Select Committee on European Union Fortieth Report

EU EMISSIONS TRADING 2008-12 (5055/06)

Letter from the Chairman to Elliot Morley MP, Minister of State for Climate Change and Environment, Department for Environment, Food and Rural Affairs

  Thank you for your Explanatory Memorandum of 26 January 2006 which Sub-Committee D (Environment and Agriculture) considered at its meeting on 8 March 2006.

  The Committee would be interested to know how successful you consider the ongoing first phase of the EU emissions trading scheme to have been so far. As we noted in our 21st Report Including the Aviation Sector in the European Union Emissions Trading Scheme (HL paper 107), installations are fined €40 per tonne of carbon emitted for which allowances have not been surrendered. How effective has this system of fines been? We would also be pleased to receive information regarding how effective sanctions are against those Member States not meeting their emission targets. Who has responsibility for notifying the Commission of Member States' performance?

  We look forward to receiving a full response to the Committee's report in due course. In the meantime, the Committee decided to clear the document from scrutiny.

9 March 2006

Letter from Ian Pearson MP, Minister of State for Climate Change and Environment, Department for Environment, Food and Rural Affairs to the Chairman

  Thank you for your letter of 9 March 2006 concerning the success of Phase I of the EU Emissions Trading Scheme (EU ETS). I am responding to you as the new Minister of State for Climate Change and the Environment. Please accept my apologies for the delay in responding. I was waiting for year 1 results to be published and analysed.

  The EU ETS Directive requires Member States to set an emissions cap at a level which is in line with their emissions reduction targets under the Kyoto Protocol. If a Member State fails to implement the Directive or meet the implementation requirements of the Directive they risk infraction proceedings for being in breach of Community law. In terms of compliance obligations, the onus is on the installations covered by the Scheme to surrender sufficient allowances to cover their emissions, rather than requiring each Member State to remain within their cap. If insufficient allowances are surrendered by the deadline it is the installations that incur the penalty, and to make up the shortfall in the following year. The European Commission is able to assess the performance of installations and Member States through the Community Independent Transaction Log (CITL).

  The publication of the results of the first year of the EU ETS on 15 May 2006 by the EU provided the first opportunity to review installations' 2005 emissions in comparison to their Year 1 allocation. In the UK, compliance with the Scheme in the first year has been excellent with 99.7% of operators submitting their verified emission reports and surrendering allowances on time. Installations that did not meet the deadline for surrendering sufficient allowances to cover their emissions are now being investigated by the regulators.[80] Enforcement action may be taken and the operators may incur penalties. However, at this stage no penalties have been levied against UK installations. EU data indicates that 849 EU installations did not comply fully with the Directive's requirements to report emissions and surrender allowances equivalent to emissions. All Member States are required by Article 21 of the EU ETS Directive to respond to a European Commission questionnaire by 30 June, this includes details of penalties applied. The Commission publishes the results of the questionnaire later in the year. These should provide an explanation of the reasons for non-compliance and whether penalties have been imposed upon installations.

  The Commission now estimates that around 65 million more allowances were allocated to installations than CO2 emitted in 2005 (though we are still awaiting data from some Member States such as Poland). This represents around 3.5% of the total EU allocation for 2005. We are currently assessing the reasons for lower emissions than allocations. These could include increased energy efficiency, issuance of allowances above actual need, changing patterns fuel usage or unusually low production in 2005.

  The UK is one of the few states to have allocated fewer allowances compared to their total emissions in 2005. Overall, the UK's emissions were 27 million tonnes CO2 above the allowances issued in 2005. This was broadly in line with our expectations, as the Electricity Supply Industry (ESI) sector were allocated less than their projected need over Phase I in order to provide incentives for abatement. They emitted 37 million tonnes CO2 more than their allocation. Other sectors were allocated on the basis of projected need and emitted 10 million tonnes CO2 less than their allocations.

  Overall, Year 1 results show that across the EU the Scheme has got off to a good start, with the infrastructure functioning well and forming a sound basis to build on for the future. During 2005 we saw the emerging carbon market develop with substantial increases in volumes traded, the start of effective monitoring and reporting of carbon dioxide emissions, and the first compliance period involving the surrender of allowances from 9,500 installations across the EU so far. With these results, Member States and the Commission have demonstrated that it is possible to develop and implement a ground breaking policy against a very challenging timetable.

  It is important to remember that Phase I is a learning Phase. It is still very early days for the EU ETS and we consider it to be too early to draw firm conclusions on whether it has brought about emissions reductions. We are currently in the process of analysing the data and further analysis of the results will be posted on the Department for Environment, Food and Rural Affairs' website over the coming weeks.

28 June 2006

Letter from the Chairman to Ian Pearson MP

  Thank you for your letter of 28 June in reply to my letter of 9 March regarding the success of Phase I of the EU Emissions Trading Scheme (EU ETS). Sub-Committee D (Environment and Agriculture) considered your letter at its meeting on 19 July.

  We are grateful for your detailed response which aided our consideration of the Communication. We acknowledge that it is still early days for the EU ETS and therefore firm conclusions regarding its effectiveness cannot be drawn. We therefore ask that you provide further analysis when it is available in order to assist our evaluation of the success of the scheme.

20 July 2006

80   Environment Agency In England and Wales, Scottish Environmental Protection Agency in Scotland, the Department of Environment, Northern Ireland and the Department of Trade and Industry for Offshore installations. Back

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