Emissions Trading

Contents

Abbreviations

1 Introduction

2 The Kyoto Protocol

3 The European Climate Change Programme

4 Emission trading in Germany: The case of RWE and E.ON

5 Conclusion

References

Appendices

Abbreviations

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1 Introduction

During the last century the Earth’s average surface temperature has risen by 0.6 degrees Celsius. It is expected to warm by 1.4 to 5.8 degrees Celsius by the end of this century. The current warming trend is expected to cause extinctions. Many plant and animal species, already damaged by pollution and loss of habitat, are not expected to survive till the next century. Human beings are likely to face mounting impacts such as raising sea level, decrease of drinking water springs and, deserts may expand into existing farmlands. The main reason for growing thermometer is the industrialisation with burning of ever-greater quantities of oil, gasoline, and coal, the destroying of forests and some farming methods which especially causes carbon dioxide, methane, and nitrous oxide. These activities cause an increasing amount of ‘greenhouse gases’ in the atmosphere. The effect is that the global temperature is increasing artificially. Global warming involving the entire world which most countries joined an international treaty, under the umbrella of the United Nations, to begin to consider what can be done to reduce global warming. Therefore, in 1997 governments agreed to an addition to the consisting treaty, namely the ‘Kyoto Protocol’ (UNFCCC, 2005).

2 The Kyoto Protocol

The Kyoto treaty was drawn up in Kyoto, Japan, to implement the ‘United Nations Framework Convention for Climate Change’ which have, in opposition to previous treaties, more powerful and legally binding measures. The content of the Kyoto agreement is that from 2008 till 2012 the industrialised countries have to reduce emissions of greenhouse gases by at least 5 percent below their 1990 levels (UNFCCC, 1992). In order to meet the emission obligations cost effectively, the Kyoto protocol has provided three flexible mechanisms. The first mechanism is the ‘Joint implementation’ (JI). This offers the opportunity to an Annex 1 party, which is generally an industrialised country (see Appendix A), to achieve their Kyoto commitment through investments in other Annex 1 countries. Thereby this investor can receive emissions reduction credits when it helps to finance projects that reduce emissions in the other country. Some aspects of this approach are being tested as activities implemented jointly. The second mechanism is the ‘Clean Development Mechanism’ (CDM). The goal of CDM is to assist non-Annex 1 parties in achieving sustainable development by means of capacity building and technology transfer. This mechanism can also help to receive emissions reduction units. The Kyoto protocol also includes as the last mechanism the possibility of trading emissions between Annex 1 parties namely ‘International Emission Trading’ (IET) to achieve emission reductions in a flexible manner and cost-effectively (Grubb, 1999). However the run-up of the Kyoto protocol in the year 2008 seemed a little while sceptic for the European Union. Therefore the EU has also taking serious steps to address its own greenhouse gas emissions (Christiansen, 2004).

3 The European Climate Change Programme

In March 2000 the European Commission launched the European Climate Change Programme (ECCP). The ECCP led to the implementation of a range of new policies and measures on the Basis of the Kyoto Protocol. The European Union has committed itself to cut the emissions even by 8 percent up to 2012. Another new measure, in comparing to the Kyoto protocol, is a more exactly directive in terms of a mandatory scheme for greenhouse gas trading especially at company level within the European Community (European Union, 2005). The directive proposal involves two phases. Firstly, a preliminary phase from before the first Kyoto compliance period 2005 - 2007 and secondly, the phase 2008 onwards. In January 2005, the European Community has implemented the Emission Trading Scheme (ETS) to enable voluntarily trading emissions via ‘learning-by-doing’. It shall be traded with carbon dioxide (CO2), because it is the easily and accurately monitored of the greenhouse gases (Germanwatch, 2001). Therefore as a first step, around 12.000 industrial installations within the EU are included which has big ratios of carbon dioxide emissions. Among other things, these are some large-scale industries and the energy sector (Mahle, 2004). The exactly criteria of choice can be seen in Appendix B. However, ETS is the first international trading system for carbon dioxide emissions in the world. But to permit a flow course it was also necessary that each member state had to prepare a ‘National Allocation Plan’ (NAP) and to publish it by the end of March 2003. The NAP determines the total quantity of CO2 emissions that member states will grant to their companies, which can then be sold or bought by the companies themselves. This means each member states must before decide how many allowances to allocate overall for the first trading period 2005 - 2007 and how many each plant will receive covered by the Emission trading scheme. The idea is that member states limit carbon dioxide emissions through the allocation of allowances so that a functioning market can develop later (European Union, 2004).

4 Emission trading in Germany: the case of RWE and E.ON

Beside the NAP several governments including Germany have been developing their own law providing guidelines. It affords at 1stJanuary 2005 the implementation of emission trading on national level and to achieve its commitment to reduce carbon dioxide emissions. According to the German law this includes that around 2.400 selected installations are able to receive certificates proportionality to their allowances. As a matter of fact just 1.849 Plants has announced to take part in the first trading period. At this, 67 percent of the plants are assigned to the power industry as shown in the diagram below.

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Source: Adapted from DEHSt (2004a)

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