EU Emissions Trading
In order to keep the economic costs as low as possible in the framework of the Kyoto Protocol’s contractual requirements, the EU member states have agreed to create a domestic market, in which businesses with emissions credits - entitling them for emitting CO2 - can trade. Emissions trading should grant climate protection efforts an additional growth spurt to pattern them more efficiently and to optimise their costs. Behind this is the notion to give our atmosphere monetary value.
The EU Emissions Trading Scheme (EU ETS) covers approximately 12,000 energy-intensive industrial installations inside the European Economic Area (EU-27 as well as Iceland, Liechtenstein and Norway, EEA). The annual market volume amounts to over 2 billion emissions credits. These credits cover over 40% of the carbon dioxide emissions in the EEA. The industries, which the system covers include: energy production, iron and steel, glass, cement, ceramic and brick. European air traffic will be added to these beginning in 2012.
Until 2012, emissions credits will be, for the most part, freely allotted. The allotments are made by the respective member states and comply with the so-called “National Allocation Plan (NAP)”. These NAPs firmly establish a cap for the admissible emissions per installation. The Plans are developed by member states and must be approved by the commission in order to avoid unfair competition.
According to calculations from the World Bank, the trade volume in the EU Emissions Trading from 2006 (approximately $25 BN) to 2007 (over $51 BN) more than doubled. In 2008, the trade volume reached $92 BN.
EU Emissions Trading explained by an example:
At the beginning of the year, a company whose investment falls under the ETS receives emissions credits, distributed in a limited amount, from the appropriate authority of the country, in which the installation is operated. Should the actual emissions exceed the available credits of the company, it can, for example, lower its emissions by installing new technologies or procuring new credits. The latter always results from reduction measures that have been implemented elsewhere (through other companies). Since greenhouse gases such as CO2 work over a wide area, it doesn’t matter where they are reduced; it’s only important that they are reduced. The whole system thus enables an ecological-working trade with the highest possible economic efficiency.
Should a company be unable to submitt the necessary amount of emission credits, a sanction of €100.00/tonne is imposed. Moreover, the missing credits must be subsequently filed.
The illustration schematically shows by means of an example the process of emissions trading between two companies, which must together reduce 10% of their CO2 emissions. For Company A, the investment costs for emissions reduction is clearly lower then those for Company B, whereby it is economically more attractive to reduce 20% of the emissions (=2000 t) than it is to buy additional emissions credits. Company A sells its unused emissions credits to Company B, which did not implement any emissions reductions. Together, they were able to reach the climate protection goal of 10%.