and allocations) in the second phase. Although procedures to provide "baseline protection" to prevent penalization for these extra reductions are possible, their credibility and practicality are unclear. Finally, the lack of a bank of allowances in the first phase forgoes a potentially strong political incentive for European companies to support the continuation of the program into the second phase namely, the holding of a large and valuable portfolio of banked allowances.
A more fundamental difficulty raised by the Kyoto process is uncertainty about the form and level of international commitment beyond 2012. This will constrain EU Member States in planning for the next phase of the EU ETS. It also makes it difficult for European industry to take a long-term approach to investing in climate friendly technologies and to planning a least cost, longer-term strategy for greenhouse gas abatement.
Although banking will be available between the second period and subsequent periods, uncertainty over the structure of a future international regime could make Member States and their industries reluctant to make the investment decisions that would enable them to take advantage of a banking provision.
The ultimate challenge raised by Kyoto may be maintaining the political will in Europe to meet the Kyoto target. Concerns about the cost of meeting the target and the potential competitiveness disadvantage for Europe could make EU Member States reluctant to impose the necessary measures on industry. A recent study from the European Environmental Agency shows that the transport sector is a source of emissions growth, suggesting that one of the most difficult decisions to be faced by the EU in the next few years will be how to address these emissions
The EU Emissions Trading Directive: Opportunities and Potential Pitfalls Joseph Kruger and William A. Pizer April 2004 • Discussion Paper 04-24
(http://www.rff.org/rff/Documents/RFF-DP-04-24.pdf)
Conclusion
Without a doubt, the rapid launch of the first large-scale greenhouse gas trading program is an impressive political achievement. Many of the design elements of the program are sound, and the program clearly builds upon many of the lessons learned from earlier experience with emissions trading programs. The European Union Emissions Trading Scheme represents a great opportunity, on the one hand, to set up the architecture and get moving toward a solution to the problem of global climate change. On the other hand, there are many potential pitfalls that could limit its effectiveness and, at worst, hurt future efforts to set up similar programs.
References
. Environmental Law fourth edition by David Hughes et al (2002) In: Atmospheric pollution, Legal Response) 555-559, Atmospheric pollution, The overall problem pp. 543
2. The Kyoto Protocol A guide and assessment by Michael Grubb (1999) In Summary and conclusions, Chapter 1 analytical foundations.
3. The EU Emissions Trading Directive: Opportunities and Potential Pitfalls Joseph Kruger and William A. Pizer April 2004 • Discussion Paper 04-24.
4. DEFRA lowers sites on allocation as EU struggles on emissions trading-ENDS report Feb 2004.
5. Environment Information Bulletin, Jan2002.
6. ENDS Report 349: Bulletin - Feb 2004.
7. http://www.defra.gov.uk/environment/climatechange/trading/ukets.ht.
8. http://www.unep.org/Documents.
9. http://www.defra.gov.uk/environment/climatechange/trading/eu/intro.htm.
0. http://www.defra.gov.uk/environment/climatechange/trading/eu/nap.htm.
1. http://europa.eu.int/eur-lex/en/com/pdf/2003/com2003_0403en01.pdf.
2. http://www.unep.org/Documents.
3. http://www.rff.org/rff/Documents/RFF-DP-04-24.pdf.
4.LEX 4570 Module handbook By Stephen Homewood.
