Friday 6. December 2019
#138 - May 2011

 

The Emissions Trading Scheme

 

Marketing the EU greenhouse emissions needs adjustment as to be an effective instrument to mitigate climate change.

 

The latest data from the European Commission of verified and compliance data on emissions from the European Union Emissions Trading Scheme (EU ETS) for the year 2010 bring us the opportunity to analyze this important policy instrument to mitigate climate change, based on the "cap and trade" principle.

This scheme sets a "cap", a limit that is established as the total amount of certain greenhouse gases that may be emitted by factories, power plants and other emitting installations. Companies receive emissions allowances, limited by the "cap", allowances than may be "traded", that may be sold or bought by one from another as needed. At the end of each year, the Scheme evaluates the volume of emissions effectively produced compared with the allowances held. If emissions are excessive, companies will be fined, but on the contrary, they may keep their spare allowances to cover future needs, they may simply sell in order to make some profit.

The total number of allowances is planned to be reduced. By 2020 they should be 21% lower than in 2005, which mean that actual emissions should be reduced also. But some circumstances are obscuring the efficacy of this scheme, and questions to be addressed in future are emerging. First is the volume of the European cap. It was determined in 2005 to control emissions from factories and power stations accounting for 2 billion tonnes of carbon dioxide annually, representing roughly half of Europe's emissions. But the economic crisis that is shaking Europe has caused the reduction of industrial activity and consequently of greenhouse gas emissions: in 2009 alone, emissions were reduced by 11,6% because of the recession.

 

This situation has meant that "savings" for future emissions continue to grow - at least 170 millions tones from 2009. This is the equivalent to the annual carbon emissions of 39,5 million cars. The surplus of carbon allowances has been estimated to have a value of 3,4 billion Euros. And the surplus could continue growing, limiting the future prospect of limiting emissions. Companies need to recognise sharper reductions in the "cap" to minimize the effects of these savings (linked to the recession) and permit the effectiveness of the system.

 

One unexpected difficulty in the Emissions Trading Scheme is its vulnerability. The system is run by its member states (the 27 EU Member States plus Iceland, Liechtenstein and Norway) and last year turnover reached 90 billion Euros. But the system had to suspend trading activities for some two weeks after being attacked by cyber-thieves last January. The European Commission took this decision after emission allowances were stolen from an account in the Czech Republic. More than 2 million allowances valued at around 34 million Euros were stolen from carbon registries in Austria, the Czech Republic and Greece. Austria, which traced some of the stolen permits in Sweden and Liechtenstein, expects to recover 725 thousand of them. The stolen certificates come from the registry's reserve account and are not associated with any particular company.

 

The Czech Republic, which lost around 1,2 million permits to cyber-thefts (mainly from power companies), decided to reinstate the allowances stolen to these companies although they claim to have found traces of these permits in Germany and Estonia. But it is extremely difficult for the authorities to find the authors, who have covered their tracks very well. Although the total amount of the permits stolen in January account for only 0,01 percent of the EU annual cap, the attacks have damaged the reputation of the system, increasing criticism of the capacity to supervise its working. The Commission has demanded that national registries improve security prior to discussing the proposal of creating a single registry for the whole of Europe, starting in 2013.

 

Not everybody agrees on using a trade scheme to control greenhouse emissions, and if the market wishes to be responsible some adjustments will have to be made: to reduce the over-allocation to certain sectors because of the lack of realistic calculations; to adapt the cap to the actual emissions produced in order to avoid the ‘banking’ of permits that distort the price and which are now a threat to achieving tighter targets in future;  and of course, improving security so that the market may be trusted.

 

José Ignacio García SJ

 

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