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Is the brave new world of emissions trading imploding?

ImageWhen emissions trading was launched it was hailed as a genuine market-driven way of addressing climate change. But problems loom as expansion approaches

There are few public policy initiatives which have been launched with such a wave of enthusiasm as the European emissions trading scheme. It wasn’t a tax. It wasn’t regulations. Everybody – be they industrialist, politician or eco-warrior – enthused that this was the first truly market sensitive way of addressing the threat of climate change. But suddenly many participants are warning that if the system is extended, as the Prime Minister wants it to, it could yet implode.

The idea behind emissions trading is simple. Company A has its allocation of, let us say, 100 units of CO2. These have a value, depending on the price that Company B or C (who will also have been given allocations) wish to pay for them. The idea is that, in order to be in a position to sell on its permits, the more far-sighted companies will undertake investments which reduce the number of permits it needs. At the end of the accounting period, each participating company has to demonstrate that it has sufficient permits to cover its total emissions. These can be bought from any participant based anywhere in the European Union. In the initial months of the trading system, the volumes traded have been understandably low. The price has varied significantly, between a handful of euros per tonne of carbon dioxide, up to around 30 euros per tonne.

It is at that price when a number of participants in the heavy industrial sector begin to look distinctly wary. Admittedly, several of the most energy-intensive sectors – like chemicals or water – remain outside the trading system. But the majority of the sectors where energy costs form a significant part of turnover (5 per cent or more of overheads) are already heavily involved, indeed were among the cheerleaders when the scheme was being launched. Mostly, it has to be admitted, for fear of some worse policy measure being introduced to restrain carbon emissions. But still every such sector could be heard making enthusiastic noises regarding this Brave New World which began in January.

No more. At the formal launch in Brussels of the second phase of the second European Climate Change Programme, of which emissions trading forms such a central part, a coalition of nine such industries were proving to be distinct party poopers. The European-wide trade bodies raising such concerns represent alloys, cement, ceramics, glass, iron and steel, lime, non-ferrous materials, and paper-making. It is not that they are objecting to the scheme as it now exists. But because of a proposal to extend the scheme to one further sector of the economy. A proposal that has been promoted heavily by the UK Presidency, and in particular by Prime Minister Tony Blair. And has now been formally adopted by the European Commission. It will involve an industry which in the UK alone increased its emissions of greenhouse gases by 90 per cent between 1990 and 2003 (when overall industrial emissions fell by 21 per cent, and in the residential sector by 3 per cent).

The Commission has decided that “the most promising way to tackle aviation emissions is to bring aircraft operators into the EU emissions trading scheme.” And it is this which is sending the nine existing participating sectors into a flat spin. So much so that they have formally concluded that if aviation were to be brought into the trading system on the same terms as all other participatns, “this would mean the end of the EU emissions trading scheme”.

Why? The problem is that, whilst purchasing allowances represents a significant cost element for the energy-intensive industries in which the carbon dioxide emissions per unit sales (i.e. per euro) are high, buying allowances would represent a very small impact upon costs in aviation. For example, a fully loaded plane travelling from Paris to New York (and back) emits around one tonne of CO2 per passenger. At 30 euros per tonne, this would add just 30 euros to the round trip. If aviation gets the same level of free “grandfathered” allowances as existing participants, then an airplane company might need to purchase allowances of just 10 per cent – adding a couple of euros to the price.

The fear of the heavy industry associations is that the aviation sector will have no trouble passing on its costs to its customers. Such price increases will not dampen demand much. And so aviation companies will be in a position to afford carbon prices far beyond the reach of energy-intensive industries, facing competition from internationally traded goods not subject to any carbon pricing.

As we stand, the political rhetoric has it that aviation is due to enter the existing trading scheme in 2008. Even were everybody as content with this proposal as the BAs and the Ryanairs seem to be, the preparatory logistics could not be completed during this decade, probably not until 2012.

Time enough, one would hope, to avoid the “one-size-fits all”concept of emissions trading. Time enough indeed to stop dishing out allocations on the basis of existing emissions levels. Time enough to develop a genuine market-place, where the freedom to pollute is the subject of the true market-place: that of the auction house.



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