Trading on efficiency

The UK is leading the way on climate change mitigation with the issue of its draft National Allocation Plan (NAP) – a vital part of the European Emissions Trading Scheme (EU ETS). Other countries will be waiting to see what happens in the UK as an indication of just how tough their governments should be on cutting emissions of carbon and other gases.

It’s well known that the UK government is committed to a 20% reduction in CO₂ emissions by 2010. Its draft NAP will create the equivalent of an overall reduction of UK emissions of 16·3%. This is just for the first phase of the EU ETS from 2005 to 2007 – from 2008 the commitment will be strengthened to achieve the 20% goal.

As part of the EU ETS, every member state must draw up a similar NAP for submission to the European Commission by the end of March 2004. The NAP must set out the total number of emission allowances (each representing 1 tonne of CO₂) to be allocated to the industry sectors covered by the EU ETS. It also has to show how this allocation is divided between individual installations included in the scheme.

The draft NAP marks a milestone in the progress to 2005 when the EU ETS is set to start. From that point the scheme will impose requirements on the largest emitters of carbon dioxide to monitor and account for their emissions. The industries covered under the scheme are:

• combustion installations;
  
• mineral oil refineries;
  
• coke ovens;
  
• metal ore processing;
  
• iron and steel production;
  
• cement and lime production;
  
• glass manufacture;
  
• ceramics manufacture;
  
• pulp, paper and board production.

Together, these account for about 50% of all UK carbon dioxide emissions. The first phase of the EU ETS runs for three years from 2005 to the end of 2007. Subsequent phases will run for five years.

After 1 January 2005, operators of installations in these sectors will be required to hold a greenhouse gas emission permit. By the 30 April 2006 these permit holders will have to declare emissions levels to the EU. This means that they will have to monitor emissions of specified gases (only CO₂ for the first phase); have emissions data verified by an accredited independent body; and make a report of this data.

The European ETS is a ‘cap and trade’ scheme. The market in emissions trading will be open, so a company is free to trade with any other company in another EU member state. This means that a permit holder can either decide to reduce the installations emission levels; buy allowances through the open market to bridge the gap between target and actual emission levels; or use a combination of both methods. Operators who achieve emission reductions better than their target can sell the ‘extra’ on the open market.

In the past, some climate change policies have been toothless, with little punishment for those who don’t comply or meet targets. The EU ETS however does impose harsh penalties. In the first phase the penalty will be 40% of the value of every tonne that the operator fails to cut. In phase two, this will increase to 100%. Even payment of the fine doesn’t exempt the operator from meeting the reduction targets – shortfalls will be carried over into the following year.

Although the property and construction sectors are not directly affected by the EU ETS in its current form, there are knock-on effects from the tough caps proposed for emissions from the power industry. Total allowances allocated in the draft NAP equate to 438·7 million tonnes of CO₂ – about 84% of current emissions from this sector.

As buildings use 40% of the UK’s energy, the drive for energy efficiency looks set to go up a gear in the light of this. The UK government has taken this hard line because it sees that there is ‘relatively large scope for low-cost abatement opportunities in the power generation sector’. There is also a view in government that the UK’s power sector only faces limited competition from abroad (electricity imports are only 2% of total supply).

There is an added burden on the energy sector because renewable energy and chp policies haven’t been as successful as they might have been. Unless we can be more energy efficient this will naturally require greater generation from the non-renewable power sector – and an increase in emissions.