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EU leads sluggish world

THE AIM of the European Union (EU) Emissions Trading Scheme (ETS)—the most advanced scheme of its kind in the world—is to mitigate climate change by reducing emissions of carbon dioxide (CO2)—other greenhouse gases (GHG) may later be included as well.

The scheme, a result of the EU Emissions Trading Directive, starts on 1 January and covers over 12,000 installations in five industrial sectors across the EU (including accession countries). The power-generation sector accounts for 55% of the emissions covered by the directive. The other sectors are refineries, ferrous metals, pulp and paper, and building materials.

The ETS will work on a 'cap-and-trade' basis. In a National Allocation Plan (NAP), each EU government will set an emissions cap for the installations within its borders covered by the scheme.

Some NAPs were submitted to the European Commission for approval by the end-March deadline, while others—including the UK's—were delayed. The UK government expected to make its submission around the end of last month. Industry sources say the Commission is not overly concerned by delays of a few weeks.

The first phase of the ETS will run for three years, from 2005 to 2007. A second phase will run from 2008-2012—coinciding with the first commitment period under the Kyoto Protocol on climate change. Further five-year periods are expected subsequently.

At the end of each year, emissions from installations are measured.

Operators then give up allowances equal to their emissions. As the UK Department of Industry (DTI) explains, participants, therefore, have three choices: meet the limit; reduce emissions below the limit and sell the surplus (or keep it for future use); or let emissions remain higher than the limit and buy allowances from others in the schemes to cover the difference.

The DTI adds that the strategies companies adopt will depend on the price of allowances in the Europe-wide carbon trading market, which will be created by the scheme, compared with the costs of reducing their own emissions.

Failure to cover emissions with allowances will lead to fines of Euro40 ($49) per tonne of CO2 in the first phase and Euro100/t from 2008.

Under the Kyoto Protocol, the EU is committed to reducing GHG emissions by 8% from their 1990 level by 2008-2012. Uniquely within the EU, the UK plans to go further than it is obliged to. Its Kyoto target was a cut in emissions over the period of 12.5%, but the government's aim is to reduce CO2 emissions by 20% from the 1990 level by 2010.

Companies will also be able to use emissions-based credits from Kyoto Protocol systems, such as Joint Implementation and the Clean Development Mechanism. Originally, the EU intended to introduce this possibility from 2008 onwards, but it may be available from 2005. A decision is expected later this year.

International efforts to mitigate climate change and reduce GHG emissions began in earnest in 1992, with governments adopting the UN Framework Convention on Climate Change. The Kyoto Protocol followed in 1997, setting out legally binding constraints on GHG emissions and establishing mechanisms for cutting the cost of curbing emissions.

However, some key countries have failed to ratify the Kyoto agreement and the EU's efforts are far from being replicated across the world. Critics say that, as a global problem, climate change requires a global solution. The efforts of individual countries arising from the flawed Kyoto Protocol, however noble, will not avert climate change.

The US, responsible for a quarter of the world's GHG emissions, opted out of Kyoto. Russia, which continues to vacillate, and Australia are other absentees.

The Protocol also excludes developing nations, including China, which will contribute a large and growing chunk of global emissions. In addition, many of the countries that have signed up to the Protocol will fail to meet the basic Kyoto requirements, let alone go beyond it. The treaty's aim of reducing GHG emissions and slowing down climate change will, therefore, be swamped by the treaty's glaring imperfections.

PricewaterhouseCoopers (PWC) points out that while the EU seems to be worryingly behind, progress is even slower elsewhere.

Only one in eight of the US companies surveyed by PWC has a climate-change strategy in place.

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