Emission trade scheme inconsistent, hurts smaller companies

The EU Greenhouse Gas Emission Trading Scheme (EU ETS) is part of the bloc's plan to reduce greenhouse gas emissions to meet international commitments under the Kyoto Protocol.

The EU's "cap-and-trade" scheme, which took effect from January 2005, allows companies to buy and sell carbon dioxide (CO2) emissions rights on specially constructed Internet sites.

The food processing industry is a major energy consumer and discharger of greenhouse gas through its reliance on cooking, refrigeration, freezing and air compressor systems.

Companies must buy credits on the open market if they fail to reach their yearly allocations or face fines. They could also chose to cut emissions by taking action on cutting their energy use or by investing in anti-pollution equipment.

While the scheme means companies can spend a lot of money in reducing their emissions or by paying for allocations, those that have reduced their emissions can make monetary gains by selling their excess credits to others. The market in trading emission rights is estimated at about €35 billion (US$43bn) per year.

Now the European Commission has opened an independent review of the system led by analysts McKinsey & Company and Ecofys over the next year. The analysts are examining the impact of expanding the ETS to other sectors and gases, and the actual impact of the programme on competitiveness. They are expected to submit their report by June 2006.

In response, the Confederation of Food and Drink Industries in the EU (CIAA) says a more fairer definition needs to be applied across the bloc of what plants are caught under the ETS.

Under the scheme individual government make the emission allocations for each firm falling under the scheme. Companies must then surrender their allowances equal to their annual allocations at the end to the year.

The CIAA says the scheme requires a harmonised definition of “combustion installation” across the EU, as some countries have used the loose definition to exclude certain sectors of the food and drink industry. This gives competitors in those countries an advantage over other CIAA members in more restrictive states.

Under the current scheme the ETS is mandatory for many industries, including “combustion installations" with a rated thermal input exceeding 20MW.

Under the scheme EU member state governments are required to set an emission cap for all installations covered by the programme. Each plant will then be allocated allowances for the particular commitment period. The number of allowances allocated to each installation for any given period will be set down in a document called the National Allocation Plan.

However in their NAPs, member states have applied two different definitions of the term “combustion installation”.

Due to differences between member states the Commission has allowed two different definitions of "combustion installation" that exceed the 20MW threshold.

One is a medium definition as advocated by the UK and others. This hich covers boilers and small-scale combined heat and power (CHP) installations that use electricity and steam heat.

The UK definition excludes fryers, dryers and ovens. However the wider definition, as applied by countries like the Netherlands, does not make such a distinction. The difference in application would presumably give companies excluded under the UK scheme a competitive advantage over those included under the Dutch method.

"Given the disproportionate costs of the ETS for many small installations, CIAA considers it vital to ensure that the necessary harmonisation of the definition of 'combustion installation' does not result in an extension of the ETS scope to additional small sites,"​ the association said. "Therefore, the harmonisation must be consistent with the exclusion of small sites from the ETS."​

The CIAA also wants the ETS to exclude more of its smaller members by setting a minimum emmission level of about 25 kt CO2/year.

"Monitoring, reporting and verification requirements cause significant financial and administrative burdens that are often disproportionate to the low level of actual emissions caused by these installations,"​ the CIAA argues. "For example under the UK NAP, 59 per cent of covered installations produce less than 25,000 tonnes CO2/year. Together these installations account for only 2.4 per cent of the total emissions covered by the UK's NAP."​

The coverage of low emitters is also out of line with ETS' goal of providing operators with an incentive to reduce emissions, the CIAA stated.

"While ETS compliance causes considerable fixed costs for small installations, their emission reduction potential is usually too low to realise compensatory volumes of sales in allowances,"​ the CIAA stated.

Until such a rule is introduced, the CIAA supports a simplification of the monitoring and reporting guidelines for low emitters. For small installations, the current guidelines are too complicated and costly and constitute the heaviest compliance burden, the association stated.

The CIAA also wants the programme to move towards a further harmonisation of allocation methodologies used by the various countries, including rules on new entrants, site closure and allowance transfer, the sharing of free allowances, base years and the general allocation method.

The CIAA also opposes an extension of the ETS to additional activities, installations or gases during the second phase of the scheme.

The first phase of the scheme runs from 2005 to 2007, and the second phase from 2008 to 2012.

During the second phase the Commission plans to include additional, smaller sites below the current capacity threshold. Below a rated thermal input of 20 MW, actual direct emissions would typically be less than 5,000 tonnes CO2/year.

Again, the CIAA argues that the cost burden associated with monitoring, reporting and verification under the ETS would be disproportionate to the marginal level of emissions from these sites.

The CIAA also notes that the primary source of greenhouse gas emissions from the food and drink industry is CO2 from combustion processes already covered under the current ETS.

"As regards smaller sources of other greenhouse gases, such as HFCs, regulation focusing on containment is the more sensible mechanism for addressing leakage problems.

Another problem concerns the national allocation plans, which the CIAA says show great diversity in the methodologies to allocate allowances to installations. Such exclusions such as benchmarking versus grandfathering, the treatment of new entrants, auctioning, plant closure and allowance transfer and voluntary inclusions are applied inconsistently across the bloc.

"CIAA is concerned about the impact of such methodological diversity on the competitive position of food and drink companies from different member states," the association stated. "CIAA is therefore supportive of moving towards a harmonisation of allocation methodologies, including rules on new entrants, site closure and allowance transfer, share of free allowances, base years and general allocation method."

The CIAA does not support the introduction of an auctioning method for share allocation during the second phase. If auctioning were to be used, the CIAA calls for a harmonised approach throughout the EU.

All of the EU's 25-member countries ratified the Kyoto Protocol on 31 May 2002. In 1996 the EU adopted a target of a maximum 2°C rise in average global temperature.

Member states must allocate allowances to installations by 28 February each year. Member states must ensure that by 30 April each year at the latest, each installation must surrender allowances equal to the total emissions during the preceding calendar year. Installations will have to make the first surrender of allowances by 30 April 2006.

About 12,000 companies would fall under the emission scheme, which includes other types of plant installations.