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Emission Trading Schemes - Essay Example

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The European Union Emissions Trading System (EU-ETS) is a landmark environmental policy, representing the world's first large-scale greenhouse gas (GHG) trading program, covering around 12,000 installations in 25 countries and 6 major industrial sectors. The scheme commenced on 1 January 2005…
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Emission Trading Schemes
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Emissions' trading has emerged over the last two decades as the preferred environmental policy tool. The key advantage of emissions trading is that firms can flexibly choose to meet their targets, rather than use predetermined technologies or standards - i.e., command-and-control policies. Emissions sources with low-cost reduction opportunities can over comply and sell their additional allowances to sources where reductions would be more difficult and costly. This leads to the lowest overall cost, or most economically efficient solution. Emissions' trading is particularly relevant to climate change mitigation as carbon dioxide (CO2) and other green-house gases (GHGs) have the same effect wherever they are emitted and compliance costs differ dramatically across sources. Hence there is considerable scope for trading, and opportunity for considerable gains from these trades. Experience in the United States and other countries have shown that well-designed emissions trading programs can reduce environmental policy costs by as much as 50%. [1].
The origins of the EU-ETS date back to 1992 when 180 countries signed the United Nations Framework Convention on Climate Change (UNFCCC). Following negotiations under this agreement, the Kyoto Protocol was signed in 1997, committing the industrialized nations to an averaged 5.2% reduction from 1990 levels by the first commitment period in 2008-2012.
The EU-ETS officially began on January 1, 2005 and consists of a "warm-up" phase from 2005-2007 and then successive 5-year periods, with the second phase from 2008-2012 set to coincide with the Kyoto compliance period. Six key industrial sectors are covered, notably electricity and heat production plants greater than 20MW capacity. Other included sectors (with specific facility size thresholds) are oil refineries, coke ovens, metal ore and steel installations, cement kilns, glass manufacturing, ceramics manufacturing, and paper, pulp and board mills. These sectors are likely to account for around 12,000 installations (depending on the final details of the specification process), and represent close to half of the total CO2 emissions from the EU-25 countries. Participating companies are allocated allowances, each allowance representing a ton of the relevant emission, in this case carbon dioxide equivalent. Emissions' trading allows companies to emit in excess of their allocation of allowances by purchasing allowances from the market. Similarly, a company that emits less than its allocation of allowances can sell its surplus allowances. [1].
Monitoring and reporting of an installation's emissions are carried out based on binding EU-wide guidelines mainly through fuel purchases and use of emissions factors, although continuous monitoring and third party verification are allowed. All self-reported emissions must be verified by an independent third party (similar to an auditor reviewing a firm's financial accounts). [2].Methodologies are under development to allow inclusion of additional sources, greenhouse gases and emissions factors. Hefty fines exists for non-compliance (40 Euro/TCO2 from 2005-2007, then 100Euro/TCO2 from 2008 onwards), levels that are considerably higher than most predictions of allowance prices. [3].
Even though the EU ETS will ultimately be judged on the basis of its effectiveness as a tool to reduce GHG emissions, the underlying rationale for choosing emissions trading was based on economic ...Download file to see next pagesRead More
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