Emission Traders Cash In, But Don't Cut Pollution

by Sanjay Suri

(IPS) LONDON -- The EU emissions trading scheme is off to a start -- in name, not in the factories producing the emissions.

European Union governments have in effect sabotaged the market they have created by setting quotas for emissions by their industry that are so generous that it is nowhere near feeling the squeeze that would make trading possible.

The European emissions market was claimed as the trendsetter here even before the Kyoto protocol came into effect on Feb. 16 after Russia ratified the agreement last November. The EU emissions scheme began officially Jan. 1 this year.

The emissions trading scheme (ETS) is one of three market mechanisms designed to give effect to the Kyoto protocol, whose declared aim is for a set of industrialized countries to cut emissions by 5.2 percent relative to 1990 levels. That means a reduction principally of carbon dioxide and methane among the greenhouse gases that are believed to cause global warming, leading to climate change.

Under the ETS in the EU, each country gets a certain quota of greenhouse gases it is allowed to emit, and within the country industries get their own quota. The EU scheme covers at present about 12,000 industrial units thought to generate about 46 percent of EU greenhouse gases. The quota significantly excludes transport, the fastest growing pollutant, and household energy use.

The principle behind the trading is that industry is forced to cap emissions either by introducing technology to cut emissions or by 'trading' its quota. If a power plant, for example, is producing 10 percent more emissions than the government has determined it can, then it can buy carbon tons of emissions from a cleaner company that is emitting less than it has been allowed to.

If everyone can emit so much that few will need to buy leftover carbon tons from cleaner companies, the market will never get going. This is just what is happening in the EU.

Much of the present trading appears to be tentative and speculative. On Feb. 24 alone about 800,000 allowances were traded in the EU around nine euro ($11.90) a carbon ton. This works like any other market; these units can be sold for a profit should the market price rise. But the generous allowances mean that the market is not being driven by industry needs, or by emission pressures.

'If there are no tight caps, it becomes just a game of trading, like Monopoly,' Mahi Siteridou from Greenpeace in Brussels told IPS. 'The market will not do what it is designed to do.'

The trading scheme was intended to give companies the choice between implementing clean technology or buying credits earned by cleaner others. 'But the lax quotas mean that it is difficult for companies to face that question,' Siteridou said.

Early speculative trading has placed the price of a carbon ton of emission around ten dollars. Many environmentalists believe it would need to be at least double that before industry can wake up to emission costs and bring 'life' to the market.

Quotas have had a clear domino effect across the EU. Almost every country has set high quotas in order to reduce costs to national industry and so keep it more competitive in the international market. Britain set a quota that was initially guided by consideration of emissions. It then submitted a higher quota seeing the generosity of other governments to their industry.

The European Commission, the executive arm of the EU, was given a set of 11 criteria to determine the national allocation plans. The principle criterion was to determine whether these plans are in line with Kyoto targets. The present allocation process has clearly failed.

The allocation plan is due to be reviewed later this year. 'The whole scheme will have to be strengthened, and obligations under the scheme examined,' Siteridou said.

The present ETS is a pilot scheme up to 2007. EU governments will be obliged to meet Kyoto targets over 2008-2012, the first phase over which the group of industrialized countries have agreed to implement Kyoto targets.

But the ETS up to 2007 could 'encourage a psychological shift,' Siteridou said. 'Industry is recognizing that there has to be a limit on emissions, and it is an important signal both internally and externally that governments and industry must be committed to carbon dioxide reduction.'

The other two market mechanisms under the Kyoto protocol include Joint Implementation (JI) under which the signatories to the Kyoto protocol listed in Annex-1 of the United Nations Framework Convention on Climate Change (UNFCC) can earn credits from projects in other Annex-1 countries. These would mean in effect East Europe where implementation costs are likely to be lower.

The third is the Clean Development Mechanism (CDM) under which Annex-1 countries can earn credits from projects implemented in developing countries.