EU emissions trading scrutinized

The cases of Germany, United Kingdom, and the Netherlands

Will the second National Allocation Plans (NAPs) of the European Emission Trading Scheme (ETS) reach their objectives? That is, ensure that member states fulfil their Kyoto commitments, and stimulate the development of low carbon intensive technologies to reach a large carbon emissions reduction on the longer term?

Greenpeace International used the cases of Germany, United Kingdom, and Netherlands as examples for their investigation of this matter. Greenpeace commissioned the Fraunhofer Institute, the Centre for Energy and Environmental Markets of the University of New South Wales, and Jos Cozijnsen, Consulting Attorney to conduct the investigation. The resulting paper was put online in June 2006.

Be more ambitious

The paper concludes that the UK is well on track to meet its share of the Kyoto target, mainly due to its significant reductions in the early nineties through liberalisation and the resulting switch to natural gas. Germany is more or less on track as well, primarily due to major reductions realised in the former Eastern Germany in the nineties. However some extra measures will be necessary if they are to bridge the final gap. In the Netherlands, emission levels are higher than in 1990. Kyoto objectives can only be met by paying for credits from JI and CDM projects. An estimated 50% of the emission reductions will have to be reached by these flexible mechanisms.

In regard to medium and long term targets, all three countries are far from reaching the proposed 30% reduction by 2020 and 80% reduction by 2050. The paper concludes that ambition levels need to be set significantly higher if they are to reach these targets.

Optimising the system

The paper also observed that the countries investigated are not using the currently available system in an optimal manner in order to reach both short and longer term targets. More specifically, the total emission abatement cost is not minimised: that is, the marginal cost of the emission abatement measures is not equal in all sectors.

A disproportionate percentage of the budget is dedicated to the industries covered by the ETS, putting a larger burden on the transport, commercial, household, and other sectors not covered by the ETS. Moreover, NAP rules are still being used more for managing the distribution of allowances than for actually stimulating a change in existing energy structures. This puts a disproportionate burden on parties that do not benefit from the distribution mechanism, and even causes transfers of wealth and windfall profits.

Four main recommendations can be derived from the paper’s conclusions:

• Emission allowances should be auctioned-off as much as possible
• In case of free allocation of emission allowances, product specific benchmarks should be used, not differentiating according to technologies or fuels
• Granting free emission allowances to new projects should be avoided; those projects should instead acquire the necessary allowances at market prices
• Governments should set credible long term emission targets, signalling in this way a future scarcity of emission allowances that should then stimulate clean technology projects.