Extending carbon trade

In December 2003, EU governments agreed on making big industries buy and sell the right to emit carbon dioxide (CO2). On 1 January 2005 the plan became a reality when companies working in the heavy industry sectors began to trade CO2 emission permits.

The first trading period finishes at the end of this year and will be followed by a slightly longer phase in 2008-12.

Within months of starting, the EU’s emission trading scheme (ETS) was under review. The European Commission last November published its first ideas for improvements to the scheme, based on early observations. A follow-up proposal is expected in September.

The review paper suggested several options for an amended ETS, which could take effect from 2012.

These include enlarging the scheme to cover more gases, such as nitrogen oxides and methane. At least one more sector will also trade CO2 permits from 2011, if a proposal to extend and create a separate trading scheme for aviation emissions wins approval from national governments.

Companies already trading under the scheme include those involved in fossil fuel generation, oil refining, and the production of cement, iron and steel, glass and ceramics, paper and pulp.

Under today’s ETS, governments base their proposals for national CO2 permit allocation plans (NAPs) on historical emissions-data from companies. In the run-up to the first round of trading, industries won the right for the CO2 allocations for many installations to be based on a historical reference period - a system known as grandfathering.

In theory, emission trading means the cleanest companies can benefit financially by selling excess CO2 permits to their dirty counterparts. But some industry groups say grandfathering means this will not work in the long run.

"The fact that rights are based on historical data means relatively dirty producers receive larger allocations than those that are clean and efficient," says Peter Botschek, a director at Cefic, the European chemicals industry group.

He says that this forces clean companies to buy permission to expand from the heavy polluters, which will find themselves with an excess of permits as they adopt modern, cleaner, more energy-efficient technologies.

The chemicals industry is not directly covered by emissions trading, with the exception of a few oil ‘cracking’ refineries and installations which produce their own power. It is, however, directly affected by the ETS impact on power prices. And it could also be drawn into ETS, depending on the outcome of the Commission’s review.

Cefic says that the old grandfathering allocation strategy needs to be replaced by a best-practice "benchmarking" scheme. This would mean basing the number of trading permits on what each industry could be expected to achieve with today’s technology.

Each company would be given slightly more than enough to cover best available technologies, leaving clean companies with excess permits to sell to the dirtiest.

Cefic suggests that governments should also keep a certain number of permits in reserve, allowing them to reward companies which do well and want to grow.

Botschek admits that the scheme would be more difficult to administer than the first ETS, but claims sectors including ceramics, steel and glass have also welcomed the idea. The Commission has said it will consider a benchmarking system for post-2012 trading.

Teresa Presas, president of Cepi, the European paper industry group, says that the first phase of ETS has not rewarded best practices.

"Emission trading could be a very good market-based mechanism but it needs improvements," she says.

These improvements would mean changes, but not just to the allocation system.

"It is a problem that only EU companies are affected by emission trading," she says, "our competitors are not subject to the same restrictions."

Small paper mills - making up half of the 13,000 mills in Europe - are also struggling with the administrative burden of emission trading, she says.

But the biggest problem to be addressed is the working of the whole energy market in Europe, according to Cepi.

"It’s very difficult to have a market mechanism in a market that is not functioning like a liberalised market," says Preseas. "We all accept the principles and objectives of the ETS, it’s the rules that have to be changed."

In December 2003, EU governments agreed on making big industries buy and sell the right to emit carbon dioxide (CO2). On 1 January 2005 the plan became a reality when companies working in the heavy industry sectors began to trade CO2 emission permits.