Industry hazy over emissions trading project

Date: 26/11/1998

By Chris Johnstone

EUROPEAN industry is taking hesitant steps to get to grips with the concept of trading in polluting emissions, despite the failure of this month's Buenos Aires climate-change negotiations to answer the many questions about how the system would actually work.

Oil companies Shell and BP have already moved to create internal systems for trading emissions between different parts of their international empires in an attempt to work out how far they could pay for, or profit from, licences to pollute.

But it is the power companies, especially electricity producers, which will be in the front line when it comes to testing whether the system can be made to work in practice. They are relatively large producers of the biggest greenhouse gas, carbon dioxide, and their emissions can be easily monitored.

The European Commission insists that the practicability of such trading has still to be proved, and remains distinctly lukewarm about an idea which has mostly been pushed by the US. Sources also suggest that sections of industry which are now proclaiming trading as the best and only solution to the problem of climate change might find the concept of 'voluntary agreements' to reduce pollution preferable once the alternative of trading emissions has been fully investigated.

Commission officials are much more heartened by the progress made in Buenos Aires on the other main pollution-cutting instrument - the clean development mechanism, which allows industrialising countries to help developing nations reduce emissions and count progress made by the latter towards their own targets.

The former were initially sceptical about being offered something for nothing and feared cuts in western aid payments. But those doubts were dispelled at Buenos Aires and they agreed to sign up to the idea. "That was the real breakthrough," said one official.

In spite of its scepticism over the idea, the Commission will next year suggest a framework for setting up pilot emissions-trading projects. It expects such schemes to spring up at both EU and national level and across industry sectors.

But officials insist that guidelines are needed to ensure that the learning process does not begin to disrupt the Union's single market. "If we are creating what really amounts to a financial asset, we should make sure it does not distort the market," said one.

Estimates of how much it would cost to buy a permit to emit a tonne of carbon dioxide, the most common greenhouse gas, vary enormously. Estimates given at hearings in the US senate ranged from 13.2 to 24.4 ecu per tonne. However, others have suggested that the price could be as high as 110 ecu per tonne - a level which should bring many marginal renewable energies such as solar energy into the frame as rivals to conventional fossil fuels.

"The renewables business will not be recognisable in a few years time," said one electricity executive, referring to the boost which should be given to the sector by new climate-change rules.

The International Petroleum Exchange (IPE), the London-based organisation which would like to place itself at the centre of world trade in greenhouse gas emissions, warns that Europe has so far been slow off the mark in gaining experience in the new pollutions business. "There is not that much time to get to grips with this," warned Nicholas Aldridge, product development officer with the exchange.

Like the international oil companies, the IPE is also investigating the possibility of pilot emission trading projects. But it bemoans the fact that the UK, which is commonly acknowledged as one of the most advanced EU countries (alongside the Netherlands, Sweden and Finland) in examining the practical questions surrounding this sort of trading, only envisages a system being up and running within ten years.

The clean development mechanism could, however, begin as early as the year 2000.

According to Aldridge, Canada is already encouraging its companies to tackle emissions trading with the promise that steps taken now to combat the problem will count in their favour when a fully-fledged system starts.

European firms complain they are still being kept guessing on this point. Many claim that few EU governments have even begun to ask practical questions about trading, let alone furnish the answers.

The IPE points out that it was the only exchange touting for future emissions business at Buenos Aires, and says the lack of rivals is a result of the relatively long lead time before any scheme will be up and running.

"This is a very long-term project," added Aldridge.

So far, most of the experience of emissions trading is in the US, which recently established a system of tradable permits for emissions of sulphur covering around 300 plants, with each plant installing monitoring equipment to measure outflows.

Sulphur is an easy pollutant to measure and reduce, but industry analysts have delivered mixed verdicts on how well the scheme worked. Most agree that it produced faster cuts in emissions than had been expected, but at a cost.

Before the system was set up and in its early stages, the price of permits was high because of expectations that they would be in short supply. This led to some companies paying over the odds for their licences.

BP also points to concerns about the fairness of the initial allocation of emissions permits, one of the major reservations about any future European trading system.

Questions still to be answered include whether future permits will be related to existing levels of pollution and, if so, whether this could have the perverse effect of encouraging business to boost pollution or hold off on clean-up measures which could endanger their emission allocation. The issue of how newcomer firms which were not given an initial share of permits would be treated in future also needs to be addressed.

"Allocation of emissions permits is a major question and no one has come up yet with a clear solution. Sulphur was a very easy substance to monitor. Here, we are in a completely new ball game," said a Commission source.

Clearly, there is a danger of emissions permits acting as market barriers - a bit like slots for airlines at busy European airports - with those which have them able to do business and those without excluded.

BP's pilot model of trading, which has been operating since September, reflects how it would like any future system to operate. Business is done world-wide, with the possibility of units which undershoot their pollution quota being able to sell such credit or unused licences to their counterparts.

"For us a tonne of carbon dioxide is a tonne of carbon dioxide and should be traded without any barriers," said Charlotte Grezo, BP's climate change manager.

However, the international rules for trade in emissions permits and credits for not polluting are unlikely to be so simple.

So far, there is no certainty that, for example, a tonne of CO2 saved by BP in Poland could be transferred to BP in the UK. "Perhaps some proportion of the saving would have to stay in Poland," said Electricité de France's (EDF) Pierre Bourdier, the company's vice president for environmental affairs.

EDF and other European power companies are anxious for some answers on these issues. They are also worried that the Kyoto climate change rules, which state that emissions from energy sources belong to the place where power is produced and not where it is used, could discourage energy exports.

Major feature on the concept of trading in polluting emissions and other issues following the Buenos Aires climate-change conference, November 1998.