102
The Lisbon scorecard VII
The ETS, a so-called ‘cap and trade’ scheme, covers energyintensive industries such as oil refineries, energy utilities and steel producers. In total, these industries represent around half of the EU’s emissions of greenhouse gases, while households and transport generate the bulk of the remainder. The ETS sets a limit, or ‘cap’, for each member-state’s emissions from the industries covered. Emissions permits are then allocated to individual companies. Companies are free to buy or sell the ‘right’ to emit carbon dioxide, with those emitting less than their limit able to sell emissions certificates on the open market.83 Those emitting 83 more than their limit must buy Companies can also invest in ‘emission-abatement’ projects in other certificates, which should motivate countries and use the resulting emissions them to emit less. credits to help meet their Kyoto targets.
Unfortunately, the first phase of the ETS – from 2005 to 2007 – has suffered from very low and unstable carbon prices, and as a result has not provided any real incentives for the development of new 84 clean technologies. 84 This is the Simon Tilford, ‘Time to get tough on carbon emissions’, CER Bulletin, result of a number of key weaknesses December 2006/January 2007. in the system: ★ Member-states are responsible for setting their own emissions caps or ‘national allocation plans’ (NAPs). The Commission’s authority is limited to assessing whether these caps are consistent with the country’s targets under Kyoto, and to preventing governments from deliberately allocating excess allowances (which would constitute illegal state aid). Under phase one of the ETS, nearly all member-states allocated more emissions permits than the industries included in the scheme actually needed. Companies from EU countries that set tough caps have been placed at a competitive disadvantage, compared to those in more generous countries. ★ Companies also allocated permits according to the current needs of companies, with sometimes perverse effects. For example, a coal-fired power station that generates a similar
Sustainable development
103
amount of energy to a gas-fired one but emits twice the volume of greenhouse gases, receives double the allocation of permits. This undermines the incentive for energy producers to invest in more environmentally friendly plants. ★ Aviation and road transport, the two fastest growing sources of greenhouse gas emissions, are not included in the ETS. Although greenhouse gas emissions from most sectors fell between 1990 and 2004, those from aviation rose by 80 per cent and from road transport by a quarter. The Commission has no plans to bring vehicle emissions into the ETS, preferring to rely on energy efficiency standards. However, it has announced plans to include the aviation sector in the ETS by 2011. ★ Uncertainty over what will replace the current Kyoto protocol, which expires in 2012, has undermined investors’ confidence in the long-term significance of the carbon market. This has deterred companies from investing in clean technologies. However, the Commission’s recent proposal of a unilateral 20 per cent cut by 2020 (rising to 30 per cent if the US and others come on board) may have allayed 85 European Commission, ‘An energy policy for Europe’, January 2007. some of these concerns.85 The Commission calculates that EU emissions of greenhouse gases in phase two of the ETS – which runs from 2008 to 2012 – will need to be 7 per cent below their 2005 levels if the EU is to meet its obligations under Kyoto. Collectively, the second phase NAPs that have so far been submitted to the Commission would barely reduce emissions, compared to the first phase of the ETS. This has prompted the Commission, to its credit, to reject many of the plans. The Commission needs to stick to its guns. Unless the caps are tightened, the EU will have no chance of meeting its Kyoto commitments. According to the European Environment Agency (EEA), only Sweden and the UK are likely to meet their targets by