Opinion of the Economic and Social Committee on the 'Green Paper on greenhouse gas emissions trading within the European Union'
Date: 2000-09-20
Institutions: European Economic and Social Committee
Subjects: greenhouse gas, industrial pollution, polluter pays principle, pollution, pollution control, pollution control measures

C 367/22

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Official Journal of the European Communities

20.12.2000

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 Ferna´ndez.

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

Under the Kyoto Protocol, adopted in December 1998,
1.1.
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.

Initial estimates, based on the actual figures for 1998
1.3.
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.

The first two mechanisms, joint implementation and
1.6.
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
to achieve
less developed countries (clean development),
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 econ-
omic 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.

The Kyoto Protocol allows the ‘flexible mechanisms’ to
1.8.
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.

Naturally, the establishment of individual emission
1.9.
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.

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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 consump-
tion (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

The Committee fully supports the European Com-
2.1.
mission’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 Com-
mission to prepare a detailed communication establishing
exactly how such reductions are to be achieved.

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 exclus-
ively 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 Kyoto
the mechanism set out
Protocol, so that, if implemented, it can later be integrated;

in Article 17 of

— the system must possess Community dimension and

intersectoral scope;

2.2.
The Commission document offers no specific guide-
lines concerning three crucial elements in setting up this
mechanism — firstly, allocation of emission levels to individual
companies (and, consequently, possible emission rights); sec-
ondly, 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 system must be progressive, initially being applied to
a small number of sectors which make a major contri-
bution 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;

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— 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.

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

3.2. Question 2

The sectors whose coverage is agreed at Community
3.2.1.
level must be provided with a harmonised common frame-
work, 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 arrange-
ments, 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.

Specific comments

3.4. Question 4

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 determin-
ing 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.

3.4.1. 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 (cal-
culation 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 harmon-
ised for the Community as a whole, as regards the
possibility of acquisition by companies from other Mem-
ber States.

3.5. Question 5

The nature of the BAT criteria, which should be used
3.5.1.
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.

(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’.

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3.6. Question 6

3.9. Question 9

The same would apply to the allocation of emission
3.6.1.
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 concen-
trate efforts simultaneously on these sectors and on the
greenhouse gas-emitting ‘diffuse sectors’.

Identical

3.7.2.
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

The three systems mentioned (energy taxes, volun-
3.8.1.
tary 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 com-
panies 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.

Brussels, 20 September 2000.

The monitoring and infringement mechanisms are
3.9.1.
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 accord-
ance 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

Although section 2 of

3.10.1.
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. A t C o m m u n i t y l e v e l

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 accu-
racy of data communicated by the Member States.

3.10.3. A t n a t i o n a l a n d l o c a l l e v e l

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

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI