Greenhouse gas emissions trading and climatic change programme

1) OBJECTIVE

To launch a public debate with a view to implementing a possible Community policy on emissions trading before the Kyoto Protocol is applied.

2) COMMUNITY MEASURE

Green Paper on greenhouse gas emissions trading within the European Union.

Communication from the Commission to the Council and the European Parliament on EU policies and measures to reduce greenhouse gas emissions: Towards a European Climate Change Programme (ECCP).

3) CONTENTS

Under the Kyoto Protocol, adopted in 1997, the European Community undertook to cut its greenhouse gas emissions by 8%, between 2008 and 2012, in relation to 1990 levels. The Community now wants to see rapid implementation of its own emissions trading scheme in order to gain experience before the international trading scheme is introduced in 2008.

Emissions trading is a scheme whereby companies are allocated allowances for their greenhouse gas emissions according to the overall environmental ambitions of their government. It is a very practical system in that individual companies are able to emit more than their allowance on condition that they can find another which has emitted less than allowed and is willing to sell its "spare" allowances. For one thing, the scheme allows a degree of flexibility without disadvantage to the environment. In addition, it will encourage the development of new technologies. Companies motivated by the profit they make in selling their emission allowances will develop and use clean technologies.

The concept of tradable allowances is not new. It has already been put into practice in the context of environment policy (Montreal Protocol), the common agricultural policy (dairy quotas) and the fisheries policy (catch quotas).

The framework Convention on Climate Change and the Kyoto Protocol are agreements between Parties, all of which, except for the European Community, are sovereign States. However, the Kyoto Protocol provides for "burden sharing", i.e. a redistribution of allowances between the EU Member States. Once the Protocol is ratified, the Member States will have to notify the Secretariat of the Convention of these redistributed targets, which must add up to an overall reduction of 8% for the Community as a whole.

Companies taking part in the emissions trading scheme will be regulated either by their national authorities or by the Commission, in line with the principle of subsidiarity.

Community-wide emissions trading could reduce the cost of implementing the Community's Kyoto commitments by nearly a fifth. Moreover, a Community emissions trading scheme would lead to one single price for allowances traded by companies, which would be compatible with the smooth functioning of the internal market. The degree of Community intervention depends on the nature of the system. The Community could opt for a supervising role (low-level intervention) or the role of a regulating authority (harmonisation - firm intervention). Whatever it chooses, it will be necessary to:

• ensure equal treatment for companies of comparable size under the emissions trading scheme;
• minimise the possibility of competition being distorted;
• ensure synergy with existing legislation;
• ensure the scheme is applied effectively;
• ensure compatibility with the scheme established by the Kyoto Protocol.

A whole series of policy options relate to the scope of an emissions trading scheme: initial allocation of emission allowances; synergy with other policies and measures; compliance and enforcement.

As regards the scope of the scheme, polluting sectors can be identified using environmental directives already in place (large combustion plants). The key to limiting risks of distortion between "trading" sources and "non-trading" sources is the application of strict policies and measures to non-trading sources, with the possibility for these firms to voluntarily opt-in to the trading system.

Allocating emission allowances is a very difficult business. It must first be determined which sectors and companies will be involved. After 2008 the Member States will have to agree amongst themselves on how to distribute the burden while complying with the emission reduction required by the Kyoto Protocol.

Regarding synergy with other policies, it has to be clarified how technical regulation, taxation and environmental agreements are respectively substitutes for or complementary to the new emissions trading instrument.

The Commission has decided to opt for a gradual "learning by doing" approach. This will provide the players with practical experience and leave them better prepared for the launch of the international emissions trading scheme. The Community wants to start by applying it to large sources of carbon dioxide (CO2), where monitoring of the system is more feasible. Armed with this experience, the Community can move on to monitor small mobile emitters (cars), which raise complex technical and administrative issues.

The Commission believes a Community approach is needed so as not to distort competition on the internal market. Different national schemes could raise serious difficulties regarding competition (State aids) and new companies entering the market. These problems are likely to worsen as the Community expands.

In its Communication on EU policies and measures to reduce greenhouse gas emissions, the Commission emphasises that implementation of the Kyoto Protocol needs to go hand in hand with a whole series of climate change initiatives in the fields of air, transport and energy, the aim being also to make such programmes mutually compatible.

The Commission is also drawing up practical proposals for the medium- and long-term operation of the European Climate Change Programme (ECCP). The proposals cover international cooperation through capacity-building and technology transfer, research/observation, demonstration of efficient and clean technologies and training and education.