European emissions trading on track

Plans from Italy and Poland are still to be approved, and Greece has not yet submitted its plan, Vis told delegates at a London-based conference on emissions trading.

Under the Kyoto Protocol, Europe has a target of reducing carbon emissions by 8% from 1990 levels by 2012, and the National Allocation Plans give each EU member country its individual emissions target.

Individual allowances will then be distributed across over 12,000 heavily polluting installations such as electricity generators, oil refineries, metal cement and glass processors and pulp and paper mills throughout Europe.

Under the EU Emissions Trading directive, which comes in to force on January 1 2005, companies have an obligation to comply with their emissions limits or face a fine. If a company knows it will exceed its emission allowance it can assess whether it’s more cost effective to reduce emissions, either by switching fuel sources or installing technology, or to purchase further emission allowances that can be sold by companies who are polluting below their allocation limit.

“No regulator will tell a company how to comply,” Vis said. “It might choose to reduce emissions, or it might buy credits. It’s up to the individual company.”

For the ETS to work there needs to be fewer allowances than are needed under a business as usual scenario, or there won’t be an environmental impact and the market won’t work,” Vis said. “There must be scarcity and there must be a bit of a squeeze.”

Because of this, there will be no guarantee that there will be a supply of emissions allowances when you need them, warned James Emanuel, director of environmental markets brokerage Evolution Markets. He advised delegates: “Don’t wait till you need them. Buy the allowances before.”

An entire year’s worth of allowances could be bought at a fixed price today using an over-the-counter contract, he said.

The ETS will run in phases, the first three being 2005-2007, 2008-2012, and 2013-2018, and at the end of each phase targets will be reviewed.

Unlike the Kyoto Protocol, which ends in 2012, the ETS directive has no end date. There is no opting out of the scheme, but from 2008 onwards, EU member states can decide if they wish to extend the scheme to other sectors, or target other greenhouse gases, Vis said.

Talks are underway in Brussels to discuss targets post 2012 and a decision is likely to be made in March.

Much research has already been conducted into whether the transport sector, in particular airlines, could be included in the scheme, said Alexander de Roo, former member of the European Parliament and rapporteur of the Linking Directive which looks at linking carbon reduction projects in developing countries into the EU emission credits scheme.

“The EU scheme covers 50% of CO2 emissions, but transport accounts for 30%,” he said.

The UK government is expected to make climate change a key priority during its presidency of the G8 next year, and may try to push through inclusion of air transport in the ETS scheme in a similar manner to that suggested in the US McCain Lieberman Bill, an amendment of the Climate Stewardship Act.

As there is little elasticity in airline demand for fuel, inclusion of the airlines industry in the ETS would likely push the price of carbon up, de Roo said.

Vis believes the ETS will be an instrument that “supplies real-time information on pollution as changes will be reflected in the price,” he said.

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