Trading in hot air: greenhouse gas emissions
"The EU is determined to take the lead and reduce our greenhouse gas emissions... we are all in this together, member states must support each other in their efforts to reduce emissions and each of them knows that for the single EU-wide trading system to work they must all follow the same rules and criteria."
- Margot Wallstron, EU Commissioner for the Environment.
Commenting on the failure of several member states to abide by the deadlines set by Directive 2003/87/EC, which is designed to create an EU-wide emissions trading system (ETS) in greenhouse gas as a means to help achieve the goals set forth in the Kyoto Protocol, Commissioner Wallstron has announced her intention to prepare infringement proceedings against the offending countries, Poland included. Poland, however, is not alone. Out of the ten new member states, only three countries have managed to submit their respective national allocation plans, by which companies subject to the regulations would be able to buy or sell emission allowances on the open market. An emission allowance means permission to emit one ton of carbon dioxide (or other defined gases) during a specified time period.
Pursuant to Art. 9 of Directive 2003/87/EC, each member state "shall develop a national plan stating the total quantity of allowances that it intends to allocate [among emitters of greenhouse gases]." Industries subject to these allowances include energy producers, coke ovens, steel mills, glass furnaces, ceramics manufacturers, pulp and paper mills, and generally all combustion installations exceeding 20 MW. Effective as of January 1, 2005, these industries will need to obtain a greenhouse gas emissions permit in order to conduct business, unless otherwise temporarily excused from compliance. The ten new member states were supposed to submit their respective plans to the EU Commission no later than May 1, 2004 while the prior member states were supposed to submit their plans by March 31, 2004.
Exactly how is the ETS supposed to work? For the sake of clarity, let's assume that two different companies, Company X and Company Y, are each granted 1,000 allowance points in year one of the program, meaning that each may emit up to 1,000 tons of carbon dioxide into the environment without incurring any expense. At the end of the year, Company X emits a total of 900 tons of carbon dioxide, in effect pocketing 100 allowance points. Company Y, in contrast, emits 1,100 tons, creating a deficit of 100 allowance points. In order to avoid a monetary fine, the amount of which is set at E40 (zł.185) per allowance point for the first three years following implementation of the scheme pursuant to Art. 16 of the directive, Company Y will need to cover its deficit of 100 allowance points by purchasing the 100 allowance points saved by Company X. The penalty amount will increase to E100 (zł.463) per allowance point as of January 1, 2008.
The price paid by Company Y to Company X for its 100 allowance points will be determined in part by the overall number of available excess allowance points, if any, for sale on the open market. Alternatively, Company Y may simply decide to invest in new technology to reduce the amount of its gas emissions if either the amount of the monetary fine or the purchase price of the excess allowance points proves prohibitive. Trading in allowance points may be executed directly between a buyer and seller, by means of a broker or other intermediary, including the establishment of formal market exchanges, similar to stock exchanges.
The transfer of ownership of allowance points will be recorded in a central electronic registry system at the EU level, which will be connected to individual registries in each member state.
Is Poland free to determine the number of allowance points granted to each emitter of greenhouse gases? No. On second thought, make that maybe. Although the directive does not specify the number of allowance points that a member state may issue to a particular industry or greenhouse gas emitter, Annex III to the directive enumerates 11 overall criteria to be observed by Poland and all other member states in issuing allowance points. For instance, the total quantity of allowance points must be consistent with the member state's obligation to limit its emissions in accordance with the Kyoto Protocol and the directive. Specifically, "the total quantity of allowances to be allocated shall not be more than is likely to be needed for the strict application of the criteria of this Annex." In other words, the amount of allowance points is not clearly defined. Moreover, the Commission may, at a future date, pursuant to Art. 30 of the directive, expand its scope to the chemical, aluminum and transportation sectors, which are not currently subject to any gas emission limitations. Additionally, the directive provides for the possibility to establish EU-wide benchmarks for allocating allowance points, depending on the best available techniques and cost-benefit analysis.
And finally, should Polish greenhouse gas emitters be concerned if Poland does not implement a national allocation plan? Yes. If Poland has not adopted an allocation plan, and thereby not issued allowance points to those greenhouse gas emitters subject to Directive 2003/87/EC, these companies, through no fault of their own, may very well be subject to a monetary penalty of E40 per ton of carbon dioxide emitted during 2005.
Paul Fogo is a senior attorney with Miller Canfield W. Babicki & Partners.
- Margot Wallstron, EU Commissioner for the Environment.
Commenting on the failure of several member states to abide by the deadlines set by Directive 2003/87/EC, which is designed to create an EU-wide emissions trading system (ETS) in greenhouse gas as a means to help achieve the goals set forth in the Kyoto Protocol, Commissioner Wallstron has announced her intention to prepare infringement proceedings against the offending countries, Poland included. Poland, however, is not alone. Out of the ten new member states, only three countries have managed to submit their respective national allocation plans, by which companies subject to the regulations would be able to buy or sell emission allowances on the open market. An emission allowance means permission to emit one ton of carbon dioxide (or other defined gases) during a specified time period.
Pursuant to Art. 9 of Directive 2003/87/EC, each member state "shall develop a national plan stating the total quantity of allowances that it intends to allocate [among emitters of greenhouse gases]." Industries subject to these allowances include energy producers, coke ovens, steel mills, glass furnaces, ceramics manufacturers, pulp and paper mills, and generally all combustion installations exceeding 20 MW. Effective as of January 1, 2005, these industries will need to obtain a greenhouse gas emissions permit in order to conduct business, unless otherwise temporarily excused from compliance. The ten new member states were supposed to submit their respective plans to the EU Commission no later than May 1, 2004 while the prior member states were supposed to submit their plans by March 31, 2004.
Exactly how is the ETS supposed to work? For the sake of clarity, let's assume that two different companies, Company X and Company Y, are each granted 1,000 allowance points in year one of the program, meaning that each may emit up to 1,000 tons of carbon dioxide into the environment without incurring any expense. At the end of the year, Company X emits a total of 900 tons of carbon dioxide, in effect pocketing 100 allowance points. Company Y, in contrast, emits 1,100 tons, creating a deficit of 100 allowance points. In order to avoid a monetary fine, the amount of which is set at E40 (zł.185) per allowance point for the first three years following implementation of the scheme pursuant to Art. 16 of the directive, Company Y will need to cover its deficit of 100 allowance points by purchasing the 100 allowance points saved by Company X. The penalty amount will increase to E100 (zł.463) per allowance point as of January 1, 2008.
The price paid by Company Y to Company X for its 100 allowance points will be determined in part by the overall number of available excess allowance points, if any, for sale on the open market. Alternatively, Company Y may simply decide to invest in new technology to reduce the amount of its gas emissions if either the amount of the monetary fine or the purchase price of the excess allowance points proves prohibitive. Trading in allowance points may be executed directly between a buyer and seller, by means of a broker or other intermediary, including the establishment of formal market exchanges, similar to stock exchanges.
The transfer of ownership of allowance points will be recorded in a central electronic registry system at the EU level, which will be connected to individual registries in each member state.
Is Poland free to determine the number of allowance points granted to each emitter of greenhouse gases? No. On second thought, make that maybe. Although the directive does not specify the number of allowance points that a member state may issue to a particular industry or greenhouse gas emitter, Annex III to the directive enumerates 11 overall criteria to be observed by Poland and all other member states in issuing allowance points. For instance, the total quantity of allowance points must be consistent with the member state's obligation to limit its emissions in accordance with the Kyoto Protocol and the directive. Specifically, "the total quantity of allowances to be allocated shall not be more than is likely to be needed for the strict application of the criteria of this Annex." In other words, the amount of allowance points is not clearly defined. Moreover, the Commission may, at a future date, pursuant to Art. 30 of the directive, expand its scope to the chemical, aluminum and transportation sectors, which are not currently subject to any gas emission limitations. Additionally, the directive provides for the possibility to establish EU-wide benchmarks for allocating allowance points, depending on the best available techniques and cost-benefit analysis.
And finally, should Polish greenhouse gas emitters be concerned if Poland does not implement a national allocation plan? Yes. If Poland has not adopted an allocation plan, and thereby not issued allowance points to those greenhouse gas emitters subject to Directive 2003/87/EC, these companies, through no fault of their own, may very well be subject to a monetary penalty of E40 per ton of carbon dioxide emitted during 2005.
Paul Fogo is a senior attorney with Miller Canfield W. Babicki & Partners.
