By Ken Silverstein Director, Energy Industry Analysis
Most of Europe is steadfast about taking the lead globally to reduce carbon
dioxide emissions that are thought to cause global warming. Regardless of
whether the Kyoto Protocol is ultimately ratified, the continent is intent on
reducing such emissions by as much as eight percent below 1990 levels by 2012.
The key: an emissions trading program that allows companies that beat certain
targets to sell “credits” to those facilities that cannot do so.
Each country is now drafting their allocation plans under the emissions trading
scheme, or ETS. Those blueprints, which must still be approved by the European
Union, will outline the emission goals for each plant in each country. The EU is
a strong supporter of the Kyoto Protocol. That treaty requires most industrial
nations to cut their greenhouse gases by six percent below 1990 levels—a goal
that would likely remain elusive without a free market exchange, which Europe
anticipates to be fully functioning by 2005. At a price of $16 per ton, the
market for carbon emissions is now worth $1 billion a year, says Point Carbon in
Norway.
Under such a system, a cap is placed on carbon dioxide (CO2) emissions.
Businesses that discharge less can sell, bank or transfer those
"credits." Companies that are pushing the limit can either take steps
to cut their pollution by implementing new technologies, by switching to a
cleaner-burning fuel, or by buying "credits" from another business. As
the ceiling on emissions is gradually lowered, pollution levels drop. If Kyoto
is not implemented, Europe says that it will still execute the scheme. If it
does go into effect, countries could buy and sell those credits among each
other.
As governments internationally continue to restrict pollution levels,
emissions-trading exchanges are expected to play a role in environmental policy.
By trading credits, a "price" for emission levels is established that
will send the proper investment signals to those who have to decide how they
will reduce harmful pollutants. Installing environmental controls may or may not
be cheaper than buying emissions credits.
Members of the EU are to come out with their so-called National Allocation Plans
by the end of March. So far, the United Kingdom, the Netherlands and Ireland
have made public their ideas. The strict emissions limits place a heavy burden
on Germany, which depends on coal to power more than half of its power plants.
At the same time, it plans to phase out nuclear power production over a 20 year
time frame. That fuel source, which has no CO2 emissions, supplies one-third of
the country's power.
Despite the hesitancy of some key leaders and key countries, the continent is
ready to move forward. "We know the timetable is tight for all capitals,”
says Jos Delbeke, head of the climate change unit at the EU Commission's
environment department, at a press conference. “As of today, we haven't
received them but we do expect to receive them on time. There would be no
hesitation in sending out infringement letters to those member states whose
plans do not land on our table.”
Difficult Task
The EU has its work cut out for it. Projections by the European Environment
Agency show that the member countries fall short of their obligations under
Kyoto by about three percent. To get the rest of the way, the agency says that
countries of the EU must take other steps such as establishing a liquid market
for emissions trading and developing sequestration of carbon by forest, soils
and agriculture.
Emissions trading can succeed. In the United States, the 1990 Clean Air Act
requires that 1980 sulfur dioxide (SO2) emissions from electric power plants be
cut in half by the year 2010. To achieve that goal, the Environmental Protection
Agency allows utilities to emit one ton of the toxin a year per allowance held.
If a plant reduces such emissions below its allowance, it will have leftover
emission credits that it can sell to other utilities or anyone who wants to buy
them.
Altogether, the program is responsible for cutting S02 emission levels, says
EPA. In 1990, 15.7 million tons of the pollutant were emitted and by 2000 that
number had dropped to 11.2 million tons—a level that EPA expects to fall to
8.95 million tons in 2010. The cost to comply is notable, says EPA. But that
money has actually spawned new technologies and new jobs, say proponents of
strict emission limits.
To be sure, there could be a cost to the EU's environmental principles. That is,
the Kyoto Protocol may not be ratified if at least 55 industrialized countries
accounting for 55 percent of all global emissions do not sign on. The United
States has bowed out. All eyes are now on Russia, which must agree to it if the
treaty is to go into effect. Even if it doesn't get approved, the EU will pursue
its ETS. And some worry that it could jeopardize international competitiveness,
particularly if others do not go to the expense of adding such pollution
prevention measures. A total of 14,000 facilities throughout the EU would have
to comply with a cap-and-trade system.
“Though the new targets would have practically no effect on global climate
change, the economic risks for Germany's economy are enormous,” says Wulf
Bernotat, CEO of Germany-based E.ON, at a press conference. “The EU emissions
trading scheme will make things difficult for coal-fired power production (and)
nuclear power has been the victim of arbitrary regulatory harassment.” About
2,400 energy and industrial sites throughout Germany will be affected under the
ETS.
Positive Outcome
Under any circumstance, the EU says that it can cut its CO2 emissions by 65
million tons between 2005 and 2007. Denmark and Austria have already begun
setting aside the money necessary to purchase emissions credits. And France,
which has reduced CO2 emissions by 15.5 percent from 1990 to 2001, is projected
to fall short of its obligation under the global warming treaty unless the
market for emissions becomes liquid and vibrant.
The U.K.'s plan, meanwhile, has drawn opposition from industry-supported groups,
which say it would put its power companies at a competitive disadvantage if
other countries and companies fail to live up to their obligations. And, Ireland
is a potential buyer of carbon credits because its CO2 emissions are 31 percent
greater than they were in 1990. The Netherlands, furthermore, has agreed to cut
such emissions by six percent by 2012 and has begun funding emissions reductions
efforts in less developed countries so that it can use those credits to help out
its own industries.
The Kyoto Protocol, which has been approved by more than 160 nations, has
provided the framework by which nations that ratify the agreement will seek to
reduce their greenhouse gas emissions. The emissions trading component of that
accord is a vehicle by which those countries can reach their goals—a concept
that has already been shown to work in the United States' acid rain program. As
long as targets are ambitious and rigorously monitored, the system of
cap-and-trade should have a guaranteed environmental outcome.
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