Supplementary memorandum submitted by
the Department for Environment, Food and Rural Affairs
GREENHOUSE GAS EMISSIONS
TRADING (QUESTIONS 22-29)
1. As requested at the Environment, Food
and Rural Affairs Select Committee, on 24 October 2001, this paper
provides a brief guide to national, European and international
greenhouse gas emissions trading.
How does trading work?
2. The effect on the global environment
is the same wherever the emissions come from. Emissions trading
allows firms to reduce their emissions of greenhouse gases in
the most economically efficient way. An overall emissions reduction
target for a group of emitters is set and individual firms then
decide how to achieve their own target. Participants can either
make "in house" emission reductions (and can sell any
reductions surplus to their requirements on the market) or they
can buy tradable emission allowances as a way of meeting their
targets. But the overall target is still met and therefore the
environmental benefit is achieved.
UK Emissions Trading Scheme
3. The UK Scheme forms part of the UK Climate
Change Programme. When it goes live in April 2001, it will be
the world's first economy-wide greenhouse gas trading scheme.
The scheme is the successful result of two years co-operation
between business, Government and NGOs under the umbrella of the
Emissions Trading Group. The UK Scheme will start six years before
international trading begins under the Kyoto Protocol. This offers
UK business and government a tremendous opportunity to gain early
experience of trading and with it a competitive advantage. Business
is very engageda forward carbon trade has already taken
place between DuPont and Mieco, a subsidiary of Marubeni Corporation.
4. Firms can enter the Scheme as target
holders (Direct or Agreement Participants) or non-target holders
(through the project route or by opening trading accounts). Direct
Participants will be required to make voluntary absolute emission
reductionsto encourage firms to take on these targets,
Government is offering a financial incentive of up to £215
million over the five years of the scheme. The scheme will also
offer increased flexibility of trading to the 3,500 companies
with targets under the Climate Change Agreements (Agreement Participants).
5. At the end of each compliance year (31
December), Direct Participants will have three months to reconcile
their accounts and emissions data. This will require compiling
their emissions data, having it approved by independent verifiers
and carrying out any additonal trading to ensure that they hold
sufficient allowances to cover their total verified emissions
for the year. Failure to hold sufficient allowances will lead
to non-payment of the financial incentive and reduction of the
number of allowances allocated in the following year. As soon
as Parliamentary time allows, we will introduce legislation to
set a statutory regime of financial penalties.
6. A successful emissions trading scheme
is expected to deliver annual savings of around seven million
tonnes CO2 per year by 2010 (based on the assumption that there
will be further rounds of participants joining the Scheme in future
years). We expect the first stage that goes live in April 2002
to deliver reductions in annual emissions levels of around three
million tonnes CO2.
EC Proposal for an EU-wide Emissions Trading Directive
7. The Commission launched a proposal for
an EU-wide emissions trading scheme on 23 October 2001. Detailed
negotiations on the measure will start in mid-November. The proposed
EU Scheme works in a similar way to the UK Scheme. Installations
in sectors covered by the proposed Directive will be subject to
a permitting regime involving a mandatory emissions cap. At the
end of each compliance year, installations must have "banked"
permits equal to their annual emissions. If installations fail
to surrender sufficient allowances to cover verified emissions
they will be subject to a financial penalty. Member States will
also have to report annually to the Commission on the operation
of their Scheme.
8. We welcome the proposal for a Framework
Directive on Trading, but are concerned with the mandatory and
regulatory approach the Commission has taken. We are concerned
that setting mandatory targets three years before international
trading starts may put EU business at a competitive disadvantage.
Furthermore, we feel that the proposed EU Scheme does not take
full advantage of the opportunity it offers to EU business and
governments to gain early experience of trading. Rather than making
the opportunity to experience trading as widely available as possible,
the EU proposal limits participation. The proposal only covers
a limited number of industrial sectors; includes emissions from
electricity generators directly (rather than to the end-user of
the electricity); and, only includes CO2, rather than all six
greenhouse gases (thus excluding firms which emit other gases).
We are also concerned that in its current form the proposal would
not dovetail well with international tradingleading to
confusion and disruption for business and governments in 2008.
International Emissions Trading under the Kyoto
9. The Kyoto Protocol provides for three
ways in which developed countries can take action abroad to help
them meet their greenhouse gas reduction and limitation targets.
The three market mechanisms are: International Emissions Trading
(IET), Joint Implementation (JI) and the Clean Development Mechanism
10. International emissions trading (IET)
is perhaps the most innovative and far-reaching of the mechanisms.
It allows countries that have achieved emissions reductions over-and-above
those required by their Kyoto targets to sell the excess reductions
to countries finding it more difficult or expensive to meet their
commitments. In this way, IET seeks to lower the costs of compliance
for all concerned whilst having the same positive effect on the
global environment. As well as participating themselves, Parties
to the Kyoto Protocol can also authorise firms (known as legal
entities) to take part in international emissions trading, provided
that such participation is consistent with the international rules
(for example, legal entities cannot trade if the authorising Party
fails to meet the eligibility requirements governing use of the
11. The 7th Conference of Parties (COP7)
met in Marrakech between 29 October and 9 November 2001 and concluded
work on agreeing the rules to govern the mechanisms, including
the precise accounting rules for how the system of linked national
registries will operate, and the question of fungibility (the
degree to which emission reduction credits generated under IET,
JI and the CDM are inter-changeable). The EU has committed itself
to ratify the Kyoto Protocol and hopes that it will enter into
force by the World Summit on Sustainable Development in 2002.
THE BONN AGREEMENTFUNDING
FOR DEVELOPING COUNTRIES (QUESTIONS 51-56)
Under the Bonn Agreement, the Global Environment
Facility (GEF) was invited to establish three new funds to provide
assistance to developing countries:
Special Climate Change FundThis
will finance activities to assist developing countries, including
in the fields of adaptation to climate change and technology transfer.
Least Developed Countries FundThis
will support a work programme for the least developed countries,
including the preparation and implementation of national adaptation
programmes of action (NAPAs).
Kyoto Protocol Adaptation FundThis
will finance concrete adaptation projects and programmes in developing
countries which have become Parties to the Kyoto Protocol. It
will be financed in part from a share of proceeds from the Clean
The EU, Canada, New Zealand, Norway, Iceland
and Switzerland, also made a joint political declaration committing
to increase their climate change funding to US$410 million a year
by 2005, including GEF contributions and additional bilateral
and multilateral funding. The first discussion on the implementation
of this declaration, including possible burden-sharing arrangements,
is expected to be scheduled shortly.
21 November 2001