13. Examples of emissions trading systems

The first phase of the EU ETS began in January 2005, and will run until December 2007. The second phase will continue from 2008 to 2012.

Features include:

• Coverage of about 11,000 installations, which together produce over 40 percent of European CO₂ emissions in 25 countries.

• Sectors and activities included in the pilot phase are: energy activities, the production and processing of ferrous metals, the mineral industry and pulp and paper production.

• Use of a cap and trade system, where EU states, through National Allocation Plans (NAPs), determine the number of allowances that each installation covered by the system receives and the total allowances required by the state. The European Commission has the power to approve or reject NAPs.

• Linking to the Kyoto Protocol’s clean development mechanism and joint implementation from 2008 will expand the market further.

For the second phase of the EU ETS, further developments will be considered, including:

• Extension to other sectors (including the chemicals, aluminium and transport sectors) and emissions of other greenhouse gases.

• Harmonisation between member states of the allocation method, rules for new entrants and closures and rules for verifying emission reports.

Further information on the EU ETS can be found at:

http://ec.europa.eu/environment/climat/emission.htm.

Example Two: The Northeastern US States Regional Greenhouse Gas Initiative (RGGI)

The Regional Greenhouse Gas Initiative (RGGI) is a regional initiative by states in the northeastern US region to reduce greenhouse gas emissions from fossil fuel electricity generators and is proposed to start in 2009.

Features include:

• A mandatory cap and trade program for CO₂ emissions from fossil fuel electricity generators above 25MW.

• A goal to lead to a stabilisation of regional emissions from covered installations at 2005 levels by 2015, followed by a reduction in emissions between 2015 and 2018, reaching a 10 percent reduction from 2005 levels in emissions in 2018.

• State-based caps on emissions, with states to allocate allowances to individual emitters, subject to the condition that 25 percent of allowances must be allocated to consumer benefit or strategic energy purposes.

• Fossil energy generators initially able to purchase offsets from approved projects in the US to meet 3.3 percent of their emissions, with 1:1 crediting for mitigation from participating states and 1:2 crediting for projects in non-participating states.

• Offset projects that may initially be in a number of areas including landfill gas, afforestation, methane capture from farming, and end use efficiency of natural gas, propane and heating oil.

• Provision of a series of safety valves, including allowing a greater percentage of offsets (up to 10 percent), 1:1 crediting of non-participating state offsets and participation in international trading, when specified trigger price thresholds for allowances are exceeded for an extended period of time.

Further information on the RGGI can be found at:

http://www.rggi.org/.

Example Three: Proposed Australian States’ National Emissions Trading Scheme (NETS)

The eight Australian states established a working group, later renamed the National Emissions Trading Taskforce, in January 2004 to develop a model for a National Emissions Trading Scheme (NETS). In August 2006, the taskforce released a discussion document outlining a possible design of the NETS, along with results of preliminary economic modelling. The document is the basis of broad public consultation being carried out to the end of 2007.

Features of the proposed NETS include:

• a mandatory cap and trade program for CO₂ emissions initially from electricity generation (being 43 percent of the national inventory of greenhouse gas emissions). Possible expansion of the scope of the scheme in five years’ time to include emissions from all fossil fuels

• modelled scenarios including capping electricity generation emissions in 2030 at the year 2000 level (33 percent reduction from BAU), or capping 2030 emissions at the year 1997 level (43 percent reduction from BAU). The impact on national economic growth and the electricity price impacts between states were modelled (and are described in the discussion paper linked below)

• known caps on emissions for ten years, extended annually, with the upper and lower bounds of future caps (“gateways”) set for at least five years after the ten-year known caps

• auctioning of permits. Generators that can show reduced profits as a result of the scheme can have some freely allocated permits in proportion to the losses. No free permits are given to new generation entrants. There is some free allocation of permits to new and existing trade-exposed, energy-intensive industries according to output levels

• any residual auction revenue to be used by individual states, possibly to minimise impact of higher electricity prices on low income consumers

• offset projects initially prioritised as forestry, industrial process emissions, geosequestration, and methane from waste treatment

• units created through the clean development mechanism would be recognised by the proposed NETS and swapped for offset units.

Further information on the NETS, including the discussion document, can be found at:

http://www.emissionstrading.net.au.

Example 4: Proposed Energy Performance Commitment (EPC) scheme for the UK

As part of an energy review, the United Kingdom government has committed to consult on measures to cut carbon emissions from large commercial and public sector organisations by 1.2 million tonnes per year by 2020. The UK government has indicated it will put forward a proposal for an Energy Performance Commitment (EPC) – a mandatory emissions trading scheme – alongside other options for achieving carbon reduction aims for that sector.

Potential features of the proposed EPC already discussed include:

• coverage of organisations with electricity consumption on mandatory half-hour electricity meters over 3,000 MWh/year

• all energy usage by those organisations at mandatory HHM sites (but excluding usage covered by the UK Climate Change Agreements policy and the EU ETS) could be within the scheme

• allowances could be allocated by a fixed quantity auction to participants (after a one- to three-year introductory phase during which allocation would be by fixed price sale without a cap on number sold)

• allowances would be tradable. A one-way price safety valve allowing purchase of allowances from the EU ETS to meet obligations could be used

• revenue from allowance auctions would be recycled back to participants.

Economic analysis commissioned by DEFRA indicates that with revenue recycling, an EPC scheme in the UK could result in significant emission reductions and also overall net present value benefits to participants in the scheme.

Further details on the proposal can be found at:

http://www.defra.gov.uk/environment/climatechange/trading/epc/index.htm.