Aspects of the European Emissions Trading Scheme - Term Paper Example

?Report on Aspects of the European Emissions Trading Scheme Executive Summary The following report offers an assessment into the European Union Emissions Trading Scheme beginning with an overview of how it started and its principal design. Historically, in the 1990s, there were many carbon-tax proposals and the challenge became actualizing any of them into workable systems. The Coasian theory proved to be the most efficient and was thus taken up. The principal design featured rolling out the scheme in three phases, where the first two phases would guide the third one subsequent to the experiences had. In addition, there was an agreement made with particular nations that made the burden of reducing emissions lesser because of their economic capabilities. The scheme also featured a ‘flexible’ arrangement where Member States created their own National Allocation Plans. Further on, the report looks into the aspects of the Emissions Trading Scheme in a comparative manner that is, the intention at the beginning, actualization stages and the present state. The main aspects include its boundary where at first the scheme focused on power generating companies and those that use energy-intensive operations that is, metal producing companies and oil refineries. The other aspect is extension where the EU Emissions Trading Scheme has formed links with other schemes through emissions-saving projects through two key mechanisms. Third world countries that have a compulsory cap-and-trade system and they have ratified the Kyoto Protocol have also formed links with the EU scheme. This has seen the carbon market expand to a global reach. Finally, there is the calculation aspect that presents three different models for calculating carbon dioxide emissions. Lastly, a breakdown of the issues has come into play since the inception of the EU Emissions Trading Scheme. These have included harmonization efforts to minimize adverse effects of competition and bringing on other sectors such as aviation with the coming in of European airlines. Additionally, there is the problem of too low prices of allowances where the European Commission has made a proposal to raise them artificially through holding back a considerable amount; this has faced rejection though the efforts are still on going. Introduction Having no prior experience with cap and trade as well as the need to develop knowledge along with architecture for the program, the European Union set out to begin with only carbon dioxide and a restricted number of sectors. This is following the established Kyoto Protocol that was created with the aim of averting hazardous human-induced interference to the climate system. As soon as the infrastructure was in place, additional greenhouse gases and sectors could be included in successive phases of the program. This would come into effect depending on any further emissions that needed to be reduced. Over time, a carbon price that is widely accepted in Europe was instituted, businesses embarked on including the price in their decision-making and the market infrastructure for a multi-national trading system came into existence (Ellerman, Perthuis and Convery 2010,p.2). The principal design of the EU Emissions Trading Scheme follows that all manufacturing sectors that are particularly energy-intensive and electricity generators are obligated to get a permit from regulators for every tone of carbon dioxide that they release. The first phase of the Scheme, taking place from 2005 to 2007, saw the permits being issued free based on companies’ historical emission levels. The second phase, taking place from 2008 to 2012, saw generators of electricity having to purchase some of their permits from auctions organized by the government; while, industrial companies continue to get their permits for free subject to some tightening of targets in acknowledgement of the risk of hurting their competitiveness. The third phase, taking place from 2013 to 2020, will see all permits being auctioned with the exception of particular manufacturing sectors that can show they are at the risk of losing international competitiveness (Ellerman and Trotigon 2009 p.53). National Allocation Plans (NAPs) have been established at the national level in a bid to centralize the EU Emissions Trading Scheme, and at the EU Commission Level to synchronize its functioning. Broken down, the EU Commission is tasked with administering the Community Independent Transaction Log (CITL), which manages the national registries along with the Kyoto Protocol’s International Transaction Log (ITL). In addition, the boundary of the scheme is progressively expanding to include additional sectors such as aviation and petro-chemicals in 2012-2013. The main characteristics of the EU Emissions Trading Scheme can therefore be summarized as its three-phase nature, establishment of NAPs and progressive expansion of the scheme (Chevallier 2012, p.4). In getting a better understanding of the EU Emissions Trading Scheme, it is imperative to look into the EU itself. It is constituted of Member States that are independent nations displaying and exercising sovereignty, making the EU have a weak federal structure. However, some authority in some domains is solely left to the Council of Ministries that is composed of relevant ministers from the Member States who each have voting rights that have been cautiously negotiated upon. This renders the EU ETS decentralized, where if it were an agreement held by U.S this would be different as the federal structure is much stronger (Sorrell et al 2008, p.30). Original intention of the Emission Trading Scheme The idea behind setting up the Emission Trading Scheme was founded on the Coasian theory, where defining rights and consenting to trade in these allowances made it possible for participants to look for the most affordable way of delivering the eventual environmental goal. A market materializes and price of emission allowances singles out the lowest-cost way of meeting the controlled set. This facilitates internalization of the external impact with maximum efficiency. Furthermore, the problem facing carbon-tax proposals in the past is taken care of following the idea to make the allowances free; the efficiency characteristic of a market-based mechanism is separated from the revenue transfers entailed in taxation. From a political standpoint, opposition is avoided through the free allowances (Grubb 2007, p.17). Before the Emission Trading Scheme came into full effect, EU created a Burden Sharing Agreement that allowed its less rich nations that is Greece, Ireland, Portugal and Spain to have a lower target of emissions reduction compared to the other richer states. This allowed these nations to increase their emissions relatively while the rest are tasked with stabilizing or further reducing their emissions, which was set at 8%. The accession countries in Eastern Europe that joined the EU later had their own individual agreement reached known as Kyoto targets (Engels 2009, p.490). The boundary aspect of the Emission Trading Scheme In the beginning, the agreement was restricted to manufacturing companies that used particular energy-intensive operations and electricity generators, with an inclination to the latter. Seven years later and evidence suggests that the electricity generating companies are more successful with the scheme (Burleson 2007, p.4). This is because they have no threat of international competition and cannot threaten to move their operations overseas. Typically referred to as the power sector, companies falling here are easy to regulate seeing as there are a relatively few number of installations and companies are responsible for high levels of emissions rendering them easier to monitor. In addition, electricity generation companies have clear options of reducing carbon emissions and access to new, efficient technologies that are dependable (Benz et al 2010, p.706). On the other hand, metal producing companies are less likely to have such options with no access to inexpensive carbon capture along with large capacities of carbonized electricity or storage (Kopsch 2012, p.772). As the first phase was on-going, there were plans to include the aviation sector in the Emissions Trading Scheme; this was to be done at the lowest possible economic cost which meant reducing emissions in the aviation sector or further reducing emissions in non-aviation sectors. Emissions reductions were to come into effect in two main ways through carrying out activities that result in reduced emissions such as taking shorter routes for flights or using aircrafts with less emission or minimizing activities achieved by reducing number of flights. The latter option was not feasible however, as the aviation sector contributes significantly on the economy (Pfeifer and Rory 2009, p.82). Inclusion of the aviation sector that is European airlines, into the Emissions Trading Scheme began last year. The calculation aspect Carbon dioxide emissions are being calculated using three different systems- Markal-Nordic, Balmorel and Econ-Classic all attributed to being energy-based models. They fall under different systems of the Nordic energy model rendering calculations essentially different. The Markal-Nordic model follows that renewables are a more likely competition to gas implying that when gas prices are high, then emissions will be lower. In contrast, the Balmorel model follows that the main competitor to gas with regard to electricity is coal; therefore, when gas prices are higher emissions will consequently be higher as more coal will be used. The Econ-Classic is an electricity-based model that follows there is no difference between either scenarios where gas or coal is in use; hence, it presents the lowest price for emissions (“EC ponders expanding...” 2005, p.9). The extension aspect The EU Emissions Trading Scheme has taken advantage of emission reducing opportunities from other parts of the world that have ratified the Kyoto Protocol. This has been through forming links that see carbon credits transferred between EU nations and third world nations, which must have mandatory cap-and-trade systems (Tanaka 2012, p. 580). As for other developing nations, there are emissions-saving projects that have been established such as the Central Development Mechanism and the Joint Implementation, set out under the Kyoto Protocol (Nazifi 2010, p.169). Through development of project-based mechanisms such as the Joint Implementation along with the Clean Development Mechanism, there has been a major expansion of the global carbon market (Klepper and Peterson 2006, p. 2). There are many, varied Emissions Trading Scheme presently and several other national and sub national schemes are expected to come out. These will promote the development and enhance the economic efficiency of the market. Notable also there have been links established between schemes such as between the Norwegian Emissions Trading Scheme and the EU Emissions Trading Scheme, referred to as a bi-lateral link, there is also a unilateral link between the EU Emissions Trading Scheme and Chicago Emissions Trading Scheme. Transfers between systems through these links is bound to get restricted as the prices are higher in the EU, although there are set to continue mostly in the form of carbon credits for offsetting purposes (“EC launches web review” 2005, p.20). Issues arising There are economic concerns pertaining to adverse competitive effects through leaking of business dynamics of the EU Emissions Trading Scheme to the U.S, which is considered a ‘Kyoto-free’ area, and developing nations (Brohe 2010, p.469). This saw observers from government agencies and the corporate world calling for harmonization efforts in order to reduce the adverse effects. Suggestions made included defining combustion installations, dealing with new entrants and rules for closing off. There were concerns that carbon prices were becoming too high and payments to utility companies were increasing (Goers and Pfluglmayer 2012, p.70). This was averted, nevertheless, as there was a realization that companies tended to over allocate allowances which was inevitable since there was no historical data to chart from. As time went on, the prices were less volatile and there was market certainty, which encouraged economic progress and investment, which were the main long-term benefits of the scheme (Flam 2009, p.35). In April this year, the executive arm of the EU- the European Commission made a proposal that would see carbon allowances amounting to 900 million tonnes taken off the market now and reintroduced later. The proposal was hereto dubbed back loading and it is intended at creating demand. Nonetheless, it was rejected and this made the situation worse as the price of carbon went further down. Even though prices had settled, there has been the problem of overcapacity owing to the initial allowances given out that were in surplus. Currently, the price is approximately at 2.75 Euros /tone, which is a dramatic fall from the 30 Euros/ton it held a while back. Other structural measures suggested to curtail the price include cutting back the list for industries exempt from getting the allowances (Michaelowa 2008, p.431). Energy-intensive companies such as chemical companies have opposed the move of artificially raising the prices as they feel that the Emissions Trading Scheme already imposes high costs on them (Blazey and Connors 2008, p.292). References "EC launches web review of the EU emissions trading system", 2005, EU Energy, no. 110, pp. 20. "EC ponders expanding the EU emissions trading scheme in Phase 2 after a 'solid start'", 2005, EU Energy, no. 107, pp. 9. 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