Trading

After the Johannesburg summit, the EU put an emissions trading system in place, which began in 2005. This was a reversal of the European negotiating position at Kyoto, which had opposed the American proposal on trading. Looking at the high cost of compliance led to the change of heart. The European Parliament and the Council of Environmental Ministers approved the Emission Trading Scheme (ETS). It covers twenty-eight countries: the twenty-five member states plus Norway, Switzerland and Liechtenstein. The goal is for emitters to make cuts where they are the cheapest, thereby generating the greatest savings for the total economy. A further goal is to foster innovation. Companies have an incentive to reduce their greenhouse gases. The scheme does not include all emissions, however. It covers facilities for energy, ferrous metals, cement, glass, pulp, paper and boards, which will amount to 40% of emissions, but it does not cover aluminum, chemicals, transportation or household use. Transportation and domestic use are hard to regulate, and the aluminum and chemical industries have powerful political lobbies.

Implementation uses permits for each facility that entitle the holder to emit one ton of carbon dioxide or its equivalent, called an allowance. This is done by the member states. The value of an allowance for a single ton is predicted to be in the range of $5-$30. Early trades were for $10 a ton. The first period of trading is 2005-2007, and the second is to end with the Kyoto dates of 2008-2012. The allowances, which are granted free of charge, can be traded across the entire twenty-eight nation region. It became apparent at once that the number of allowances was too generous, so there was no real pressure to reduce carbon emissions.

Several aspects remain unresolved. Member states may apply to exclude particular facilities temporarily. Supposedly, they will make equivalent reductions in greenhouse gases by alternative techniques and will be carefully monitored. Member states may provide that allowances canceled in the first period be reissued in the second period, a form of banking. Member states may use Emission Reduction Units from Joint Implementation projects under the Kyoto Protocol toward meeting their targets under the treaty. This will also be true for Certified Emission Reductions from Clean Development Mechanisms and Removal Units from forest sinks. A concern with both the basic scheme and its links with the Protocol flexibility mechanisms is the transaction costs, that is the expense for actually making the trade in terms of identifying allowances and buying or selling them at a reasonable cost in a timely fashion.

The EU designed the scheme to avoid giving an unfair advantage to any one member state. It believed that having a diversity of methods for assigning the initial quantities of the allowances, both by grandfathering and auctions, would avoid giving special advantage to existing companies.

The EU does not want its member states to compete in offering the most lenient situation. There will be a temptation for poorer countries to lower their pollution standards to entice factories to move there. A further problem is that a company may move facilities to places not covered. An obvious location is Russia or the Ukraine. The EU planners considered it important to expand the scheme to cover all of western and central Europe by adding three non-members. Of course, facilities can also move to developing countries not covered by Kyoto. If these problems are resolved, the European scheme will be a logical worldwide model. Unfortunately, when the deadline of March 31, 2004, arrived for the countries to submit their national plans, none did. Seven submitted preliminary plans, and the rest submitted nothing.

The EU emissions trading scheme is designed to allow some trading outside of the country of origin of the emissions. The Kyoto Protocol provides for two methods: Joint Implementation and the Clean Development Mechanism. The former is between two industrial countries (that is Annex B), and the latter is between an industrial country and a developing one. This is also a change from the European bargaining position at the Kyoto Conference. Again, the realities of actually meeting the limits prompted backtracking. Aside from the differing partners, Joint Implementation and the Clean Development Mechanism both provide for implementation in a different country and then trading the reduced emissions. For example, a European corporation will reduce greenhouse gas emissions in a different country, perhaps Romania or Indonesia, then trade them for credits at home. One method would be simply to buy an old inefficient factory and close it. Another method would be to assist in constructing a new plant in Rumania or Indonesia so that it will emit fewer gases. The problem with this latter method, however, is that a new plant virtually always has newer and more efficient engineering, so the question becomes how much is a plant eligible to trade to the European facilities of the corporation.

Negotiating Essentials

Negotiating Essentials

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