Europe is leading the world in the fight against global warming. From January 2005, the EU will have the first cross-border trading system for greenhouse gas emission allowances - well ahead of the worldwide scheme to be set up in 2008 under the Kyoto Protocol. The new plan, in which the European Parliament played an important part, will help the EU meet its joint commitment under the Kyoto Protocol to curb greenhouse gases by 8% from 1990 levels by 2012.
The majority of EU Member States have been in danger of not meeting their Kyoto Protocol commitments. The new EU-wide emissions trading system will help tackle this problem by lowering the cost of reducing emissions and hence guiding European companies in the right direction before the start of the global Kyoto scheme in 2008.
Under the new EU scheme, around 10,000 European companies will be able from 1 January 2005 to buy and sell permits to emit carbon dioxide. Companies will be set emissions targets by their national authorities and those that manage to produce lower levels than their targets will be able to sell their spare quotas. To put it another way, if a factory breaches its limit, it will be able to buy "pollution rights" from other firms in Europe that have reduced their emissions.
By creating a market of buyers and sellers of these allowances, the EU hopes to provide incentives for reducing emissions. The profits that can be made from selling emission allowances should encourage companies to develop and use clean technologies. An EU-wide scheme (rather than separate national schemes) will also prevent distortions of competition within industry. The scheme is expected to cut the cost to the EU of meeting its Kyoto Protocol targets by €1.3 billion a year up to 2010, i.e. 35% of the total expense.
The system will come into effect in two stages, with a trial phase running from 2005 to 2007 and the second stage from 2008 to 2012. It requires EU Member States to draw up national plans by March 2004.
A compulsory scheme
Some national governments wanted to have the system applied on a voluntary basis but Parliament backed the European Commission's view that it should be compulsory throughout the EU, on environmental grounds as well as to avoid distortions of markets.
The governments pushed for opt-outs that would allow entire industries to be exempted. Parliament, however, insisted on a limited opt-out system applicable only to individual plants and factories, arguing that blanket exemptions would undermine the system.
Initially the scheme was intended to apply solely to carbon dioxide pollution, and only to the energy, ferrous metals, paper and mineral industries, which account for around 46% of carbon dioxide emissions. The plan was for the Commission to decide later, following a progress report, whether to include more industries and gases. However, MEPs successfully pushed for Member States to be allowed, in stages, to include other industries on a voluntary basis. In addition, the Commission's progress report will focus particularly on whether to include the chemicals, aluminium and transport industries. Lastly, thanks to Parliament, each Member State can now apply in its own right to include other greenhouse gases from 2008.
The polluter pays
Another thorny issue was exactly how national authorities should allocate the emissions allowances. The Commission proposed that the allowances should initially be issued free of charge to companies on the basis of their historical level of emissions. However, MEPs felt this would undermine the "polluter pays" principle, be unfair to new companies entering the market and lead to market distortions. They suggested a mixed system, with most permits to be allocated free but a percentage sold off by auction. A compromise was struck, allowing governments to auction 5% of the permits for three years from 1 January 2005 and 10% in the second phase. More auctioning may be introduced after 2012.
Parliament argued that individual governments should not be free to issue unlimited emissions allowances. Each EU country will now be required to limit the quotas it allocates, and its overall figure must be in line with its individual Kyoto target.
The Kyoto Protocol allows industrialised countries to use "flexibility mechanisms" to help achieve their emissions reduction targets, for example by investing in greenhouse gas reduction projects in other countries or transferring clean technologies to developing countries. However, on Parliament's insistence the directive makes it clear that priority must still go to "domestic" measures.
The Kyoto protocol
Average temperatures in Europe rose by around one degree centigrade during the twentieth century and this trend is set to continue or even worsen in the coming hundred years. Aside from natural phenomena such as variations in solar activity, humans are partly responsible for this climate change because of the pollution they generate which traps heat in the atmosphere, thus producing the greenhouse effect. Carbon dioxide (CO2) pumped out by industry, transport and heating systems is the main culprit, along with a few other gases such as methane, nitrous oxide and fluorocarbons.
The European Union has 5% of the world's population but produces 15% of all greenhouse gases. With this in mind, the EU ensured it played a constructive role in negotiations on the Kyoto protocol, which was agreed by the international community in 1997 to strengthen and implement the United Nations framework convention on climate change. The protocol lays down binding targets for cutting greenhouse gas emissions.
The introduction of a greenhouse gas emissions trading system between the EU Member States is part of a broader plan of action that seeks to promote clean and renewable energies and, in the long term, prepare Europe's infrastructure for the consequences of climate change.