EU emissions trading - more than hot air? 

Dec 1, 2007, 12:24 GMT

Brussels - Two years after the EU's flagship carbon dioxide (CO2) trading scheme was launched, it has yet to convince experts that it will have much effect in the fight against global warming.

'The scheme has not really had an impact yet. It has massive potential, but at the moment there is a risk that that potential might not be realised,' Simon Tilford, chief economist at London- based think-tank the Centre for Economic Reform (CER), told Deutsche Presse-Agentur dpa.

The EU's Emissions-Trading Scheme, or ETS, is the world's first multinational attempt to limit the emission of CO2 - the gas most linked with global warming - by treating it as a commodity.

But serious questions remain as to whether the scheme will make CO2 emissions expensive enough that companies will invest in low- carbon technology - the only way to avoid the catastrophic effects of climate change.

'The ETS has encouraged firms to boost their efficiency, but it's not yet pushed them to invest in clean technology,' Tilford said.

Under the scheme, the EU's executive, the Commission, permits its 27 member states to emit fixed amounts of CO2 a year. National governments share out their permits among heavy industries such as energy generators and steel smelters.

Industrial plants which then produce less CO2 than the government limit are allowed to sell their surplus permits, while plants which produce more have to buy permits to cover the gap - or else invest in new techniques to reduce their emissions.

The idea is to make it more costly for business to emit CO2, and therefore boost efficiency and stimulate 'clean' innovation.

'We need to change the way business works, and that's where the EU ETS comes in - it puts a cost on emissions and a value on reductions,' Henrik Hasselknippe, senior emissions-trading analyst at Oslo-based carbon-trading consultancy Point Carbon, said.

According to a recent CER study, 'How to make EU emissions trading a success,' companies need to be confident that the price of a ton of CO2 emitted will remain above 20 euros (29.32 dollars) for 20-30 years if they are to invest in new technology.

A ton is very roughly the amount of CO2 an average small car would emit in 8,000 kilometres - approximately a year of moderate use.

After the EU ETS came into force in 2005, the price of a ton of CO2 rose to 31.58 euros as EU companies bid for surplus permits.

But in May 2006, the first official figures on emissions revealed that the Commission had issued more permits in 2005 than firms had released CO2, making it pointless for companies to buy more.

'The first-phase cap was too high, because the Commission didn't have verified data on emissions,' said Noriko Fujiwara, climate- change expert at the Centre for European Policy Studies in Brussels.

As a result, the price for CO2 collapsed. Critics of the scheme called it a failure, and even supporters admitted that the opening phase of the project had had little immediate impact on emissions.

'Anecdotal evidence suggests there's not going to be a great fall in emissions in 2007. The UK and Germany don't look that good, so there possibly won't be any reduction in 2007,' Tilford said.

But the Commission, aware that the fiasco had put its credibility on the line, hit back by proposing caps well below 2005 levels for the project's second phase, which is to run from 2008 to 2012.

That policy quickly won plaudits among international traders. While the price for phase-one CO2 permits fell below 1 euro per ton, the price for phase-two permits rose steadily, with Point Carbon now predicting that it will average around 25 euros across the period.

And a survey of 2,250 companies conducted by Point Carbon in March 2007 showed that two-thirds of respondents had launched emissions- reduction projects that year, four times more than in March 2006.

Experts question whether the credit for that change should go to the EU ETS.

'Clearly companies are now trying to cut emissions, but it's hard to separate out the factors. For example, we don't know whether it's the ETS or the price of fossil fuels - there's a bigger incentive now towards energy efficiency because of fuel prices,' Tilford said.

But despite the concerns - or perhaps because of them - experts agree the ETS has scored a victory simply by coming into existence.

'The main significance of the ETS was that the first phase was launched and didn't fall apart. The EU is the pioneer, and now other countries are asking about its experience,' Fujiwara said.