EEF has criticised this week’s announcement that the UK is to cut the allocation of carbon dioxide emission permits to industry in the second phase of the EU’s carbon trading scheme. These will be cut by three per cent in 2008-12 compared to the number granted during the first phase of the scheme.
The EU Emissions Trading Scheme (EU ETS) is Europe’s flagship policy for tackling emissions of carbon dioxide and meeting its Kyoto commitments. The scheme works on a "Cap and Trade" basis. Under this EU Member States are required to set a cap on carbon dioxide emissions from industrial sectors covered by the scheme. This National Allocation Plan (NAP) then sets a cap for each plant covered by the scheme in order to create a shortage and keep prices high, thereby encouraging companies to emit less than they have been allowed. Pollution credits can be exchanged on an EU-wide carbon market allowing 'greener' companies to make a profit from selling their excess credits to the more polluting ones (who have to pay fines if they exceed their allocations).
The first phase of the scheme commenced on 1 January 2005 and runs until 2007. During Phase 1 of the scheme all sectors received free allocations. However the UK’s NAP proved controversial as it went a good deal further in capping emissions than many other Member States. As such recent interim reports from Germany, France, Italy and other EU countries have shown that they have emitted far less CO2 than was anticipated in their NAPs. This surplus has caused carbon prices to fall, which in turn means there are less incentives for companies to cut down their emissions and free up extra credits. It was thus expected that for EU ETS to be a success many Member States would have to make tougher allocations under the second phase, particularly because a number are a long way from meeting their Kyoto commitments.
The draft UK NAP released on Thursday would give 238m allowances per year to British during Phase II, 7m fewer than the total distributed during the 1st phase. Seven per cent of these allocations will be auctioned but the Government has said that the electricity sector will bear the brunt of this while traded sectors, like steel, will be given the allowances they need.
In contrast on Wednesday (28 June) the EU’s biggest Member State, Germany, submitted a plan to the European Commission which experts say would only mean a 0.63% reduction of carbon compared with 2005. Moreover the German NAP does not include any auctioning and the limits will not apply to new power plants for 14 years from 2008.
Other Member States too are likely to publish lax NAPs and it remains to be seen whether the Commission, which strictly speaking approves the NAPs, will reject them. While Member States are legally obliged to meet their Kyoto Targets, EU ETS is not the only mechanism they have for doing so. Thus a Member State can submit generous NAPs if they can plausibly argue that other measures are helping them to meet their climate change targets.
EEF has been extremely critical of the UK Government’s announcement. Whilst welcoming the fact that the electricity supply industry will bear most of the immediate burden through the auctioning of permits, we are concerned that these costs will be passed on to businesses that are already paying amongst the highest energy prices in Europe. Firms covered by EU ETS therefore face the double whammy of complying with the scheme and paying higher energy prices.
In addition, whilst re-iterating our support for the principle of ETS, EEF has been critical of the Government’s decision to push for reductions, which will leave the UK with significantly tougher targets than the rest of Europe.
The UK will now begin work on a detailed installation-level distribution of allowances with the intention of sending its final NAP for European commission approval by early September.