Loose targets bring industry relief

As more member states submit their plans for targets under the EU Emissions Trading Scheme, industry lobbying has appeared to win out. Environmentalists and emissions trading advocates are banking on the Commission to make the market work. Mark Nicholls reports

In most of the capitals of Europe, it seems, the howls of anguish from industry about the introduction of the EU Emissions Trading Scheme (ETS) have been heeded. By late April, only eight of the EU-15 had submitted their ‘national allocation plans’ to the Commission, almost one month after the 31 March deadline. However, the trend is clear – towards lax targets that fail to impose significant reduction requirements on the sectors that will be covered by the scheme from next January.

Are emitters off the hook?

The most eagerly awaited plan – that of Germany – was finally submitted in late March following bitter wrangling between the economics and environment ministries. The former, lobbied heavily by industry, won the day, and the plan – which sets targets for the first, 2005–07 phase of the scheme – requires limited reductions against current emissions levels.

Meanwhile, the expectation is that the UK government is likely to soften its targets. The UK’s draft plan – which was the first to be published in January – originally was in line with the government’s goal of a 16.3% reduction against 1990 levels by 2010. The new plan, which was due to be delivered to the Commission as Environmental Finance went to press, is expected to use new energy-use projections to give industry extra leeway in meeting its targets.

Other countries have been particularly generous. The Austrian NAP, for example, allows the industries covered by the scheme – electricity generation, pulp and paper, oil refineries, building materials and ferrous metals, as well as combustion plants in other sectors – to emit 33.2 million tonnes of carbon dioxide a year in the first phase.This compares to 30.2 million tonnes/year over 1998-2001, and is in the context of the country being way off meeting its Kyoto Protocol reduction target.

Italy, too, has given industry an easy ride. Its draft, which is out for consultation until 6 May, allows for emissions of around 280 million tonnes from the ETS sectors – compared to 256 million tonnes in 2000. Like Austria, Italy is also a long way from its Kyoto goal of reducing emissions to 6.5% below 1990 levels between 2008 and 2012. Its latest figures show it to be 8.7% above.

Neither France nor Spain, the other two key countries yet to publish draft plans, is expected to buck this trend. A leaked version of the French plan – obtained by Greenpeace – suggests that France will allow a 2% rise in emissions from affected installations up to 2007. The new left-of-centre Spanish government is more sympathetic to the Kyoto Protocol than its predecessor, but its domestic industry has been lobbying hard against tough targets.

Similarly, the accession countries of Eastern Europe,which had until the end of April to submit their NAPs to the Commission, are expected to allocate in line with their industries’ needs.Apart from Slovenia, they are well on course to meet their Kyoto targets, although they have been discouraged from ‘over-allocating’ to industry by the Commission.

Much of industry, privately, has welcomed these generous allocations. In an April research note from its European utilities team, Citigroup noted that the generous NAPs mean the ETS “remains a second-order investment issue” for the utilities sector. “So far, it does appear that governments are taking the view that setting aggressive targets that would risk dislocating their electricity markets in 2005–07, with all the knock on effects into the rest of the economy, should be avoided,” it notes.

Relief from industry contrasts with concern from environmentalists and the carbon trading community – the brokers, consultants, and financiers who hope to build businesses on the back of ‘real’ targets and active trading. They are concerned that the targets set will fail to meet the scheme’s environmental objective – that is, moving the EU towards its Kyoto reduction targets – and that they will fail to incentivise industry to rein in emissions, or generate much carbon trading activity.

Indeed, prices in the so-called ‘grey’ allowance market have fallen back since the plans began emerging, dropping from just over €13/tonne in February to around €7 in late April, according to prices reported by Carbon Finance.

Efforts are under way to lobby the Commission to reject, or at least tighten, member states’ plans, as it is entitled to do under the terms of the directive that established the ETS (see Emissions trading advocates lobby for tougher EU targets). But it is unclear how easy it will be for the Commission’s environment directorate to impose tougher targets.

Opinions are mixed. Some believe that the Commission will find it difficult to resist pressure from EU member states – in turn under pressure from domestic industry – to leave most of the NAPs alone, although some of the more unrealistic plans are likely to face amendments.

As a possible sign of the weak position of those in the Commission who have argued for ‘scarcity’ – including environment commissioner Margot Wallström – it has stepped back from bringing infringement proceedings against countries that were late in submitting their NAPs.

Others believe the Commission is likely to try and strike a balance. Chris Rowland, head of utilities research at investment bank Dresdner Kleinwort Wasserstein in London, says, “I believe that the Commission is in a position to tighten the NAPs if it chooses to. The bigger picture is that the Commission wants some constraint – not enough to require massive investment to meet the targets, but not so lax that carbon trades at €1/tonne.That would be as much of a disaster.”

For its part, the Commission is sticking to its line of refusing to comment on individual NAPs before it has completed its assessment of all the members’ plans. But while it is hard to see the Commission winning the argument for a hard line on targets across the board, it would be a foolish company – or emissions trader – to assume at this point that the member states have had the last word. EF