March 05 2007
Any hope of a reprieve from the increasing regulation of greenhouse gas emissions should be forgotten, particularly following the issue on February 2 2007 of the Fourth Assessment Report by the United Nation's Intergovernmental Panel on Climate Change (see in particular the first of the three reports in the Fourth Assessment). The report concludes, in part, that the world's temperature will increase by approximately 3° Celsius this century. In the face of these results, any forthcoming international agreements may require industrialized countries to decrease their emissions by between 60% and 80% by 2050.
The European Commission has recently taken a number of initiatives that will significantly affect the future of greenhouse gas emissions trading in the European Union. The EU Emissions Trading Directive (2003/87/EC) is a key part of the European Union's response to fulfilling its commitments under the Kyoto Protocol on climate change. The directive created an Emissions Trading Scheme (ETS) in EU allowances (EUAs). One EUA is equal to the right to emit one tonne of carbon dioxide and the total number of EUAs is capped. At the beginning of each trading phase every installation falling within the ETS is allocated a certain number of EUAs free of charge. Phase I covers 2005 to 2007 and Phase II 2008 to 2012. Crucially, the number of allowances allocated to an installation may be less than the number of tonnes of carbon dioxide it emits throughout the year. If the operator of an installation believes that it will not have sufficient EUAs, it can buy additional allowances, change its means of production to decrease the tonnes it emits and/or participate in Kyoto flexible mechanisms (eg, the clean development mechanism and joint implementation, which are explained further below).
During the first trading period, businesses excluded from the ETS may be subject to increased energy costs but are otherwise largely unaffected. This is unlikely to continue much longer for the following reasons:
On November 29 2006 the commission issued decisions on NAPs submitted by Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, Sweden and the United Kingdom for the Phase II trading period (as summarized in a communication of the same date); on January 16 2007 it issued decisions for Belgium and the Netherlands; and on February 5 it issued a decision in Slovenia. In each case it concluded that the proposed NAP failed to meet at least one of the mandatory criteria required by the directive. Member states' treatment of the following areas was found particularly lacking:
The commission had not yet released its decisions on the remaining 14 NAPs. Nonetheless, it is expected to continue to take issue with the number of allowances member states propose to allocate. A glance at the current market shows that over the past three months, the daily price of allowances has dropped from almost €12 to just below €4, which has been partially attributed to their over-allocation. The commission will, in all probability, learn from the shortcomings exposed during the first two years of trading.
The EU Emissions Trading Directive has a built-in review mechanism. In Autumn 2007 the European Climate Change Programme Working Group will begin the process of considering amendments to the directive in order for these to be implemented through legislative amendment in time to take effect in the Phase III trading period (post-2012). As is evident from past NAP reviews, the commission is particularly concerned with the total number of allowances allocated. The entire 'cap and trade' system rests on the principle that only a limited number of allowances are on the market. The next review will be focused on four categories:
Each category includes issues that could have a major impact on (potential) participating installations:
EU industry has only six years to prepare for these potentially major changes. Assuming, for example, that gypsum production was added to the ETS, a company considering constructing a new installation will have to address questions such as the following:
Such a simple example clearly illustrates that now is the time for strategic decisions to be made.
There has been uproar from the aviation sector, in the European Union and beyond, in response to the commission's proposal to include the sector within the ETS. US operators in particular have challenged the idea that from 2012 the scheme would cover all flights arriving at or departing from an airport in the European Union. From 2011, all intra-EU flights will be subject to the ETS. The impact assessment on which the proposal relies states that airlines are expected to pass on, to a large extent or even in full, compliance costs to customers. The cost on intra-EU airline tickets is predicted to increase by €1.80 to €9 by 2020. Long-haul trips may see an additional cost increase by €8 to €40. The impact on cargo flights is unclear. However, one can imagine that cargo customers will bear the brunt of the compliance costs as they are analogous to a tax or fuel surcharge. All airlines benefit from passing on the costs rather than assuming them, as has been seen with the utilities sectors.
Under the commission's proposal, airline carriers would be the entities responsible for compliance with the ETS, with each airline falling under the competence of one member state. In general, member states would have to treat domestic aviation in the same way as international aviation. The allowance allocation method would be harmonized throughout the European Union. Finally, by the end of 2008 the commission will put forward a proposal addressing nitrogen oxide emissions from aviation.
The commission's January communications entitled "Limiting Global Climate Change to 2 Degrees Celsius: The way ahead for 2020 and beyond" and "An Energy Policy for Europe" demand even more stringent policies, including a 20% reduction (as compared to 1990) in greenhouse gases by 2020, even though many member states are struggling with their current target reductions for 2012. Industry must engage at both the national level and EU level in the ongoing review and expansion of the ETS and, more broadly, the European Union's climate change policy. Involvement should include, among other things, participation in consultations and provision of relevant data. Failure to participate may result in future regulation which is unduly restrictive or impracticable.
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