Emissions Trading
Emissions Trading in the European Union
Current situation
Emissions trading in the European Union began in 2005, affecting two thirds of all facilities in electricity generation and the four industry sectors with largest CO2 emissions (steel, construction materials, ceramics and paper). Every production plant in these industry sectors was allocated a certain number of certificates, each of which permit the emission of one tonne of CO2. If the number of certificates is insufficient, companies can buy the right to emit additional CO2 from companies who will not use all of their certificates. Unless the company buys more certificates, it will be penalised.
This kind of trading of certificates will lead to higher economic efficiency. It may be true that those companies whose costs for saving CO2 are higher than the costs of buying certificates will buy them instead of conserving energy resources. However, as long as the costs of reducing CO2 emissions are lower than the price of the certificates and profit can be earned by selling certificates, all companies have the incentive to cut down their CO2 emissions. Thus, savings in CO2 emissions will be carried out in those areas of the economy where they are the most cost-effective.
Problems
- Too many certificates
In the first stage of EU emissions trading too many permits were given out. As a result, the price of a certificate dropped to just a few cents. In addition, Great Britain and Germany only committed themselves to minor reductions in CO2 emissions. The number of certificates will decrease over the coming years, but only slightly.
- Too many exemptions
The marginal decrease in emission permits will be further weakened by the exemptions granted to the Eastern European countries. This is not only environmentally harmful, but also hinders economic modernisation. Another exemption takes the form that it is possible to obtain emission credits by funding environmental projects (CDM projects). This could mean that more than 50 percent of all emissions reduction takes place outside Europe, even though the standards of these projects are very questionable.
- Too few sectors are included
Except in the industrial sectors mentioned above, CO2 emissions have as yet not been limited. From 2012 onwards, air traffic will be included in the emissions trading but the CO2 emissions of other forms of transport and industry sectors remain unrestricted.
- Only carbon dioxide is traded
In addition to carbon dioxide there are other gases that are harmful to the climate, especially methane and nitrous oxide. These are not considered under the current emissions trading system.
- Errors in auction arrangements
A portion of the certificates will always be auctioned. However, the revenues generated are only designated for their eventual purpose by a broad declaration of intent. Moreover, only a limited number of the certificates are currently allocated in this way, and only power plant operators will only have to have to purchase all their emissions rights at auction from 2013. However, even in this matter exemptions are granted to Eastern European power plants, as well as for Cyprus and Malta.
- Incorrect allocation of certificates
The allocation of certificates between different industry sectors and facilities is the responsibility of EU Member states. On this issue, Germany is making the mistake of allocating more emissions rights to coal-burning power plants than to the more environmentally friendly gas-fired power plants. This creates an incentive to build new coal-burning power plants.
Our proposals
GBG is pleased that the European Union has assumed a pioneering role in introducing emissions trading. The EU must now live up to this position by strengthening the regulations on emissions trading. An opportunity to do so was lost with the Climate and Energy Package 2008.
First of all, the upper limit for emissions has to be decreased more swiftly. As yet, emissions trading has shown little evidence of success because the certificates were given away too generously and, until 2013, at no cost. A strict cap on CO2 emissions must be implemented swiftly.
Moreover, methane and nitrous oxide should also be integrated into the emissions trading program and certificates should be allocated more carefully within the industry sectors, so that no environmentally harmful incentives are created, for instance for building new coal power plants.
The inclusion of shipping traffic, road traffic (particularly in the transport sector), as well as agriculture in emissions trading must be considered. One possibility for implementation in the road traffic sector is to allocate emissions rights to fuel distributors, i.e. to oil companies. The corporations would then have to hand over certificates for the amount of fuel imported into the EU, according to the type of fuel and the amount of CO2 it produces. The resulting costs would be passed on to consumers.
Exemptions should be avoided wherever possible. Furthermore, all proceeds from the auctions must be used for environmental protection. Auctioning should be used more frequently in general, instead of giving certificates away or selling them cheaply.
