The EU Emissions Trading Scheme
Under the Kyoto Protocol, the European Union agreed to reduce its greenhouse gas emissions by 8% by 2012 compared to 1990. This has set the stage for the development of Europe-wide policies to cut climate pollution and the EU Emissions Trading Scheme (EU ETS) is a pioneer in this field.
The EU Emissions Trading Scheme sets targets and timetables for emission reductions in the power sector and energy-intensive industry covering approximately 46% of the EU’s carbon dioxide (CO2) emissions.
How it works
The main components of the European Emissions Trading Scheme are:
• Mandatory CO2 emissions caps on all large large amount sources (of about 12,000), including the power sector and all the energy/carbon-intensive industries such as chemicals, steel, aluminum, cement, paper and pulp.
• Allowances corresponding to the total level of CO2 that can be permitted are allocated by National Governments through a National Allocation Plan (NAP). Each NAP is based on a country’s Kyoto commitment To ensure compliance, each NAP requires approval by the European Commission.
• Companies included in the scheme are given pollution allowances. If they emit less CO2 than their agreed CO2 level they can sell their permits in the EU ETS market. Companies that need additional permits to continue their polluting activities purchase CO2 permits from this market. This gives a clear financial signal to companies to manage their pollution levels.
• A fine of 100€ per tonne of CO2 is levied on a company that exceeds its CO2 emission level.
• A pilot phase (Phase 1) is being conducted between 2005 and 2007. The EU Emissions Trading Scheme will be fully operational in the period 2008-2012 which is called Phase 2.
• Possible trading with other regions of the world after 2012. The European Commission is currently investigating the possibility of linking the EU ETS with other international trading schemes to lay the foundation for a global carbon market. This is different from the Clean Development Mechanism which provides permits that can be sold into the EU ETS.
Unfortunately, European governments have so far succumbed to pressure from the highest polluting industries and imposed very weak limits on carbon pollution. As a result, the scheme is far from meeting the highest potential of economic efficiency and environmental effectiveness.
More ambition needed
According to WWF, to be effective, the European carbon market should impose tougher pollution limits. Only with supply scarcity of allowances, this market will deliver results.
Also, most allowances are now allocated for free to companies (“grandfathering”) reducing incentives to cut climate pollution. WWF believes that key requirements for a functional scheme is the pan-European harmonization of allocation to avoid unfair competition between companies from different countries. This should be coupled with full auctioning of pollution rights with the revenues to be re-invested in climate protection and clean energy development.
WWF considers it essential that the EU maintains its efforts to control greenhouse gas emissions and its climate policy’s international credibility through a stronger carbon market.
The EU Emissions Trading Scheme sets targets and timetables for emission reductions in the power sector and energy-intensive industry covering approximately 46% of the EU’s carbon dioxide (CO2) emissions.
How it works
The main components of the European Emissions Trading Scheme are:
• Mandatory CO2 emissions caps on all large large amount sources (of about 12,000), including the power sector and all the energy/carbon-intensive industries such as chemicals, steel, aluminum, cement, paper and pulp.
• Allowances corresponding to the total level of CO2 that can be permitted are allocated by National Governments through a National Allocation Plan (NAP). Each NAP is based on a country’s Kyoto commitment To ensure compliance, each NAP requires approval by the European Commission.
• Companies included in the scheme are given pollution allowances. If they emit less CO2 than their agreed CO2 level they can sell their permits in the EU ETS market. Companies that need additional permits to continue their polluting activities purchase CO2 permits from this market. This gives a clear financial signal to companies to manage their pollution levels.
• A fine of 100€ per tonne of CO2 is levied on a company that exceeds its CO2 emission level.
• A pilot phase (Phase 1) is being conducted between 2005 and 2007. The EU Emissions Trading Scheme will be fully operational in the period 2008-2012 which is called Phase 2.
• Possible trading with other regions of the world after 2012. The European Commission is currently investigating the possibility of linking the EU ETS with other international trading schemes to lay the foundation for a global carbon market. This is different from the Clean Development Mechanism which provides permits that can be sold into the EU ETS.
Unfortunately, European governments have so far succumbed to pressure from the highest polluting industries and imposed very weak limits on carbon pollution. As a result, the scheme is far from meeting the highest potential of economic efficiency and environmental effectiveness.
More ambition needed
According to WWF, to be effective, the European carbon market should impose tougher pollution limits. Only with supply scarcity of allowances, this market will deliver results.
Also, most allowances are now allocated for free to companies (“grandfathering”) reducing incentives to cut climate pollution. WWF believes that key requirements for a functional scheme is the pan-European harmonization of allocation to avoid unfair competition between companies from different countries. This should be coupled with full auctioning of pollution rights with the revenues to be re-invested in climate protection and clean energy development.
WWF considers it essential that the EU maintains its efforts to control greenhouse gas emissions and its climate policy’s international credibility through a stronger carbon market.
