Special Edition: Climate change

Support grows for globalising EU's carbon trading scheme

By Ahmed ElAmin

- Last updated on GMT

Related tags: Greenhouse gas, Kyoto protocol

With most world leaders now in consensus that something must be
done to tackle climate change, the EU's carbon trading scheme
is starting to look more attractive as the prototype of a
global system.

If such a scheme were to become global then the food and drink industry could face a hefty bill, either through paying for the right to emit more CO2, or spending on the environmental measures needed to reduce their outputs. With the US reluctantly agreeing last week at the G8 meeting to negotiate a post-Kyoto climate change agreement under the auspices of the UN, a significant shift toward such a system becomes more likely. "We are committed to moving forward in that forum and call on all parties to actively and constructively participate in the UN Climate Change Conference in Indonesia in December 2007 with a view to achieving a comprehensive post-2012 agreement (post-Kyoto agreement) that should include all major emitters,"​ the G8 statement read. During such negotiations you can bet that the EU countries will be arguing that they have shown the bloc's Emissions Trading Scheme (ETS) can be expanded to include other nations. Germany, in particular, has called for a global auctioning system on CO2 rights. But critics will argue that the system is too costly for industry, puts the brake on growth, and does nothing to reduce CO2 outputs, or improve efficiency, especially if China, the elephant in the room, refuses to participate. Others, such as environmental economists Denny Ellerman and Barbara Buchner, argue in a study published last month that the ETS is successful and the most significant accomplishment in climate policy to date. Who is right? And should industry be afraid of the coming controls on what they once viewed as free resource to burn for their activities - fresh air? The EU's ambitious ETS started operating in 2005 as part of the bloc's plan to reduce greenhouse gas emissions to meet international commitments under the Kyoto Protocol. The EU accounts for 20 per cent of global greenhouse gas emissions, according to scientific estimates. The "cap-and-trade" scheme sets limits on each manufacturer's CO2 outputs. Companies can then buy and sell CO2 emissions rights according to need on specially constructed internet sites. It effectively allows the market to put a price on the way the industry uses fresh air and emits greenhouse gases, measured in the form of CO2 or tonnes of carbon. Plants that emit more CO2 than their allocation need to buy allowances to cover the extra emissions. Companies that emit less than their allocation are able to sell the allowances on the market to companies that need them. To date the value of traded CO2 volume is estimated at €14.7bn ($18.86bn). Some of those costs, which do not include the price of environmental measures taken at the plant level, have been borne by the food industry. The food processing industry is an energy consumer and discharger of greenhouse gas through its reliance on cooking, refrigeration, freezing and air compressor systems. The impact of the scheme on the sector is reflected in the fact that, for instance, in France 13.6 per cent of all ETS installations are food and drink plant sites. In the UK the food and drink industry make up 3.1 per cent of the estimated allocations. Preliminary data from the first year of the EU's greenhouse gas trading scheme served to highlight problems in the allocation of plant outputs and in the tracking of CO2 emissions. The data indicated that the Commission had allowed countries to set allocation limits at too high a level, lessening the need for companies to make major changes in the manufacturing plants. Figures published in May 2006 showed that CO2 emissions were 44 million tonnes under the level permitted in 2005. The result was that carbon prices under the trading scheme fell dramatically, reducing the incentive for companies to cut emissions. Countries have also disputed the Commission's allocations when it has made adjustments. Poland and the Czech Republic this month said they would sue the Commission over their allocations. This year the Commission proposed to cut greenhouse gases by 20 per cent by 2020 compared with 1990 levels. Germany supports a 30 per cent reduction. The Commission is also currently reviewing the ETS system and plans to make new proposals to improve its functioning after 2012. Under the scheme companies can be fined about €40 per excess tonne of CO2 emitted, a price above allocations being traded on the market. A Standard & Poor's ratings services report published last week warned that such carbon legislation could create substantial risks for companies and, potentially, for their financial health. Legislation that targets large reductions in emissions early, in the absence of adequate technology, could impose a greater burden and be more harmful to a company's financial health, the report stated. "Significant increases in capital costs may be incurred and profitability may suffer as companies work to achieve and maintain compliance with potential restrictions on greenhouse gas emissions,"​ S&P stated. Critics, such as UK-based business organisation Open Europe, say the system is too flawed and should be abandoned. They argue that member states are not making equal sacrifices, with the UK punishing its own industry with tough emission reduction targets. The imbalance has cost the affected UK firms £470,000,000 in total in 2005, they claim. The system has also become an example of "botched central planning", rather than a real market, they argue in a report. Loose targets have undermined efforts to build a stable market, with the price fluctuating madly, the say. When it was realised in April 2005 that many member states had set loose targets, the secondary market for emissions permits crashed to €9.25 over the course of a few days from €30.50 per tonne of emissions. Despite its teething problems, the EU's ETS is one of the most important environmental policy developments of the past decade, argue supporters of the system. Such supporters include at least seven environmental economists, including Ellerman and Buchner, who last month published an extensive analysis of the system since its launch in 2005. Ellerman and Buchner focus on the allocation of the allowances. They note that, although there is evidence that some member states and sectors received over-generous allowances, the main goal of limiting CO2 emissions was achieved. "The EU has succeeded in placing a price on CO2 that starts to reflect the scarce capacity of the earth's atmosphere to absorb more greenhouse gas emissions,"​ they argue. The Commission's primary role was to enforce scarcity of the allowances to ensure that they were sufficiently valuable to be traded. After the overallocation in the first round, the Commission has now reduced the proposed number of allowances of 14 of the 25 member states by a combined annual amount of almost 100 million tonnes of CO2. An analysis of the historical emissions data by the economists suggests that abatement or environmental measure taken by companies had achieved a reduction of about 7 per cent, even allowing for the growth in emissions that accompanies growth in gross domestic product. The economists conclude ETS has been successful in helping to correct what they call the market failure that surrounds climate change, and in delivering the EU's commitments to reduce carbon dioxide (CO2) emissions under the Kyoto Protocol. The seven conclude that it will be central to future global climate negotiations. They also call for a global framework for managing climate policy in the long term. They say that the EU ETS is important because of its size and the number of countries participating. "It shows that emissions trading can be done, and will be hard to ignore in future climate negotiations,"​ they conclude. However they note that if CO2 emissions are to be significantly reduced globally then one problem in achieving this is that there is no equivalent to the Commission at a global level to play the coordinating role. "The challenges of establishing a global system are likely to be formidable,"​ they warn. For industry inside and outside the EU it's a wait and see situation as the world's leaders battle it out to protect their economies. Standard & Poor's credit analyst Swami Venkatarman said they can only face what will possibly become a major cost. "Most of industry now seems to accept the inevitability of carbon controls and instead of fighting to stop them, is seeking to influence their final outcome,"​ he said.

Related topics: Processing & Packaging

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