Key emissions trade-off will leave UK ‘isolated’

A government scheme to combat global warming will fail in its objective to reduce greenhouse-gas emissions.

A government scheme to combat global warming will fail in its objective to reduce greenhouse-gas emissions and risk isolating the UK from wider international initiatives on the issue, heavy industry warned this week.

The Emissions Trading Scheme, due to come into effect in April, will offer companies tradeable emission permits and financial incentives in return for agreeing to cuts in their emissions of carbon dioxide and other greenhouse gases. Companies that go under their agreed targets can sell their excess permits to others who may find it difficult to meet theirs.

While industry broadly favours emissions trading as a strategy to fight global warming, the most energy-intensive companies – without whom it would be difficult to create a worthwhile market – say the money allocated is insufficient for them to justify the necessary investments. The government has committed £41m to the scheme in its first year, with a cap of £100 for each tonne of CO2 saved.

The big users say this is ‘woefully inadequate’ for companies that have strong commercial incentives to maximise their energy efficiency and will have already made what they see as every feasible investment to reduce consumption.Hugh Mortimer, commercial manager for utilities at BOC, said the £100-per-tonne incentive was an order of magnitude too small for his company to consider joining the scheme: ‘BOC’s abatement costs would be much higher than that. We’re talking many thousands of pounds.’

Jeremy Nicholson, economic adviser to the Energy Intensive Users’ Group, said the same was true for most of his organisation’s members. ‘We don’t expect to see much activity in emissions trading in the near future,’ he said.

The absence of large polluters – and tradeable permits – in the scheme will produce a small and illiquid market, with insufficient capacity to stimulate trading. ‘Who is going to buy the right to emit?’ said Nicholson.

John Craven, head of the Secretariat for the Emissions Trading Scheme, acknowleged that the take-up in the first year was likely to be modest – between 20 and 30 companies.

However, he stressed that the scheme was a pilot operation that was intended to make companies consider reduction strategies, as well as influencing the development of international initiatives.

Renegade regulations

However, industry fears the go-it-alone UK proposal will prove incompatible with the wider worldwide developments on emissions trading.

The draft directive on the issue published by the European Commission on 23 October for establishing an EU-wide scheme was based on an obligatory ‘cap and control’ approach, which UK industry fears will be irreconcilable with the essentially voluntary UK arrangement.

‘The other big question is how – if at all – it is compatible with the proposals coming out of Europe,’ said Nicholson of the EIUG. ‘How is the UK system going to mesh in?’The UK scheme will be operating at least three years before any European-wide scheme and probably six years before a wider international agreement comes into effect, following the agreement among the signatory countries to the Kyoto Protocol during the recent climate change conference in Marrakesh.

In order to secure Russian and Japanese consent, the Morrocco meeting agreed to a ‘downgrading’ of the Kyoto proposal, lowering requirements from a 5.2% reduction in 1990 levels of greenhouse gases to just 1.5%.

However, the conference did succeed in establishing important ground rules for an international emissions trading scheme to start in 2008.

UK companies will be invited to bid for a share of the £41m in late January or early February, after the Government publishes the rules for the auction next month. The scheme will then commence in April but will measure emissions for the 2002 calendar year. The first incentive payments will be made in April 2003.