European Cap and Trade Programs
The European Union (EU) has been the catalyst for many of the cap and trade programs that now operate worldwide. With the help of the United Nations, the EU has pushed their environmental cause upon industrialized nations and developing countries and have helped make aware the detrimental effects of global warming. They have consistently made this a top priority in the last decade. The European Union is far head when it comes developing a program for carbon trading and reducing carbon emissions.
The European Union’s Emission Trading Scheme (EU ETS) was created in 2005 and is the largest multinational greenhouse gas emissions cap and trade program. It was designed to help European nations meet their commitments to the Kyoto Protocol. This program includes 27 countries and all large industrial facilities, including those that generate electricity, refine petroleum, and produce iron, steel, cement, glass, and paper. The ETS currently covers more than 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors which are collectively responsible for close to half of the EU’s emissions of CO2 and 40% of its total greenhouse gas emissions.
The first phase of the EU ETS from 2005 to 2007 was deemed a failure and programs since then have learned from its costly mistakes. It never priced carbon fairly. Phase 2—which runs from 2008 to 2012—will redeem Phase I and hopefully help Europe fulfill its commitments. The rules for Phase 3—which extends from 2012 to 2020—were published in December 2008 targets a 20 percent reduction in emissions from 1990 levels by 2020.
Under the EU ETS, large emitters of carbon dioxide within the EU monitor and annually report their CO2 emissions, and they are obliged every year to return an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year. In order to neutralize annual irregularities in CO2-emission levels that may occur due to extreme weather events (such as harsh winters or very hot summers), emission allowances for any plant operator subject to the EU ETS are given out for a sequence of several years at once. Some emitters get the allowances for free from the EU member states’ governments, but some changes have been since then. Besides receiving this initial allocation on a plant-by-plant basis, an operator may purchase EU allowances (carbon credits) from others (emitters, traders, the government.) If an emitter has received more free allowances than it needs, it may sell their carbon credits to someone else.
In January 2008, the European Commission proposed auctioning a greater share (60+ %) of permits rather than allocating freely, and inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons. The EU ETS has recently been extended to the airline industry as well, but these changes will not take place until 2012.
EU ETS program adopted Kyoto flexible mechanism certificates as compliance tools. The first is the Joint Implementation projects defined by Article 6 of the Kyoto Protocol, which produces Emissions Reduction Units (ERUs). The second is the Clean Development Mechanism (CDM) defined by Article 12, which produces Certified Emission Reductions (CERs). Lastly, the International Emissions Trading (IET) defined by Article 17 is another method of compliance. Each method is equivalent to the reduction of one ton of carbon dioxide. These Certified Emission Reductions (CERs) can be obtained by implementing emission reduction projects in developing nations that have ratified the Kyoto Protocol.
Under the EU ETS, the governments of the EU Member States agree on national emission caps which have to be approved by the EU commission. They are required to allocate allowances to their industrial operators, track and validate the actual emissions in accordance against the relevant assigned amount, and require the allowances to be retired after the end of each year. The operators within the ETS may reassign or trade their allowances by privately by moving allowances between operators within their company, or over the counter using a broker to privately match buyers and sellers or trading in one of Europe’s Climate Exchange for derivatives. When each change of ownership of an allowance is proposed, the national registry and the European Commission are informed in order for them to validate the transaction.
In order to make sure that real carbon trading emerges (and that CO2 emissions are reduced), EU governments must make sure that the total amount of allowances issued to installations is less than the amount that would have been emitted under normal circumstances. For each Phase, the total quantity to be allocated by each Member State is defined in the Member State National Allocation Plan (NAP) (equivalent to its UNFCCC-defined carbon account.) This method has been hugely criticized due to ‘grandfathering’ where the government gifts more allowances to heavy polluters for free. An amendment has been approved abolishing the NAP by 2013. The end result is for each Member State to meet the Kyoto target.
Europe’s cap and trade system will reduce carbon emissions and climate change when it’s implemented, though politics is holding it up.
In short, cap and trade programs for carbon emissions is a market-based policy tool for protecting human health and the environment by controlling large amounts of emissions from a group of sources. The government initiates a cap and trade program by having Congress set a cap, or maximum limit, on all global warming emissions. The cap is intended to be lowered within a set time frame to achieve the eventual goal of lowering emissions. Sources such as electric utilities and oil refineries then receive authorizations to emit in the form of emissions allowances, with the total amount of allowances limited by the cap. These allowances are attained by initial auction or by trading from other sources in the form of carbon credits. A carbon credit is equivalent to a ton of carbon dioxide emissions or equivalent greenhouse gas. There are two distinct types of Carbon Credits: Carbon Offset Credits (COC’s) and Carbon Reduction Credits (CRC’s). Carbon Offset Credits consist of clean forms of energy production, wind, solar, hydro and biofuels. Carbon Reduction Credits consists of the collection and storage of Carbon from our atmosphere through biosequestration (reforestation, forestation), ocean and soil collection and storage efforts.
