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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