Emissions trading risks collapse, markets warn

By Saffina Rana

Date: 28/10/04

The EU's emissions trading scheme that begins in January 2005 will collapse unless the European Commission "gets tough" with recalcitrant member states, equities analysts are warning.

They say that Italy, the Czech Republic and Poland have not set tight enough carbon dioxide limits for the scheme to function properly.

The Commission is currently considering national plans from EU member states which set out how they intend to reduce emissions of greenhouse gases, in order to meet their commitments under the Kyoto Protocol on global warming. One element of these plans is a series of allocations of emissions, by those industrial sectors that are the largest producers of greenhouse gases. Trading in these allocations will form the basis of an emissions trading market from the beginning of 2005.

Around 12,000 installations across Europe will be covered by the scheme. If one industry reduces emissions more than forecast it can sell the pollution 'saved' in the form of an emissions allowance to others who are having problems meeting their target. It has yet to be decided what sort of financial product will form the basis of this market.

On 20 October the Commission approved seven more national plans, bringing the total to 16 (see table). The approval of plans from Cyprus, the Czech Republic, Hungary, Italy, Lithuania, Malta, Poland and Spain is still ongoing and Greece is yet to submit its national allocation plan.

However, some of these draft plans have already been seen by analysts, who last week expressed concerns about their content. According to Chris Rowland, managing director of equities research utilities and capital markets at Dresdner Kleinwort Wasserstein, there are significant problems with the plans submitted by Italy, the Czech Republic and Poland. He said that the allocations requested for 2005-07 were too high.

"The Commission needs to be tough now. If the Commission doesn't tie back these plans, the scheme will crumble," he told a conference on emissions trading organized by Environmental Finance. Similar issues had arisen with the plans from the Slovak Republic, Estonia and Latvia. "I hope the Commission is tough with Poland, Italy and the Czech Republic as it has been with the Slovak Republic."

The Commission concedes it is having problems with countries asking for "unreasonably big allocations" that "substantially" exceed actual yearly emissions data collected by the UN and the Commission, and the projections of expected emissions calculated from them. This was the case for all eight of the nations whose plans were considered last week, according to Peter Vis, acting head of unit of the industrial emissions unit of the Commission's environment department

and head of the task force that evaluates national allocation plans.

"Initially there were problems with all eight," Vis explained, "but six amicably reduced their allocations when the Commission asked."

These were Belgium, Estonia, Latvia, Luxembourg, the Slovak Republic and Portugal. The eastern European states conceded significantly more than the others: the Slovak Republic was asked to cut back its allocation by 14.9 million tonnes, Estonia by 8.1 million tonnes and Latvia by 5.6 million tonnes.

"We've asked the three new member states to reduce their allocations more than the others," said Vis. "We will allow them to grow as much as is foreseeable - but it must not be over those projections."

France was also asked to reduce its allowances by

4.5 million tonnes and make some other adjustments to its plan, a position that was agreed after

the Commission's initial announcement. Finland's plan requires further adjustment before it can be

accepted, although the emissions allowance is not under discussion.

Status of national allocation plans for CO2 emission allowances in the EU

• Accepted unconditionally

Belgium

Denmark

Estonia

Ireland

Latvia

Luxembourg

Netherlands

Portugal

Slovak Republic

Slovenia

Sweden

• Conditionally approved

Austria

Finland

France

Germany

UK

• Not yet assessed

Cyprus

The Czech Republic

Greece

Hungary

Italy

Lithuania

Malta

Poland

Spain

• Saffina Rana is a freelance journalist based in Brussels

According to the author equities analysts were warning that the EU's emissions trading scheme which was set to begin in January 2005 would collapse unless the European Commission took a tougher stance on recalcitrant Member States.