November 2003

Emissions Trading Scheme for GHGs

Emissions Trading, Yet Another Hurdle In The Great Carbon Steeplechase

The much talked about directive to establish an Emissions Trading Scheme (ETS) for Greenhouse Gases (GHG) has been formally adopted by the European Parliament, which means it is now EU law. Member States are required to adopt the Directive and to transpose it into national law by the end of 2003.

As a mandatory scheme for certain industries, this initiative represents yet another level of regulation for companies in the UK to add to the already daunting controls exercised by programmes such as Integrated Pollution Prevention and Control and Climate Change Agreements. In the endless race to maintain competitiveness and profitability, this scheme could be the fence at which many companies fall, but what does the EU ETS and Greenhouse Gas Emissions permit really involve?

The EU ETS' main characteristics are as follows:

What is the scheme?

The ETS is an installation-based, cap-and-trade system covering CO₂ emissions.
Although it is formally independent of the Kyoto Protocol scheme, it has been designed as a compliance tool for the EU to reach the target set under the Kyoto Protocol, an overall reduction of GHG emissions levels by 8% below their 1990 level.
A robust monitoring, targeting and verification process will be required for all participating installations.

When does it start?

The ETS will be implemented during two different periods: 2005-2007 and 2008-2012.
The second period of the ETS was purposely designed to coincide with the first Commitment Period of the Kyoto Protocol.
The deadline for those installations covered by the initial scheme, to apply for GHG permits is the end of January 2004. Those installations not submitting applications by this time may be required to purchase the allowances needed.

Who will be covered by the scheme?

The ETS will cover all EU member states (25 countries).
The ETS will initially affect around 12,000 installations of the five following sectors:
- Power and heat generation (for installations with a rated thermal input exceeding 20 MW),
- Crude oil refineries and coke ovens ,
- Production and processing of ferrous metals including metal ore, pig iron and steel,
- Production of cement clinker, glass, tiles, bricks and porcelain ,
- Production of pulp and paper (for installations with production capacity exceeding 20 tonnes per day).
The ETS will initially only cover CO₂ emissions from these installations.
Member States may apply to EU Commission for individual installations but not sectors to be temporarily excluded until 31 December 2007 from the scheme. (In the UK, those installations covered by a Climate Change Levy Agreement can apply to be excluded)

How will it work?

Member States will have to allocate allowances to installations across sectors covered by the ETS Directive in order to reach the national targets set up under the Kyoto Protocol.
The deadline for submitting National Allocation Plans (NAP) is March 31, 2004. By the end of the year, the European Commission will issue guidelines for allocation including the benchmarks that Member States may employ in developing their National Allocation Plans.
It is rumored that DEFRA will release an interim NAP in mid December 2003, this would be seen as an effort to influence the methodology used across Europe for the NAP.
For the three-year period beginning 1 January 2005, Member States shall allocate at least 95% of the allowances free of charge. For the five-year period beginning 1 January 2008, Member States shall allocate at least 90% of the allowances free of charge.
The proportion of the total quantity of allowances will be allocated to installations by February 28 of each year.
A number of allowances equal to the total emissions from these installations during the preceding calendar year will have to be surrendered by 30 April each year at the latest, therefore enabling borrowing of allowances from future years.
Excess allowances will be bankable within each period and Member States may allow installations to bank allowances across periods.

What will it cost?

The costs of this scheme can be measured in many ways, with GHG permit application costing in the region of £530, and similar annual subsistence costs it may appear relatively cheap. However with huge emissions abatement costs for the industries involved, and a potential penalty for missing targets in the region of 40 euros per tonne, no one should be under any illusions about the consequences of not taking this issue seriously. Trading allowances is likely to be the most cost effective way of ensuring compliance with this legislation, this of course requires that you can monitor, control and forecast effectively. Powerful products like Climate Change Advantage can give you that specific knowledge needed to navigate the emerging emissions markets.

The effect of the EU ETS is likely to see massive transfer of allowances between those member states with Kyoto targets and those without, although as test trades in the EU ETS show, prices around the 13 Euros mark, it is currently much more expensive than the existing UK scheme which has been pretty static at around £2.20 per tonne for many months.

Ultimately it will be the customers of these industries that will truly pay the price, take power generation as an example. With much of the electricity supply throughout Europe being from coal-fired plants, analysts are predicting price hikes of between 15 - 40pc in 2005.

Speculation on the costs of the EU ETS will increase as NAP's are revealed and then assessed by the EU.One thing however is certain, as with most things in life, there will be winners and losers - But which one are you?

For more information on how to ensure you are a winner, contact Darren McNulty on 024 76 279007.