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European Commission Emissions Trading Proposal

Gerhard Sabathil
Ambassador and H o D, EC Delegation to Norway and Iceland

For Norwegian Parliamentarians, 26.04.02

The EU is committed under the Kyoto Protocol to reduce greenhouse gas emissions by 8% from 1990 levels by 2008-2012. The EU has already reduced its greenhouse gas emissions by 4% between 1990 and 1999 and is thereby on track to meet its commitment, but there is still a way to go.  

The European Commission does not intend to meet its Kyoto commitments by concentrating on any one measure or sector, but to take action simultaneously on a broad range of fronts. I am very pleased that the the Council of EU environment ministers adopted the Commission's proposal for their decision on March the 4th to ratify the Kyoto Protocol. We are confident that Member States will take the necessary steps in order to allow for a simultaneous ratification together with the European Community before 1st of June 2002.

 Similarly, we welcome indications by Japan, New Zealand and Norway that they are preparing for ratification. The European Commission has also proposed a strategy to increase the use of alternative road fuels and improvements in the energy efficiency of buildings and will come forward with a range of additional measures in the next two years. 

These include measures on energy efficiency, promotion of combined heat and power, fluorinated gases and shifting the balance towards less polluting modes of transport.  A Directive to promote electricity generation from renewables and agreements with car manufacturers on vehicle fuel efficiency are examples of measures that have already been adopted by the EU.

But let me now return to the emissions trading proposal;

By presenting proposals for an emissions trading system and other emission reduction measures in parallel to ratifying the Kyoto agreement we wish to demonstrate that we are serious about delivering on the commitments we have signed up to. The emissions trading proposal is a cornerstone of the Community’s cost-effective implementation strategy for reaching the Kyoto target and meet its obligations under the United Nations Framework Convention on Climate Change.

It is an environmental policy instrument to lower the cost of reducing green house gas emissions. Emissions trading will lower the cost of complying with the Kyoto commitments, even in countries that are likely to reach their targets without major problems. This is because entities in these Member States will be able to sell allowances to entities in other Member States where compliance will be more difficult. 

(Allowances is the same as kvoter in Norwegian) Moreover such entities will be compensated for doing so, thereby reducing the costs of the reductions that they have already made. This is the biggest emissions trading scheme that has ever been seen anywhere in the world. It will cover CO2 emissions from large stationery sources. It is estimated that the sources covered will emit 46% of the Community’s CO2 emissions in 2010. By any measure, this is a significant proportion.

·        What is the background of the Commission proposal?

To recall;  the EU is committed under the Kyoto Protocol to reduce greenhouse gas emissions by 8% from 1990 levels by 2008-2012.  The EU's and Member States' greenhouse gas reduction targets were agreed in legally binding form at the 4th March 2002 EU Council of Environment Ministers. The individual reduction targets are those agreed politically in June 1998 under the so-called "Burden Sharing Agreement.   This means that some EU countries will increase their emissions (examples are Spain, Portugal and Sweden) , while others Just decrease their emissions (examples: Germany, UK, Luxembourg).

As a measure to meet this obligation, the Commission presented in March 2000 a green paper on Gas Emissions Trading within the EU. Through this green paper, the Commission  launched a debate across Europe on the suitability and possible functioning of emissions trading. The debate and a following wide consultation with stakeholders, member states and future member states showed strong support for emissions trading. On October 23, the Commission adopted the proposal for a framework Directive on emissions trading across the EU.

(At the same day, the Commission also presented the proposal on Kyoto-ratification that was adopted by Council in March as well as a Communication on the European Climate Change Programme and the key measures for the implementation strategy.)

·        What are the key elements in the proposal?

The proposed Directive aims at establishing an EU framework for emissions trading and an EU-wide market for emissions.

It thereby ensures the proper functioning of the internal market and prevents distortions of competition that might arise from separate national emission trading schemes. The Commission proposes that emissions trading in the EU should start in 2005, and in a first phase cover CO2 emissions from large industrial and energy activities.

These are estimated to account for about 46% of the EU’s total CO2 emissions in 2010, and about 4,000 to 5,000 installations across the EU will be affected. In 2004 the Commission will consider an extension of the Directive to other sectors and greenhouse gases.

Each installation covered by the Directive will have to apply to the competent authority in its Member State for a permit allowing it to emit greenhouse gases. (This permitting procedure shall be fully co-ordinated with the procedure under Directive 96/61/EC on Integrated Pollution Prevention and Control (IPPC) in order to avoid unnecessary bureaucracy. )

On the basis of the permits, Member States shall allocate emission allowances to each installation every year. They will gradually reduce the number of these allowances over time to ensure that emissions are reduced.

It is these allowances that can be traded, although no operator of an installation will be forced to trade. By 31 March each year, the operator will have to surrender a number of allowances equal to the emissions of its installation in the preceding calendar year.

The Directive would set harmonised penalties to be paid by operators for not surrendering a sufficient number of allowances. In the period 2005-2007, the Member States shall allocate allowances free of charge according to a national allocation plan to be approved by the Commission and respecting certain criteria so as to avoid state aids and distortions of competition between sectors in different Member States.

For the 2008-2012 period, the Commission shall specify a harmonised method of allocation at a later stage. Member States will set up national registries to ensure the accurate accounting of the holding and transfer of allowances, and the Commission will designate a Central Administrator at Community level to keep an independent record of allowances.

The Member States shall report to the Commission every year on the implementation of the Directive. The Directive will also set principles for the monitoring and reporting of emissions from installations, on the basis of which the Commission intends to adopt more detailed guidelines at a later stage, as well as criteria for the verification of the operators' reports.

  ·        What are the next steps for the proposal?

Negotiations are underway in the Council and in the European Parliament. We expect analysis of the proposal and lobbying (hopefully in that order) from stakeholders, member countries and future member countries. We also expect that this process will lead to the improvement of the proposed directive to be adopted by Parliament and Council.

·        What happens when the EU Enlarges?

The first wave of enlargement may have happened before the commencement of this scheme (2005), and so the number of participating countries would be larger than the current EU 15. The Accession Countries are aware of this, and are actively preparing schemes of their own, while watching carefully developments within the EU.

·        What about the Emissions trading in the European Economic Area?

All members of the European Economic Area, including 2 members of the “Umbrella Group”, would be eligible and welcome to join the EU system under the specific arrangements between the EU and EEA countries. The Commission would wish that Norway and the other EEA countries do join the scheme as of the start. The trading proposal is a clear internal market concern, and as member of this internal market, Norway is welcome also because of the competition aspects connected with the scheme.

Finally, the Commission has invited Norway to participate in a working group that has recently been established under the EC Monitoring Mechanism for greenhouse gas emissions[1]. This working group will consider methodological and technical issues relating to aspects of the emissions trading scheme, in particular the guidelines for monitoring and reporting emissions and the establishment of registries. The first meeting is likely to take place before the summer.

The Proposal on emissions trading represents a major innovation for environmental policy in Europe.  We are de facto creating a big new market, and we are determined to use market forces to achieve our climate objectives in the most cost-conscious way.  For the market to operate properly and deliver environmental benefits we must create the necessary structures.

Emissions trading will play an increasingly important role over coming decades when we will extend it to other sectors and greenhouse gases. Our system will also be fully compatible with the emerging international emissions trading system.  But, as a first first step we must establish confidence in a system that is shown to work, with adequate controls.

The emissions trading proposal shows how we intend to fulfil our commitments by using new instruments. As I stated in the introduction, the European Commission does not intend to meet its Kyoto commitments by concentrating on any one measure or sector, but to take action simultaneously on a broad range of fronts.

We all know that even the targets in the Kyoto Protocol are only a first step if we want to prevent the severe consequences that climate change could have.

Thank you for your attention.

[1] Council Decision 93/389/EEC for a monitoring mechanism of Community CO2 and other greenhouse gas emissions (OJ L 167, 9.7.1993, p.31), as amended by Decision 1999/296/EC.