The European Union's greenhouse-gas trading system needs reinforcement.
When the European Union (EU) started the world's first mandatory greenhouse-gas emissions trading system in January 2005, there was widespread scepticism about its prospects. Thousands of companies were allocated ‘allowances’ for emitting a given amount of carbon dioxide; if they produce more, they have to buy extra credits. The sceptics questioned whether prices would climb high enough to provide a real incentive for industry to invest in clean technologies, or for power producers to switch to less-carbon-rich energy sources.
Some of this criticism subsided when the price, as well as the volume of trading on the new market, began to increase. By the middle of last month, the price of credits to release a tonne of carbon dioxide had reached more than €30 (US$39). Then the price fell sharply, on rumours of unexpectedly low industrial emissions in a number of EU countries. But although the European Commission officially confirmed on 15 May that EU industries emitted 44 million tonnes less carbon dioxide in 2005 than they had been allocated, the predicted market meltdown failed to materialize (see page 405).
There are lessons to be learned from this month's market turmoil. Clearly, the European Commission, which is in charge of approving each member state's emissions allocation, over-allocated such rights for the initial trading period, from 2004 to 2007. But that is no reason to fear for the market's survival — it is normal, in the history of using such markets to control pollutants, for regulators to aim low and then turn up the heat as more experience is gained.
It is equally clear that administrative questions regarding the estimation, allocation and verification of emissions have yet to be fully resolved. Reporting and verification methods vary from country to country, with some, including Poland and Italy, admitting that their national registries aren't yet functioning.
Additionally, the basis of allocating emissions rights to different sections of industry isn't sufficiently clear or logical, and can actually hurt growth sectors that have actively sought to cut emissions but whose efforts are not rewarded by the system. A British-led initiative to update the allocation system has unfortunately come to nothing.
These issues need to be addressed if emissions trading is to remain viable and reach beyond the EU. A review of technological improvements in pollution control made since 1990 — the baseline year for the allocation assessment — is needed, along with greater harmonization of the allocation and verification processes. Independent inspectors accredited by the European Commission must be granted full access to facilities across the EU.
Ultimately, the market will have to be transparent, and the price substantial and reasonably stable, if industry is to take it into consideration when making investment decisions. A power company will not spend hundreds of millions of euros on carbon-sequestration facilities unless prices on the market signal clearly that it is economically sensible to do so. As such investments can take 20 years to bear fruit, industry also needs to know the system will still be around for the long haul.
The EU will in due course provide these assurances. The European Commission, in the meantime, must press on with the task of creating a firm and fair regulatory framework within which the market can thrive.