Emissions trading scheme (ETS)
10-06-08
Increasingly these allowances will be auctioned off to the highest bidder.
The overall amount of emissions allowances shared out (or auctioned) decreases each year in line with national targets to reduce overall emissions. Allowances can be bought and sold as a commodity, and third party organisations (not obligated under the ETS) are allowed to buy and sell emissions allowances.
The UK has had its own voluntary ETS system since 2002, but the European version took over from 2005 under the terms of the Emissions Trading Directive of 2003. Currently, the ETS only includes carbon dioxide emissions, and it only affects large-scale energy users - although this means it already covers approximately half of the UK's carbon dioxide emissions.
"Phase I" of the ETS ran from 2005 to the end of 2007, and was characterized by an over-allocation of emissions allowances. This meant that the trading of emissions allowances saw prices - the so-called "price of carbon" - falling from €30 to less than €10 per tonne.
"Phase II" of the ETS has now begun, to run from 2008 to 2012, with a reduced allocation of allowances within National Allocation Plans in order to prop up the price of carbon.
Phase III
The European Commission and the UK government are both now considering the options for Phase III of the ETS, which will run for five years from 2013.
This could see other greenhouse gases - like nitrogen - included in the system, an increase in the range of industry sectors included within the ETS, and an increase in the number of allowances that are auctioned off, rather than handed out for free.
Within its Climate Action and Energy Package (January 2008) the European Commission proposed targets including a 20% reduction in EU greenhouse gas emissions by 2020 from 1990 levels, increasing to 30% when there is an international climate agreement.
For the UK, the Commission's proposals include a reduction of 16% in UK greenhouse gas emissions from sectors not covered by the EU ETS by 2020 from 2005 levels.
Prime Minister Gordon Brown has already said he wants 100% of ETS allowances for large electricity producers to be auctioned off during Phase III of the ETS. Under the Climate Change Bill, the UK government wants to see medium-scale energy users involved in emissions trading through the Carbon Reduction Commitment.
From 2012, the UK government is also likely to extend the ETS abroad, by allowing investments in emissions reductions projects in developing countries to count towards compliance with the ETS. This would involve credits from projects registered under the Clean Development Mechanism - part of the Kyoto Protocol that allows investments abroad to count towards emissions targets.
Transport emissions
The government is supporting moves within Europe to include aviation within the EU emissions trading scheme. This could see internal European flights included from 2011 and all flights entering or leaving the EU included from 2012.
As with other industrial sectors, allocation of allowances would be partly through an auction process, with an overall cap on total sector emissions each year based on a 2004-2006 benchmark.
The UK government held a public consultation on including aviation in the ETS in March 2007. It believes such a move would bring about a reduction of between 200,000 and 400,000 tonnes of carbon emissions a year by 2020 in the UK.
The government here is also pushing for surface transport to be included within the ETS, insisting that the inclusion of road transport would be "cost-effective". It has suggested requiring fuel producers to hold carbon allowances to cover the amount of fuel they sell. An overall 2-5% under-allocation of allowances to the road transport sector could save between 1 million and 2 million tonnes of carbon a year.
However, the inclusion of road transport within the ETS could be politically difficult along with the current road taxes, which are seen as high by many road users in the UK.
