CO₂ trading to become reality in EU

European companies required to reduce their greenhouse gas emissions will soon be able to buy, sell, or bank carbon credits under the world’s first multinational emissions trading system, which was finalized in July by the European Union (EU). The market, slated to open in 2005, is seen by EU officials, environmental groups, and industry alike as a key tool for meeting EU emissions reduction targets agreed to under the Kyoto Protocol on climate change and is expected to reduce industrial compliance costs by as much as 35%.

For now, only carbon dioxide (CO₂) emissions will be covered under the scheme; EU member states will develop national plans that set reduction targets for relevant industrial sectors and allocate emissions allowances to specific installations. The caps imposed must be in line with each country’s Kyoto commitments and approved by the European Commission (EC) by April 2004 (Environ. Sci. Technol. 2003, 37, 89A).

The system is based on the U.S. trading system for sulfur dioxide emissions implemented under the 1990 Clean Air Act Amendments, notes Kevin Baumert, a senior associate at the World Resources Institute, an environmental research organization. Although President Bush is adamantly opposed to any mandatory limits on CO₂ emissions, the use of market-based emissions trading under the Kyoto Protocol was added at the insistence of the United States in the mid-1990s. “Now, ironically, it’s the Europeans who are out in front actually implementing a large-scale emissions trading system,” Baumert says.

More than 10,000 large-scale facilities face emissions limits during the system’s first phase from 2005 to 2007. Sectors covered include the electricity, oil refining, cement, iron and steel, glass and ceramics, and pulp and paper sectors, which account for nearly half of all European CO₂ emissions, according to the EU.

Meanwhile, an EC directive proposed in late July would link the cap-and-trade system to the other flexible mechanisms allowed under the Kyoto treaty for reducing the cost of cutting greenhouse gas emissions, namely the clean development mechanism and joint implementation. Through these two instruments, countries can meet part of their Kyoto commitments by investing in greenhouse gas reduction projects in developing countries and countries in transition, which include former Soviet-bloc countries.

Environmentalists oppose this linkage, however, because they fear such an action could eliminate any motivation for EU companies to reduce their own emissions. These mechanisms also are untested, and there are no clear rules about what will be allowed and what will be excluded.

On the other hand, Eurelectric, an electric industry trade organization whose members account for the bulk of emissions covered under the new trading scheme, wants to see Kyoto’s flexible mechanisms brought into play starting in 2005 rather than 2008, which is the date the EC is considering. Such a move would bring more credits onto the market, lowering their prices and helping companies to maintain their competitiveness in global markets, according to the trade group.

After trading begins in 2005, the EC plans to review the system in 2006, with an eye toward including other greenhouse gases, as well as other industrial sectors—such as the chemical, aluminum, and transport industries—during the system’s second phase, which will run from 2008 to 2012. —KRIS CHRISTEN