FEATURE - Europe's Pollution Trade Scheme Faces Tough Times
Date: 28-Nov-05
Country: UK
Author: Stuart Penson
Europe's ground-breaking emissions trading scheme -- launched in January to curb industry's carbon dioxide output and bring the bloc into line with Kyoto Protocol targets to cut heat-trapping gases -- has survived a tough start to emerge as a new commodity market potentially worth billions of euros a year.
But challenges lie ahead: industry and energy consumers grumble about the costs of complying with the scheme, and the need to impose tougher CO2 limits in the future could strain the system even further.
"The scheme is an astounding achievement in policy terms," said Paul Ekins, head of the environment group at the independent Policy Studies Institute in London.
"But what happens in the future is still very unclear. Businesses have already said that this is making life very difficult for them," he said.
The future role of emissions trading will be high on the agenda at United Nations climate change talks, which start next week in Montreal, Canada.
The willingness of the United States and China, the world's top polluters, to embrace trading after 2012, when the first phase of Kyoto ends, could be crucial.
The United States, which has shunned the UN-backed Protocol, is backing the use of clean technology to tackle climate change, rather than market approaches like emissions trading.
Pockets of voluntary trading, not backed by enforced CO2 caps, have emerged in the United States and Japan but participation is limited.
SHORT-TERM FIX
Critics say Europe's scheme fails to give industry the long-term price signals needed to plan big investments in emissions-reducing technology.
"CO2 trading is very short-term, it has no effect on investment in technology or research and development," said Dieter Helm, Fellow in Economics at the University of Oxford.
European companies also say the cost of complying with the CO2 caps puts them at a disadvantage compared to foreign rivals who do not have to meet targets.
The caps should become even tougher in phase two of the scheme (2008-12), when the market must start delivering against Kyoto targets.
Under Kyoto, Europe is committed to cutting greenhouse gas emissions by eight percent below 1990 levels by 2008-12. Some European countries are a long way off target.
The European Commission took a hardline on CO2 caps for phase one, throwing back proposals which it deemed too lenient.
But its authority was shaken by a court ruling this month that Brussels must re-consider British government proposals to soften CO2 targets imposed on its industry.
ENERGY BILLS SOAR
Consumers say the scheme has already forced up bills as utilities companies have passed on the cost of complying.
Energy bills, already at record levels on the back of soaring oil prices, could go higher still if utilities are hit with stricter CO2 limits, analysts say.
"This is a real political issue. It is a potential threat to the integrity of the scheme," said Ekins.
In Montreal, delegates from around 190 countries are supposed to agree to start talks on taking the Kyoto Protocol forward beyond 2012. Some say the negotiations may last 5 years.
Criticism of Europe's emissions market has not stopped a sharp rise in trading volume since January. Dealers say allowances covering about a million tonnes often get traded in a day.
The market could be worth about 4 billion euros ($4.7 billion) this year alone, according to research by Amsterdam-based consultants Prospex.
Power companies -- the worst polluter covered by the scheme -- are among the biggest traders as they switch in and out of positions in line with shifts in fuel costs. Investment banks have also entered the fray, boosting liquidity further.
"Volumes are rising," said Andrei Marcu, president and chief executive of the International Emissions Trading Association.
"The market approach to tackling climate change is certainly working -- it is changin
