Opinion of the Economic and Social Committee on the "Green Paper on greenhouse gas emissions trading within the European Union"

(2000/C 367/07)

On 13 March 2000 the Commission decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the Green Paper on greenhouse gas emissions trading within the European Union.

The Section for Agriculture, Rural Development and the Environment, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 26 July 2000. The rapporteur was Mr Gafo Fernández.

At its 375th plenary session 2000 (meeting of 20 September), the Economic and Social Committee adopted the following opinion by 90 votes with three abstentions.

1. Introduction

1.1. Under the Kyoto Protocol, adopted in December 1998, the European Union undertook to cut its emissions of greenhouse gases collectively by 8 % between 2008 and 2012 compared to the 1990 figures.

1.2. In June 1998, the Council took steps to share out the effort to be made, on a non-symmetrical basis, between the various Member States in the form of the "burden sharing agreement", taking account of criteria such as per capita emissions or the individual income levels for each country.

1.3. Initial estimates, based on the actual figures for 1998 greenhouse gas emissions, suggested that, if present trends continued, the European Union would experience difficulty in meeting its Kyoto commitment.

1.4. The Kyoto Protocol made a clear distinction between Annex 1 countries (developed countries, which were required to set reduction targets for their greenhouse gas emissions, either individually or jointly under a regional integration agreement) and the less developed countries which, on account of their historically low level of per capita emissions, were exempted from such reductions so as not to prejudice their development potential.

1.5. The Protocol introduced three mechanisms, referred to as the "flexible mechanisms". They are: joint implementation, the Clean Development Mechanism, and the one under discussion here, emissions trading.

1.6. The first two mechanisms, joint implementation and clean development, aim to encourage developed countries or companies from such countries to take steps in other countries, either Annex 1 developed countries (joint implementation), or less developed countries (clean development), to achieve reductions in greenhouse gas emissions, transferring reduction credits to the first country. In contrast, emissions trading seeks to regulate the sale of surplus emission rights built up by a company or other body - either by cutting back its activity or by more efficient use of energy or processes - to another company, whether of the same country or another developed country, thereby enabling the second company to fulfil its commitments in this regard.

1.7. The underlying aim of these "flexible mechanisms" is of course to bring about overall achievement of emission reduction targets, by allowing efforts to be concentrated on areas where the cost-efficiency ratio is the highest possible in the short term. It therefore involves implementing an economic approach based on the allocation of resources by free market forces. This should not, however, obscure the fact that this optimisation will have the effect, in the medium term, of increasing the marginal cost of future measures - unless technological advances succeed in containing these rising costs.

1.8. The Kyoto Protocol allows the "flexible mechanisms" to be applied to the "Parties" (the Member States which have signed the agreement) in 2008, which is when the greenhouse gas emission commitments become binding. Nothing in the present proposal, however, prevents parties to the protocol from implementing flexible mechanisms earlier, on an internal basis.

1.9. Naturally, the establishment of individual emission rights requires the introduction of individual emission "permits" for companies in a number of sectors. It would seem logical, within the European Union, to tie these individual emission limits to the "best available technology" (BAT) criteria laid down by Directive 96/61/EC on integrated pollution prevention and control (IPPC Directive). However, this poses two problems: firstly, the directive does not cover all greenhouse gas emitting sectors or even all production sectors. Secondly, BAT criteria will not be available for a number of sectors until 2003-2004.

1.10. The second implication of the establishment of an emission rights system within the European Union is the possible distorting effect on competition which can result from non-uniform application to sectors and companies within a single country, or between countries.

1.11. Two possible alternatives should be presented at this stage. The first is to create a harmonised framework within the Community, defining sectors and implementing measures, with a possible distortion arising from the differing weight assigned to emissions in each Member State. The second is to carry out a case-by-case analysis of each national system (in those countries which decide to implement one) in order to verify their compatibility with the competition regime (system of indirect state aid) or with the internal market (emissions rights are goods subject to free movement, at least between those countries having such a national system).

1.12. Implementing a system of this type, of course, reflects an allocation approach based on observing a number of historical emission rights ("grandfathering"), although tempered by BAT energy efficiency criteria. This raises a further, connected issue: the allocation of emission rights to new activities and how they relate to national emission limits.

1.13. For new companies carrying out activities similar to those of other companies already covered by the IPPC Directive, the system involves applying BAT energy efficiency criteria as applied to other companies in a similar position. However, for new activities involving high energy consumption (although this is an unlikely scenario) the problem may arise that such activities do not exist in any other Community country, and that there are therefore no BAT criteria. A further problem could be the different views in each Member State on authorising new, energy-hungry or emission-intensive activities, subject as they are to the need to comply with national emission commitments.

2. General comments

2.1. The Committee fully supports the European Commission's initiative to promote the reduction of greenhouse gas emissions and, to that end, facilitate the establishment of a Community emissions trading system, fully compatible with the thinking behind the similar system provided for in the Kyoto Protocol. It should be borne in mind, however, that the trading of emissions certificates is not in itself an instrument for reducing emissions. The Committee calls upon the Commission to prepare a detailed communication establishing exactly how such reductions are to be achieved.

2.2. The Commission document offers no specific guidelines concerning three crucial elements in setting up this mechanism - firstly, allocation of emission levels to individual companies (and, consequently, possible emission rights); secondly, the relationship between these individual company emission ceilings and the national reduction effort; and thirdly, the levels assigned to new companies commencing activities from now on.

The Committee believes that the system should be organised along the following lines, as part of an all-embracing approach to these questions:

- allocation of emission levels to individual companies can only be conducted on a scientific basis, with solid evidence, and applying criteria defined at Community level. For this reason, the Committee favours the use of BAT criteria in those sectors where application is subject to Community law or, alternatively, amongst other things, a worldwide comparable benchmarking system;

- Member State greenhouse gas emissions are the sum of emissions of six gases and all emission sources, including "point sources" (e.g. some of those mentioned above) and "diffuse sources" (such as those generated by traffic). Therefore, although applying BAT criteria does of itself imply a reduction in CO2 emissions, the national reduction commitment cannot be precisely and exclusively matched with a reduction of the point emissions of a given number of industrial sectors;

- allocation of emission rights to new activities (covered by BAT criteria) can consequently be conducted on an automatic, measured and non-discriminatory basis by comparison with existing similar activities. This larger volume of greenhouse gas emissions must, of course, be offset within each Member States by simultaneous and at least equivalent reductions in other sectors or activities in order to meet the national emissions commitment.

2.3. In the Committee's view, therefore, the emission rights trading mechanism must be based on the following underlying principles:

- the system must be firmly based on the "polluter pays" principle;

- the Community system must be entirely compatible with the mechanism set out in Article 17 of the Kyoto Protocol, so that, if implemented, it can later be integrated;

- the system must possess Community dimension and intersectoral scope;

- the system must be progressive, initially being applied to a small number of sectors which make a major contribution to CO2 emissions;

- the system must be based on an EC regulation, i.e. a fully binding legislative act proposed by the Commission and adopted by the Council and European Parliament;

- this regulation must establish a common and harmonised regulatory framework, specifying relevant sectors and practical arrangements, based on Decision 1999/296/EC on a monitoring mechanism of greenhouse gas emissions, and the large combustion plant (LCP) Directive;

- the negative effects in terms of distorting competition must be minimised, and sufficient flexibility built in to avoid permanent appropriation of the initial benefits of the system;

- the system must be voluntary, so that companies in the sectors defined at Community level can join the scheme and benefit from it;

- to this end, a provisional but reasonable date for entry into force should be set: this might be 1 January 2005;

- a further condition should be attached to entry into force: a minimum percentage to be determined of a Member State's total emissions should be in theory covered by the system;

- the system should allow optional application to the applicant countries listed in Annex 1 to the Kyoto Protocol and to the countries of the European Economic Area.

2.4. Lastly, the system must supplement, and not replace, planned action at Member State level aimed at complying with national emission quotas in accordance with burden sharing.

3. Specific comments

The Committee intends to restrict itself to the questions raised by the Commission in its green paper, and in their original order.

3.1. Question 1

3.1.1. The need to create a harmonised basis for determining the emission quotas for each company coming under the system means that these quotas can only be set in accordance with the energy efficiency figures laid down in the BAT criteria and applied, at least in an initial phase, to installations covered by the LCP Directive.

3.1.2. The sectors included in the system will therefore be those indicated in the IPPC Directive, provided that by 2005 the efficiency standards for the sector under the BAT criteria have been established and, furthermore, that the installations are covered by the LCP Directive or, in the event that these efficiency standards are not available, that the industry has provisionally defined emission standards on the basis of voluntary agreements on a European scale, approved by the European Commission, and based on, amongst other things, a worldwide comparable benchmarking system.

3.2. Question 2

3.2.1. The sectors whose coverage is agreed at Community level must be provided with a harmonised common framework, requiring all the companies in the relevant sectors to be subject to the system. However, this(1) must not under any circumstances be interpreted in terms of compulsory sale of potential emission credits, especially if they are considered to be undervalued on the market, although in any case companies will naturally be obliged to reduce their emissions to levels to be established.

3.2.2. Guarantees of legal certainty must be provided by setting certain minimum conditions for the regulation of this trading: this might firstly entail setting an initial period of reasonable length for emission credit sale agreements between companies. The aim would be for the market to consolidate progressively, meaning that the laws of supply and demand could operate satisfactorily without being affected by a very low level of transactions.

3.3. Question 3

3.3.1. Although in theory the opting-in/opting-out scheme would be compatible with the internal market (reverse national discrimination mechanism), it would entail two disadvantages. The first would be to compromise the competitiveness of companies of Member States not joining the scheme, which would sooner or later create a need for compensatory arrangements, and the second would be to deprive such Member States and their companies of the practical experience of implementing a system of this kind, prior to its becoming compulsory under the terms of the Kyoto Protocol.

3.4. Question 4

3.4.1. Member States would be able to include more sectors than those covered on a compulsory basis within the Community, subject to two conditions:

- compliance with the implementation arrangements (calculation and verification methods) for emission rights, as set for the sectors coming under the Community scheme;

- no restrictions on trading the emission rights of those sectors included at Member State level but not harmonised for the Community as a whole, as regards the possibility of acquisition by companies from other Member States.

3.5. Question 5

3.5.1. The nature of the BAT criteria, which should be used in setting emission allowances for each company/sector, is such that there is no need to set overall quotas per sector - these, whether within the Community or the Member States, would generate insoluble problems.

3.6. Question 6

3.6.1. The same would apply to the allocation of emission rights to individual companies. Using BAT criteria enables a historical emission figure (based on past levels of production multiplied by efficiency of greenhouse gas use) to be allocated. For subsequent years, this historical figure will be set in accordance with BAT levels weighted by real output figures.

3.7. Question 7

3.7.1. The Community system, as defined to date, is based on the "downstream" system, or emission "point sources". It would appear both appropriate and necessary for each Member State, as part of its national programme to meet its burden-sharing commitments under the Kyoto Protocol, to concentrate efforts simultaneously on these sectors and on the greenhouse gas-emitting "diffuse sectors".

3.7.2. Identical levels cannot however be set for all the Member States. This would be unrealistic in view of their differing economic structures.

3.8. Question 8

3.8.1. The three systems mentioned (energy taxes, voluntary environmental agreements and emissions trading) are, in this order, complementary measures. Voluntary agreements, as initiatives going further than established standards, serve to consolidate progress at sectoral level. Energy taxes, particularly the CO2 emission tax (proposal for an energy/CO2 tax), have the effect of penalising diffuse emissions and simultaneously, through the planned repayment system, of penalising companies not meeting certain BAT criteria for emissions. Lastly, emissions trading helps to make efforts to reduce emissions beyond the BAT criteria economically worthwhile. It should be made absolutely clear, however, that these intensified efforts to reduce emissions must under no circumstances lead to a reduction in energy CO2 ecotax repayments, as envisaged in the present draft proposal under discussion at the Council.

3.9. Question 9

3.9.1. The monitoring and infringement mechanisms are sufficient from a theoretical point of view. These systems do however need to be fine-tuned, in particular by improving monitoring and verification systems at Community level. Similarly, it must be ensured that the mechanisms are fully compatible with those implemented subsequently in accordance with the Kyoto Protocol.

3.9.2. The same applies to the infringement procedures, although in general the system for submitting complaints to the European Court of Justice in Luxembourg has a sufficiently powerful impact on public opinion in the Member State in question. In contrast, however, the economic penalties borne by Member States rather than individual companies could have the effect claimed for them in the green paper only by being set at excessively high levels.

3.10. Question 10

3.10.1. Although section 2 of the present document expressed a preference for an EC regulation - a legally binding instrument which does not need to be transposed into national law - it is clear that many aspects of the system should be shaped by the national and local authorities. Responsibilities might then be distributed as follows:

3.10.2. At Community level

Definition of general implementing measures: sectors to be included, verification system, harmonised operating methods for the emission rights market, criteria for allocation of individual quotas based on BAT criteria, verification of accuracy of data communicated by the Member States.

3.10.3. At national and local level

Allocation of emission quotas to individual companies, emissions monitoring, identification of sectors subject to emission permits in addition to those determined on a harmonised basis at Community level.

Brussels, 20 September 2000.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) Translator's note: the Spanish text of the working document says: "However, the word 'obligatory' must not under any circumstances be interpreted ...". The Spanish version of Question 2 in the green paper (point 6.3) mentions an "obligatory emissions trading system", whereas the English version, and all other versions except Greek, refer to "a common emissions trading scheme".