Carbon Trading Sample Research Papers

Under the Kyoto Protocol, the fifteen countries which were Member States of the EU when the protocol was agreed (EU-15) are committed to reducing their collective greenhouse gas emissions in the period 2008-12 to eight per cent below 1990 levels, the reference year of the Kyoto Protocol. This collective commitment has been translated into differentiated national emissions targets for each EU-15 Member State. In 2009, the EU committed to a reduction target of 20 per cent below 1990 levels by 2020. One of the main policies setting out how the EU intends to meet its 2020 target is the EU Emissions Trading Scheme (EUETS).1

The EUETS was launched on 1 January 2005. It includes elements from carbon dioxide emissions trading schemes which originated in the UK and in Denmark and which merged into the EU-wide scheme in early 2005.2 The EUETS sets targets for emissions from energy-intensive industrial sectors such as the energy, cement, pulp and paper industries,3 and it consists of three phases.

Phase I ran from January 2005 till the end of 2007. During this period the only controlled gas was CO2. The objective of Phase I was a tentative one-two per cent reduction, although there was considerable uncertainty about the level of emissions actually being released by the industries covered by the EUETS. Each Member State was given control of the allocation of their permits after it had drawn up a national allocation plan (NAP), which had to show that the Member State was setting the overall EUETS cap in line with its Kyoto Protocol reduction target. Permits were generally given to the participating emitters at no charge. The number of permits issued was based on previous emissions levels, ‘a practice called grandfathering’. It was believed that subsequent trading of permits would establish the correct price. Member States were allowed to sell a maximum of five per cent of permits by auction, but only Denmark chose to exercise this option to the full.

The problem with grandfathering was that domestic industries in each Member State lobbied their governments for the maximum allocations possible, which led to an over-allocation of permits: more permits were given out than the industries actually required. As a result, at the end of Phase I, total emissions from within the industry sectors covered by the EUETS had increased by 1.9 per cent.4

Another effect of over-allocation was that when, in April 2006, it became clear that companies participating in the EUETS had been granted significantly more permits than they needed to cover their 2005 emissions, the price of permits collapsed. With permits losing their validity at the end of Phase I (i.e. no carry-over or ‘banking’ was allowed between Phase I and II), their price in the carbon market dropped from a high of around € 30 to just € 1. See Chart 1. Not all participants were equally successful at bargaining for a generous allocation or equally well equipped for trading; hospitals and universities did less well than energy companies whose core business is trading and which knew how to play this new asset market. As a consequence, by 2012 the estimated 230 million surplus EUA permits, worth up to € 3 billion at a price of € 13 per tonne,5 will have resulted in significant financial gains for some of the largest polluters. For example, power generators that had successfully overestimated their permit requirements received record windfall profits because they passed on hypothetical costs for permit purchases to their customers. 

Phase II coincides exactly with the first commitment period of the Kyoto Protocol (January 2008 to December 2012). Again the only controlled gas is CO2 (although France, the Netherlands and now Norway6 have opted to include NO2), and again permits were allocated by Member States in NAPs. 2005 was set as the base year against which emissions changes are measured. Business-as-usual emissions for 2005 were set at 2177 MtCO2. The object of Phase II is to reduce emissions by 4.3 per cent to 2083 MtCO2 per annum.

The EU operations of ArcelorMittal, the world’s largest steel company, are covered by the EUETS. The company’s operations have received significantly more permits than they needed to cover their operations. The company is likely to have made over € 2 billion in profits from trading EUETS permits between 2005 and 2008, with over € 500 million of the profits accrued in 2008 alone.

Sources: D. Leloup (2009) Analysis of Acrelor Mittal EU ETS Data.

Under the legislation for Phase II, a greater quantity of permit auctioning was envisaged – up to ten per cent – but this was left to the discretion of the Member States. The result is that only Germany (nine per cent) and the UK (seven per cent) have declared an intention to auction anything like this quantity, with most making no commitment to do so. From Phase II, the ‘Linking Directive’ – which links the EUETS with the Kyoto Protocol’s flexible mechanisms – allows companies to start using CDM or JI credits (see Chapter 3) up to a limit of 11 per cent of a Member State’s total allowance.78 This will effectively allow emissions within the EUETS to increase during Phase II.9 The price of EUETS permits in Phase II has fluctuated almost as dramatically as in Phase I, falling from over € 30 to less than € 10. This time the fall has been attributed to the reduction in industrial activity following the global ‘credit crunch’ of 2008-09. In September 2009 the EUETS permit price was around € 14-15. This greater resilience in price, despite the fact that permits were once again overallocated, is due to the fact that this time permits can be banked through to the next phase. Many expect that power companies, which in Phase II continued to receive their permits free of charge, will gain windfall profits between € 23 and € 71 billion during Phase II because of the continuation of the practice of passing on non-existent costs for permit purchases to the consumer.10

Chapter 4 gives more detail on how, during the financial credit crisis of 2008-09, some companies used their EUETS allowances to raise cash that was otherwise hard to obtain due to the unavailability of bank credits and lack of liquidity in the banking sector – giving them a significant business advantage not available to businesses outside the EUETS, such as the renewable energy industry.

Phase III will run from January 2013 until the end of 2020. The final emissions target has been set at 1720 MtCO2e, 14 per cent below 2005 levels (and equivalent to 21 per cent below 1990 levels, but see the qualifications below regarding the use of offset credits). The legislation for Phase III makes modifications to the existing rules of the EUETS and introduces some new ones:

  • in line with the Kyoto Protocol, several carbon equivalent gases will be introduced
  • 50 per cent of the reduction between the beginning of Phase II and the end of Phase III can be accounted for by imported offset credits from the CDM or JI
  • NAPs will be coordinated by the European Commission from 2013 onwards
  • auctioning has been increased, though the exact level has still not been fixed. Intense lobbying by manufacturing industries – claiming they would move production outside the EU if auctioning was introduced in the EUETS in isolation from other trade blocks doing the same – is likely to result in around three-quarters of manufacturing companies covered by the EUETS continuing to receive free permits in Phase III. When it introduced plans to increase auctioning in Phase III, the Commission envisaged that 100 per cent of allocations would be auctioned by 2027.11

As well as these changes, a ‘price trigger’ has been introduced. This means that if the price of permits exceeds three times the average price of the previous two years, the Commission will call a meeting of Member States to decide how to limit the price. Some commentators have expressed concern that there is no provision for such a meeting if, by contrast, the permits drop below a set price. Others have expressed concern that such a price trigger will keep prices too low to actually incentivise investment in low-carbon technology that goes beyond end-of-pipe technology investments.

One market observer told Point Carbon: ‘The obvious thing to say now is that the caps must be corrected in the second phase, but what has happened recently makes us realise that if regulators are off with their estimates, prices will be either very high or very low. I am not sure that something with such an inherently unstable price is an incentive for people to invest. It is a fundamental flaw in the scheme.’12

Due to a combination of continued over-allocation at the start of Phase II, and the economic downturn since 2008, companies may ‘bank’ up to 700 million surplus Phase II permits and carry them over to Phase III. This would be equivalent to 14 times the reduction claimed by the EU in 2008. If entities also use their full allowance of offset credit purchases during Phase II, they may be able to carry over an additional 900 million offset credits. This may add up to 40 per cent of the Phase III reduction effort being achieved solely through the carry-over of surplus permits and credits from Phase II13 – and would substantially reduce the requirement to cut emissions within the EU.

Monitoring and verification of emissions in the EUETS

Article 14 of the EUETS Directive requires Member States to ensure that companies covered by the EUETS scheme monitor and report their greenhouse gas emissions in accordance with guidelines published by the European Commission.14 Imre Csikós, MOBilisation for the Environment,15 explains:

‘Emissions are generally not measured directly, but determined by calculation based on fuel consumption, specified emission factors, and the thermal efficiencies for combustion units and on output and other chemical and engineering estimates for process emissions. In order to avoid undue costs, the specific monitoring, reporting, and verification procedures vary according to the size of the installation with higher “tier” or more accurate and more costly techniques being applied to larger installations than to smaller ones. Each Member State is responsible for certifying verifiers and more generally for ensuring compliance through the deduction of allowances from accounts in the national registry equal to the verified emissions reported for each installation.’

The summary report of a 2009 EUETS Compliance Forum workshop hosted by the European Commission highlights gaps in consistency of the monitoring and verification process. The report mentions different Member State ‘approaches on rejection of emission reports – dealing with not verified emission reports; inconsistent and/or different interpretations of the MRG [Monitoring and Reporting of Greenhouse Gas Emissions under the EUETS] requirements; cost pressures on verifiers and the effect on the quality of the verifications; … missing professional scepticism and independence of the verifier.’16

Энсей Танкадо стал изгоем мирового компьютерного сообщества: никто не верил калеке, обвиняемому в шпионаже, особенно когда он пытался доказать свою правоту, рассказывая о какой-то фантастической дешифровальной машине АНБ.

Самое странное заключалось в том, что Танкадо, казалось, понимал, что таковы правила игры. Он не дал волю гневу, а лишь преисполнился решимости.

Когда службы безопасности выдворяли его из страны, он успел сказать несколько слов Стратмору, причем произнес их с ледяным спокойствием: - Мы все имеем право на тайну. И я постараюсь это право обеспечить.

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