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CLIMATE CHANGE-EUROPE: There's Money in Emissions

Analysis by David Cronin

BRUSSELS, May 16 2008 (IPS) - 'Cap and trade' has become one of the stock phrases that one is almost guaranteed to hear at any European conference on climate change these days.

The underlying concept is simple enough: a ceiling is placed on the total amount of carbon dioxide (CO2), the main gas blamed by scientists for global warming, that a country may emit. This is then divided between the most polluting companies operating in that country. Companies that release more CO2 than they are allowed to must buy extra permits; those that emit less than their allocation may sell their unused permits.

Yet like many ideas that work fine on paper, difficulties can arise when the system is put into practice, as the European Union's main institutions have found out.

In 2005, the EU's Emissions Trade Scheme (ETS) came into operation as part of a battery of measures designed to prove the bloc's bona fides in tackling the most pressing ecological challenge of modern times.

So far, the scheme has not exactly worked a treat. Few countries have issued less licenses than industry wanted, thereby losing an opportunity to drive up the price of carbon and coax firms into investing in cleaner technology. And because most permits were awarded free of charge, power companies were able to reap windfall profits by selling unused permits.

Four major utilities in Germany are estimated to have raked in 8 billion euros (12.5 billion dollars) between them within a year of the ETS launch.

To address the flaws that have been detected in the scheme, the European Commission published proposals for a revamped ETS earlier this year. These recommended that all emission permits for the power sector should be sold by auction from 2013.

Auctioning will also apply to some other industrial sectors that guzzle large quantities of energy. But special treatment can be given to companies within Europe that would be put at a disadvantage because other parts of the world lack similar measures.

That the scheme has attracted a huge level of interest from industrialists was proven May 15 when the European Parliament held a hearing on the subject. Members of the Parliament (MEPs) are currently deliberating over what stance they should take on the plans for a revised ETS and are being heavily lobbied by corporate interests to ensure that it does not harm their profitability.

Matthias Duwe, director of the campaign group Climate Action Network Europe, was one of the few participants in the hearing who criticised the proposals from an environmental, rather than a commercial, perspective.

He argued that the revamped system would still have serious shortcomings.

The overall aim of the Commission's blueprint is to ensure that companies covered by it reduce their emissions by 21 percent by 2020, compared to 2005 levels. This target, according to Duwe, is "no way near what is necessary" to prevent climate change from having increasingly dire consequences for humanity.

Another weakness pinpointed by environmentalists is that rather than requiring that all reductions take place within Europe, the ETS provides for a form of 'off-setting'. EU governments will be able to give companies on their territories credits for emission- reduction projects that take place in the wider world, such as projects that promote the use of low-polluting technologies in poor countries.

Duwe believes that full auctioning of allowances should take place from 2013, rather than 2020 as the Commission has suggested. And he is perturbed by how exceptions are to be made for companies deemed at risk of relocating to other parts of the world that do not have similar environmental regulations to the EU. Such firms would continue to be given allowances for nothing.

José Manuel Barroso, the European Commission president, has indicated that he would be prepared to continue giving free allowances to firms in such sectors as chemicals and steel production if no agreement can be reached on setting up an international emissions trading system. Barroso's comments followed concerns expressed by European companies that they would not be able to compete with the U.S. and rising economic players like India and China if they have to pay for licences to pollute.

"There is no guarantee those sectors that are completely exempt will actually make a proper contribution to reducing emissions," Duwe told IPS. "You might as well take them out of the system entirely."

Nick Campbell from the employers lobby BusinessEurope said it is vital that industrial sectors "exposed to international competition receive 100 percent free allocation" under the ETS "until we have an international agreement" on creating such a system in the wider world.

"We want to send a clear signal that the EU will protect its business unless others join us in the fight against climate change," he said. "Do not take the chance of accelerating the demise of manufacturing industry in the EU."

Peter Carl, head of the Commission's environment department, said it would be "patently absurd" to incur the risk that European companies would relocate to foreign countries which do not have emissions trading.

It is important, he suggested, that Europe develops a workable ETS, in order to demonstrate to other parts of the world how using this market-based approach to environmental management can bear fruit. "The new ETS will or will not be a success for the European economy and will or will not show other developed countries how to go about it, depending on whether we can resolve the problems of Europe's energy-intensive industries," he said.