Select Committee on European Scrutiny Eighteenth Report


The European Scrutiny Committee has agreed to the following Report:—




COM(01) 581

Draft Directive establishing a scheme for greenhouse gas emission allowance trading within the Community, and amending Directive 96/61/EC.

Legal base:Article 175(1) EC; co-decision; qualified majority voting
Document originated:23 October 2001
Forwarded to the Council:22 November 2001
Deposited in Parliament:11 December 2001
Department:Environment, Food and Rural Affairs
Basis of consideration:EM of 21 January 2002
Previous Committee Report:None, but see footnote
To be discussed in Council:No date set
Committee's assessment:Politically important
Committee's decision:For debate in European Standing Committee A


  1.1  At the Kyoto climate change conference in December 1997, the Community agreed to take certain measures to reduce emissions of a "basket" of six gases — carbon dioxide, methane, nitrous oxide, and three so-called "industrial gases" (hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride). Emphasis was, however, placed upon the need for flexible mechanisms, and the Kyoto Protocol allows for "emissions trading" between countries, under which a country which chooses to go beyond its Kyoto target can "sell" the excess to those finding it more difficult to meet their commitment. Similarly, many developed countries, including the UK, have proposed allowing their businesses to participate in emissions trading.

  1.2  In March 2000, the Commission produced a Green Paper[1], outlining its thinking on how a trading scheme might operate within the Community. It pointed out that such a scheme would not only provide a "certainty of environmental outcome", but would also, for any given reduction in emissions, result in lower compliance costs for both buying and selling companies, thus enabling market mechanisms to achieve a pre-determined environmental outcome at the lowest cost. It also suggested that the wider the scope of the system, the greater the potential for lowering costs, but it recognised that there are "sound scientific and practical reasons" why it might not be advisable at this stage to cover all six greenhouse gases, and all emission sources. It therefore concluded that a prudent approach would be to concentrate on large fixed-point sources of carbon dioxide (which it says accounts for about 80% of the Community's greenhouse gas emissions), and where monitoring and supervision would be more feasible, but to be open to gradual extension in terms of geographical, sectoral and gas coverage. In this connection, it noted that about 45% of carbon dioxide emissions would be covered by concentrating on six sectors — electricity generation, iron and steel, refining, chemicals, glass, pottery and building materials, and paper and printing.

  1.3  The document also set out two principal arguments for a co-ordinated Community approach: first, to avoid creating barriers to trade and distortions of competition; and secondly, to achieve greater cost savings and administrative simplicity, though the Commission recognised that there was a trade-off between this latter aim and maintaining greater autonomy for Member States. It therefore set out three possible models, with varying degrees of Community intervention, with the middle option being to develop a Community scheme, whilst leaving Member States with some degree of choice as to whether, and to what extent, they participated.

  1.4  Other considerations highlighted by the Commission included the problems which would arise over the initial allocation of emission allowances as between trading and non-trading sectors, between trading sectors, and between companies, and the need to ensure an equitable burden between those within any trading system and those outside. It also emphasized the importance of the allocation method; the need to determine how emissions trading would relate to existing technical regulation, taxation and environmental agreements; and the importance of compliance and enforcement.

  1.5  At the time, the Government's main concern was how the Commission's proposals would sit alongside the existing policies which had been announced in the UK, particularly as regards the indicative list of sectors and gases identified by the Commission. It also wanted to be assured that the proposal would fit with international emissions trading under the Protocol, potentially involving all developed countries. On the basis that the Communication was to be followed by more specific proposals, our predecessors cleared the document on 12 April 2000.

The current document

  1.6  The current document builds upon the thinking in the Green Paper, and comprises a draft Directive, which would introduce a Community-wide emissions trading scheme in 2005, three years before the start of international trading under the Kyoto Protocol. During this period, the main purpose of the scheme would be to provide experience on which to base more definitive arrangements from 2008, and it would have the following main features:

  • although it would apply in principle to all the greenhouse gases covered by the Kyoto Protocol, uncertainties over monitoring mean that it would in practice be confined initially to carbon dioxide, and (with the exception of chemicals) to certain "core activities" as defined within the Integrated Pollution Prevention and Control Directive (96/61/EC) and set out in paragraph 1.2 above;

  • Member States would grant to undertakings in those sectors greenhouse gas permits, and, although the total quantity of emissions allowances covered by these would be left essentially to the Member State, national allocation plans would be subject to Commission approval, would have to comply with a set of common criteria and to be consistent with the Member State's own obligations under the Burden Sharing Agreement reached within the Community to meet the commitments undertaken at Kyoto;

  • during this initial period, no charge would be made for permits, on the grounds that setting a price would be difficult, and likely to lead to differences between Member States and hence to distortion of competition;

  • an undertaking would be able to emit quantities of carbon dioxide up to the limit laid down in its permit, and would have to surrender an allowance equal to its actual emissions:

  • if an undertaking failed to surrender sufficient allowances to cover verified emissions, it would be subject to a financial penalty;

  • crucially, however, if an undertaking does not need the whole of its allocation, it would be able to sell the balance to another undertaking with an insufficient allocation;

  • in order to create a European system of allowances, it would also be possible for that undertaking to be in another Member State, in which case appropriate adjustments would be made to the national targets under the Burden Sharing Agreement;

  • allowances would be linked to the period for which they are issued, but could be "banked" from one year to another, and carried over from one period to another.

  1.7  The Commission also proposes a number of other features. These include:

  • the need for national registries in order to keep track of allowances;

  • rules governing monitoring, reporting and verification;

  • consistent penalties across the Community, sufficient to deter non-compliance: these would be based either on a fixed sum for each excess tonne, or on a multiple of the market price (but with a lower penalty level during the initial three-year period);

  • public access to the allocation of allowances, and to the results of monitoring etc;

  • regular reporting by Member States to the Commission on issues relating to the scheme;

  • links with other emissions trading schemes, including mutual recognition.

The Government's view

  1.8  In his Explanatory Memorandum of 21 January 2002, the Minister of State (Commons) at the Department for Environment, Food and Rural Affairs (Mr Michael Meacher) says that the UK is firmly committed to early action on emissions trading, and that its own scheme — which will be the first of its kind — is due to become live in April 2002. Consequently, although it welcomes the Commission's proposal, it is concerned that this would cut across the domestic scheme, and might impact on wider UK energy policy.

  1.9  The Minister sees the main differences between the domestic scheme and that proposed by the Commission as being:

  • the UK has chosen to adopt a voluntary approach to participation in advance of the 2008 Kyoto Protocol commitment period, whereas the Commission scheme would be mandatory as from 2005: the Government is concerned that this could put Community businesses at a competitive disadvantage, curb economic growth, and antagonise the business community, rather than build up the support and enthusiasm for trading which it considers a voluntary scheme would have done;

  • in the domestic scheme, electricity generators are excluded from the main part of the scheme, with emissions from power generation being assigned to the end-user as "indirect" emissions (and providing an incentive to reduce energy use and widen the opportunity to participate in trading to all businesses using electricity) the Government is concerned that the Commission proposal, which only includes direct emissions, would not only limit participation, but may encourage generators to switch away from coal (which it says would be inconsistent with its objectives on fuel diversity and security) and lead to costs incurred by them being passed on to consumers;

  • the Government also feels that basing the coverage of the scheme on the sectors covered by the IPPC Directive (less the chemicals industry) and to carbon dioxide emissions is unduly restrictive, and does not provide industry from all sectors with the opportunity to gain experience of trading across all greenhouse gases,

  • the Government is concerned that the requirement on Member States to allocate emission allowances, and therefore to determine what reductions it would be reasonable to expect each company or sector to deliver, is likely to be significantly more bureaucratic, may not be consistent with UK energy and industrial policy, and may not deliver emission reductions in the most cost-effective way.

  1.10  The Minister also says that the Government is conducting consultations with interested parties as part of its implementation of the UK emissions scheme, and that it will provide a Regulatory Impact Assessment at a later date.


  1.11  Although the Commission appears to regard the main purpose of this proposal as providing experience on which to base more definite emissions trading arrangements as from 2008, it is clearly important that the whole approach to this important subject should get off on the right footing. We have therefore noted the Government's concerns on this score, and the significant differences between what is proposed here and the provisions of the UK's own scheme, which is due to come into operation shortly.

  1.12  In view of this, we have concluded that, notwithstanding the Minister's undertaking to supply at a later date a Regulatory Impact Assessment, the document is of sufficient importance to warrant giving the House the opportunity to question the Minister in more detail about the proposal and the points he has raised on it. We are therefore recommending it for debate in European Standing Committee A. We also believe that this should take place at a reasonably early stage in the Council's deliberations, but preferably after receipt of the promised Regulatory Impact Assessment. Therefore, we hope the Minister will ensure that this Assessment is made available in good time.

1   (21093) 6915/00; see HC 23-xiv (1999-2000), paragraph 10 (12 April 2000). Back

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