The fear among environmental commissioners in Europe is that at the current rate, the continent will only cut its emissions by 0.5 percent by 2012. That's because carbon dioxide (CO2) emissions from the transport sector are up 20 percent over 1990 levels and they could rise by 34 percent by 2010 if policies there don't change, say commissioners.

That's why they say that the program is now too lenient and to be successful it needs stricter limits. Commissioners there have said that Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia and Sweden have set their allowable emissions limits too high and must bring them down. In response, Germany has said that emissions there should total no more than 465 million metric tons per year, which is down from 495 million metric tons per year. Altogether, the country wants to see cuts in CO2 emissions of 20 percent from 1990 levels by 2020.

Only Britain's plan won approval from commissioners. It has placed a cap of 246 million metric tons per year on carbon releases. Long term, the country has a goal of cutting CO2 emissions by 50 percent by 2050. Meantime, Spain has said it would reduce its allowable limits on carbon emissions under the trading scheme another 3 percent during the second phase of implementation beginning in 2008.

"The Commission reduced the allowances by almost 7 percent below the emissions proposed by the national allocation plans and 7 percent below the 2005 emissions," the EU executive says, in a written statement.

The EU emissions trading forum is the world's largest and now worth $9.44 billion, the commission says. About 362 million metric tons of carbon were traded in 2005 -- a number that was exceeded after six months in 2006. But, commissioners determined that there is a surplus of credits, which means it is cheap for companies to get the "pass" they need to emit more than they should. The goal now is to reduce the allowable carbon limits and make credits more scarce -- a process that would increase the price of a carbon credit and make it more attractive to install pollution control equipment.

Next Phase

Once European nations get approval for their emission allowance plans and during the next phase of implementation, they will make critical decisions that include which companies and which industries are eligible for the credits. Under the rules, governments can provide free of charge 90 percent of credits while auctioning off 10 percent.

A group of European banks, that include Morgan Stanley and Barclays Capital, are involved in trading carbon credits and are urging EU Commissioners to keep adopting a tougher position on emission allowances. The European Carbon Investors and Services says that additional cuts in such carbon releases during the 2008-2012 phase should be 10 percent -- 3 percent more than what the EU has just demanded. The bankers are concerned about nations granting too many credits to certain industries, which would make a mockery of the overall goal.

To be sure, the EU has its work cut out for it. The U.N says that -- globally -- 34 industrialized countries are set to reduce emissions by 3.5 percent from 1990 levels by 2012. But, that still falls short of the overall objective of 5 percent required under Kyoto. And, as noted, Europe's aim is to cut carbon emissions by 8 percent in that time frame.

Clearly, the establishment of an emissions trading plan is critical to achieving greater cuts. As governments around the globe continue to restrict overall pollution levels, cap-and-trade systems involving carbon will expand. The thinking is that 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.

"We believe that increased trading will benefit the environment and provide incentives to achieve low cost emission reductions," says Natsource, which analyzes the carbon markets. "Increased trading activity will likely continue in the years that follow."

Despite the fact that President Bush does not endorse the Kyoto Protocol, about 40 U.S. companies created a trading market for CO2 emissions called the Chicago Climate Exchange. Meanwhile, eight mega companies that include Dupont, Entergy and Shell are establishing a trading system among each other and have vowed to cut their CO2 emissions by 80 million metric tons no later than 2010.

And Australia, which also objects to the terms of the Kyoto Protocol, has until recently opposed carbon trading and called it a "carbon tax" that could harm the nation's export of fossil fuels. But, Prime Minister John Howard is changing his tune and now saying he would join an international exchange if the United States, China and Japan also do so. He has furthermore softened his tone on mandatory CO2 reductions.

"We do need to find ... a new Kyoto," says Howard. "We do need, as a world community, to try and find a new global solution, and that global solution must include all of the major emitters."

With an expanding global economy along with population increases, achieving cuts in carbon emissions isn't easy. But, the European Union says that the need to do so is paramount and has therefore decided to take the lead in achieving such goals. Trading emissions credits are central to the mission. And, if successful, the endeavor will likely encourage all nations to join the cause.

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