The emissions trading world is about to undergo two major shifts. The EU Emissions Trading Scheme, the first mandatory cross-national scheme of this kind, will come into force on 1 st January, 2005. Secondly, Russia’s recent surprise moves towards ratifying the Kyoto Protocol mean that the treaty may finally become a legally enforceable agreement sometime in the first half of next year. Without the US, Russia’s participation is needed to make the treaty legally enforceable. The protocol stipulates that countries ratifying it must account for at least 55% of 1990 greenhouse gas emissions from the industrialised world. Russia’s participation will put this share at 61.6%.
The EU trading scheme was devised as a means towards helping EU member states meet their emissions targets as set out in the Kyoto Protocol. Although linked to Kyoto, the scheme will operate whether or not the Protocol ever becomes legally binding. The EU 15 as a group need to cut emissions of the six greenhouse gases* by 8% from 1990 levels by the period 2008 – 2012 (calculated as an average over this five-year period). Under the burden-sharing agreement, each individual member state was given its own target, all of which would add up to an overall 8% cut (see table). The ten members which acceded this year have their own target cuts which were not included in the original burden-sharing agreement.
The guiding principle behind the EU’s ETS is that the caps on emissions set by each government should be consistent with meeting its Kyoto target. However, the EU scheme will initially only limit carbon dioxide emissions and will be restricted to six main industrial groups which together account for 45% of total EU CO2. emissions (see Box 1). The scheme is further linked to the Kyoto agreement through the Linking Directive, which allows the use of the other so-called flexible mechanisms set out in the original Protocol (the clean development mechanism and joint implementation, or CDM/JI). These are based on the same principle as emissions trading in that they are designed to reduce the costs of cutting emissions through allowing investment to take place where it is cheapest.
A cut in CO2 has the same effect wherever in the world it takes place—unlike, for example,sulphur dioxide emissions, which have a purely local effect on air quality. CDM/JI, however, differ from emissions trading in that they generate emissions credits through specific project-based schemes (see table of CDM/JI definitions). Participants in the EU’s ETS will be able to exchange credits earned from such projects for EU allowances, which they can then use towards meeting their emissions targets. These project credits will therefore be in addition to the free allowances allocated by member states and will boost the liquidity of the EU market.
The EU’s ETS will be a totally electronic market — EU allowances will simply be records on an electronic database. Each member state is required to establish a national registry for the scheme, which will record the holding and transfers of allowances. Each national registry will be linked to a central EU database, known as the Community Independent Transaction Log (CITL). This in turn will be compatible with the UNFCCC’s Independent Transaction Log, which will record trades in AAUs to meet Kyoto targets. While only operators of installations covered by the EU’s ETS will be given initial allocations of EUAs, anyone will be allowed to trade allowances so long as theyopen an account in one of the national registries.