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Last Updated: Wednesday, 16 February 2005, 02:07 GMT
EU leads Kyoto 'carbon revolution'
By Stephen Mulvey
BBC News

The Kyoto protocol, now finally in force, is designed to cut greenhouse gas emissions by making the polluter start paying for climate change.

The pollutants in question are carbon dioxide (CO2), methane, nitrous oxide from vehicle exhausts, and some types of man-made gas used in industry. The polluters are the countries which emit them into the atmosphere.

A smokestack in front a forest scene
The EU's 12,000 biggest-emitting plants are involved in the scheme
Each signatory has an emissions target it is legally obliged to meet by 2012.

Any country struggling to fulfil its obligations may have to buy credits from another that is on track to meet its target with room to spare.

But the Kyoto trading system will only get under way in 2008 - so the EU's Emissions Trading Scheme, which officially came into existence on 1 January 2005, is a vision of the future.

It is not so far a particularly encouraging vision - but it is, at least, a start.

Four of the 25 EU states - the Czech Republic, Greece, Italy and Poland - have not yet joined the system at all, and the UK is squabbling with the European Commission over its emission allowance under the scheme.

We need to accept that the first phase of emissions trading is not going to deliver emissions reduction
Russell Marsh, Green Alliance

No country wants to put its businesses at a disadvantage, so all have played safe, erring on the side of generosity when setting emission quotas for industry.

The result, a number of experts argue, is that too many allowances have been issued for the scheme to drive a major clean-up.

"We need to accept that the first phase of emissions trading (2005-2007) is not going to deliver emissions reduction," says Russell Marsh, head of policy at the Green Alliance, a UK environmental think tank.

"It's clear that at the moment, the way it has been set up, the carbon price is not going to be high enough to make a real difference, now or for the next three years."

Caution or ambition?

The carbon price is the price of an allowance to emit one metric ton of carbon dioxide - the only greenhouse gas covered by the European scheme at this point.

Graphic showing price of CO2 on ETS
The winter has been mild and wet, which is one reason why the price has fallen
Andreas Arvanitakis, Point Carbon UK

These allowances have been traded for months on the forward market (for delivery at a future date) and currently cost in the region of seven euros.

It is only now that allowances are actually beginning to land in company accounts, enabling "spot" trading to take place.

The first such deal took place last week, in Denmark.

If too many allowances have been issued, the carbon price will fall. In theory, it could even reach zero.

To see how cautious EU states are being, consider the UK's latest allocation plan, produced in October.

This increased by 3% the projected CO2 emissions of the 1,000 generating plants and other installations big enough to be included in the scheme, partly on the basis of new, increased forecasts of electricity demand.

The allowances the plan proposes to allocate, however, come to only 5.2% less than this new projected emissions figure, so the overall cut in emissions required in 2005-2007, compared to 2004, is not great.

The Commission has rejected the new plan, but not because it is too soft.

In fact, the UK government says its plan is "well beyond the requirements of the EU ETS directive and... one of the most ambitious across Europe".

At least the UK, unlike a number of the wealthier EU states, has already met its Kyoto target.

Role of the weather

Professor Michael Grubb of the UK's Carbon Trust is another who says that the "weak" emission allocations made by member states raise the question of "whether we have the guts to let the system work properly".

Designed to be a cheap method of achieving emissions cuts
Ensures the cheapest efficiency savings are made first
National governments allocate allowances to industry, in line with their Kyoto target
National plans vetted by European Commission
Allows participants to gain credits by financing clean development projects abroad

But Andreas Arvanitakis of consultants Point Carbon UK is more upbeat, describing a carbon price of up to 20 euros as "perfectly feasible".

It depends, he says, on such factors as the rate of economic growth, the relative cost of coal and gas, and even the weather.

"A cold and dry winter in Scandinavia would mean that there was little hydropower available, and more coal would be used, which would push the price of carbon up," he says.

"In fact, the winter has been mild and wet, which is one reason why the price has fallen by more than a euro since the start of the year."

The larger the difference in price between coal and gas, the more the carbon price is likely to rise, because coal produces about a third more CO2 per unit of energy generated.

If it did reach 20 euros, this is the point at which generators in Germany, the EU's biggest emitter, would be likely to make a major switch from coal to gas, according to the German trading company, Syneco.

Learning phase

Even if the European trading system fails to lead to significant cuts in emissions in the first three years, it will not necessarily have been a waste of time, says Russell Marsh.

Graphic showing volume of trade on ETS
  • 7mt traded in first six weeks of 2005
  • Most traders are large energy companies
  • Banks are also involved in speculation
  • "We can look at this as a learning phase," he says.

    "It's a new system and there are a whole load of issues that will need to be resolved to make it work effectively."

    But he argues that the next phase of the trading system will have to be "a lot more stringent" if the EU is to meet its collective Kyoto target of getting greenhouse gas emissions 8% below 1990 levels, by 2012.

    Many would also like to see it broadened.

    The 12,000 plants included in the EU scheme so far account for less than half of its overall CO2 emissions (46% in the UK).

    And CO2 is only one of the six greenhouse gases covered by the Kyoto treaty, albeit the most significant one.

    In the larger scheme of things, Kyoto itself is only a modest start to the problem of tackling climate change.

    Globally, the protocol aims to achieve a 5.2% reduction in the 1990 level of greenhouse gas emissions by 2012.

    By contrast, EU environment ministers agreed in December that keeping greenhouse gases at "manageable" levels would require a cut in emissions of 25% to 50% by 2050.

    The UK government thinks even that is insufficient, and is aiming for a cut of 60% by the same date.

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