Green firms cash in on wasteful counterparts

Europe’s emissions trading scheme turned two years old this month, but not everyone has been celebrating. Although the idea of using market mechanisms to force industry to cut emissions was widely accepted as a pragmatic, cost-effective way of tackling climate change, the scheme has fallen short of expectations.

Created to allow industrial users to trade allocations of carbon emissions, the scheme allows ‘green’ companies to cash in on their virtue by selling surplus credits to their wasteful counterparts.

"It started in a very erratic way," says Fulvio Conti, chief executive of Italian energy giant Enel, reflecting on the chaotic first two years of the scheme. Conti says that uniform deployment across all member states and industries is essential for the future success of the scheme.

"We should be able to look through national allocation plans in a less distorted way. We should not allow that, country by country, they should negotiate here in Brussels to create distortions," he says. "We need better organisation of the market for emissions trading."

Over-generous allocations in some member states have diluted the value of the carbon being traded, limiting the rewards for green companies. The European Commission is, however, getting stricter about harmonising regulations and tightening the scheme, a development not to everyone’s liking.

Referring to the decision of Environment Commissioner Stavros Dimas to cut ten member states’ allocations in November last year, Henning Rentz, head of policy at German electricity company RWE, expresses his exasperation: "In the case of Germany, there was a severe cut of 29 million tonnes. The government is now in negotiations. [The Germans] do not accept this cut."

Germany may yet take the Commission to court. Other countries facing an average 7% reduction in carbon allocation were Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, Sweden and the UK.

Another source of worry for industries is the shortness of the trading periods covered in EU national allocation plans. The energy sector, which works on long-term investment strategies, is particularly affected. The next such period will run from 2008-12.

"We need more planning security for our many investments," says Rentz. We are planning to invest €10 billion in power plants across Europe. To realise these investments we will need a stable framework in terms of allocations of CO2 allowances for plants. If we don’t know what the framework is, we don’t know how we’ll work over the next 20-30 years."

But he is otherwise confident that the scheme has the potential to be a success. "The first two years have shown that emissions trading works. We’ve seen a rapidly developing market. We hope the European Commission and governments of member states find rules and regulations allowing for a stable framework," he says.

Europe’s emissions trading scheme turned two years old this month, but not everyone has been celebrating. Although the idea of using market mechanisms to force industry to cut emissions was widely accepted as a pragmatic, cost-effective way of tackling climate change, the scheme has fallen short of expectations.