Select Committee on European Scrutiny Thirty-Seventh 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



Environment, Food and Rural Affairs

Basis of consideration:

SEM of 9 July 2002

Previous Committee Report:

HC 152-xviii (2001-02), paragraph 1 (6 February 2002)

To be discussed in Council:

See paragraphs 1.13 and 1.15 below

Committee's assessment:

Politically important

Committee's decision:

For debate in European Standing Committee A (decision reported on 6 February 2002)



    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. Emphasis was, however, placed upon the need for flexible mechanisms, and the Kyoto Protocol allows for "emissions trading" between countries. Similarly, many developed countries, including the UK, have proposed allowing their businesses to participate in emissions trading.
    2. In March 2000, the Commission produced a Green Paper,[1] outlining the potential advantages of an emissions trading scheme, together with its thinking on how such a scheme might operate, and setting out two principal arguments for a co-ordinated Community approach (to avoid barriers to trade and distortions of competition, and to achieve greater cost savings and administrative simplicity). It therefore set out three possible models, with varying degrees of Community intervention.
    3. At the time, the Government's main concern was how the Commission's thinking would sit alongside the existing policies which had been announced in the UK, and, on the basis that the Communication was to be followed by more specific proposals, our predecessors cleared the document on 12 April 2000.
    4. The current document

    5. The thinking in the Green Paper was subsequently reflected in the current document, which the Commission brought forward in October 2001. This 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, its main purpose being to provide experience on which to base more definitive arrangements from 2008. The Commission envisages that the scheme would include the following main features:

    • although it would apply in principle to all the greenhouse gases covered by the Kyoto Protocol, it would in practice be confined initially to carbon dioxide, and to certain "core activities" as defined within the Integrated Pollution Prevention and Control Directive (96/61/EC);

    • Member States would grant greenhouse gas permits free of charge to undertakings in those sectors under national allocation plans subject to Commission approval, and consistent with their obligations under the Community's Burden Sharing Agreement to meet its Kyoto commitments;

    • 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, but, if it did not need the whole of its allocation, it would be able to sell the balance to another undertaking (which could be in another Member State) with an insufficient allocation;

    1. The Commission also proposed that there should be 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; and links with other emissions trading schemes, including mutual recognition.
    2. 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) said that the UK was firmly committed to early action on emissions trading, and that its own scheme — the first of its kind — was due to become live in April 2002. Consequently, although it welcomed the Commission's proposal, it was concerned that this would cut across the domestic scheme, and might impact on wider UK energy policy.
    3. The Minister saw the main differences between the domestic and Community schemes as being:

    • the UK has chosen a voluntary approach to participation in advance of 2008, whereas the Commission scheme would be mandatory as from 2005: the Government was concerned that this could put Community businesses at a competitive disadvantage, and antagonise the business community, rather than build up support;

    • electricity generators are excluded from the main part of the domestic scheme, whereas the Commission proposal only includes direct emissions;

    • basing the coverage of the Community scheme on the sectors covered by the IPPC Directive and on carbon dioxide emissions was unduly restrictive, and would not provide industry generally with the opportunity to gain experience of emissions trading,

    • the requirement on Member States to allocate emission allowances was likely to be significantly more bureaucratic, might not be consistent with UK energy and industrial policy, and might not deliver emission reductions in the most cost-effective way.

    1. The Minister also said that the Government was conducting consultations with interested parties as part of its implementation of the UK emissions scheme, and that it would provide a Regulatory Impact Assessment at a later date.
    2. In our Report of 6 February 2002, we commented that, although the Commission appeared 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 this important subject should get off on the right footing. We therefore noted both the Government's concerns, and the differences between this proposal and the UK's own scheme. In view of this, we recommended the proposal for debate in European Standing Committee A, which we suggested should take place at a reasonably early stage in the Council's deliberations, but preferably after receipt of the promised Regulatory Impact Assessment.
    3. Supplementary Explanatory Memorandum of 9 July 2002

    4. In his Supplementary Explanatory Memorandum of 9 July 2002, the Minister reiterates the main concerns, but highlights one possible change in the proposal, which bears on the UK's preference for a voluntary approach at this stage. This is that the Council and European Parliament are currently considering arrangements whereby individual Member States might be able to "opt out" sources of emissions that are covered by existing national climate change policies between 2005 and 2007.
    5. The Supplementary Explanatory Memorandum is also accompanied by the promised Regulatory Impact Assessment, which points out that, although the UK's climate change programme is expected to deliver its commitments under the Kyoto Protocol, the proposal will reduce the costs of doing so and minimise distortions of competition without disadvantage to the environment; that the Directive would only provide a framework for an emissions trading scheme within the Community, and will incorporate "significant" flexibilities (which the UK is seeking to extend) enabling Member States to set targets and determine allocation arrangements, with due account being taken of steps already adopted nationally; and that the early experience which the UK is gaining through its own national trading scheme should enable business in this country to capitalise when a Community trading market opens up.
    6. The Assessment also discusses the likely compliance costs. It points out that the proposal will not require business in this country to make greater emissions reductions than those currently envisaged under the UK's climate change programme, and indeed that any compliance costs are expected to be reduced as a result of a Community-wide scheme. It points out that the analysis accompanying the Commission's proposal put the annual cost savings for the Community as a whole at about 35% relative to Member States implementing national schemes, equivalent to some _1.3 billion. Of that sum, about _1.08 billion would accrue to energy activities (_599 million to utilities and other power generation, and _485 million to industrial combined heat and power); _209 million to the iron and steel industries; _31 million to the mineral industry, and _2 million to pulp and paper. However, the Assessment also points out that some transitional costs may arise for particular sectors within the UK, and that there is also likely to be an impact on electricity prices. It says that the implications of these and other factors are likely to be considered in the Government's forthcoming Energy White Paper.
    7. Finally, as regards timing, the Minister says that the European Parliament's first reading of the proposal is expected in September 2002, and that the Danish Presidency is aiming to reach a Common Position in the last quarter of the year, and potentially as early as October.
    8. Conclusion

    9. We are grateful for this further information, from which we have noted that, in addition to the costs savings expected to be delivered by the Community scheme, the Government now envisages that the UK's earlier concerns over its mandatory nature, and the need to provide more flexibility to accommodate the trading arrangements already adopted at national level, are likely to be met.
    10. Since we have already recommended that the proposal be debated, we are simply at this stage drawing the Regulatory Impact Assessment and the Minister's comments to the attention of the House. However, we also note that the Presidency could be seeking political agreement in October, and we therefore expect the Government either to arrange a debate beforehand, or, if that is not possible, to maintain the UK scrutiny reserve until the debate has taken place.


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

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