EU Parliament Approves Emissions Trading

After years of wrangling, the European Parliament has finally fired the starting gun on the world's first international emissions trading market by voting to cap European industry's carbon dioxide output and let firms trade the right to pollute.

The European Union's assembly on Wednesday passed a bill which means that from January 2005 -- three years earlier than laid out in the 1997 United Nations Kyoto Protocol -- many electricity generators and plants in the oil refining, smelting, steel, cement, ceramics, glass and paper sectors will be issued with "carbon credits" to emit carbon dioxide (CO2).

"It means that the architecture foreseen under the Kyoto Protocol is coming to life," EU Environment Commissioner Margot Wallstrom said in a statement released after the vote.

The new rules will apply to 25 members of the EU, including the countries joining next year, and is expected to improve climate conservation.

Governments are to allocate the CO2 credits by next March to some 10,000 companies across Europe, which cause almost half of the EU's carbon dioxide emissions. If they manage to keep emissions below their entitlement, they stand to make money.

Companies using more environmentally-friendly technologies that emit less pollutants can sell their credits to power stations and any other firms exceeding their CO2 limits. A company will also be able to buy credits to emit carbon from another company which couldn’t afford the fuel that would pollute in the first place.

Business concerns

The law will form the cornerstone of the EU's efforts to meet its commitment under the Kyoto Protocol to reduce emissions by 8 percent from their 1990 levels by between 2008 and 2012.

The EU has led a campaign to persuade other industrialized countries to join it in ratifying the protocol. But given that in 2001, emissions of greenhouse gases increased for the second year running, it's not yet certain that the EU will be able to keep to its promise. Germany, Europe's worst offender when it comes to carbon dioxide emissions, is still two percentage points off its target of a 21 percent reduction in emissions.

In 2001, the United States, which alone accounts for around 35 percent of the world's greenhouse emissions, pulled out of the treaty, saying it would hurt its economy and rejected the scientific claims of global warming. The hard stance of the Bush administration has led other nations, such as Australia, to follow suit.

Many European companies are now concerned that the EU clampdown on emissions will make them less competitive. And the treaty doesn't constrain emissions from industrializing countries such as India and China. A spokeswoman from the UNICE, the EU employers confederation, pointed out on Tuesday that "this is a good solution at the European level, but a major issue, having Europe's partners on board, remains to be settled."

Russia holds key to Kyoto

According to a complex weighting system, Russian ratification will determine whether the Kyoto treaty will actually enter into force in 2008, as planned. Only if nations accounting for 55 percent of emissions sign up, can the treaty become international law.

Russia is still wavering, citing economic interests as a reason. Even though Russian Prime Minister Mikhail Kasyanov announced at the Earth Summit in Johannesburg last year that Moscow would ratify Kyoto "in the near future", Russia is still concerned that billions of dollars it might have earned by selling "rights to pollute" are in doubt, since the U.S, the biggest potential buyer, is not on board.

Germany set to save

Analysts have predicted trades in the right to emit CO2 among the 10,000 plants affected could be worth up to eight billion euros a year by 2007, creating a new financial market place.

The final version of the law -- which still needs approval from EU member states -- will include an opt-out clause for companies which can show they are making an equivalent effort to reduce greenhouse gases.

In Germany, where industry has a number of agreements with the government to reduce emissions, factories may well use this option. According to a study conducted by the German Environment Ministry, Germany's relatively stringent environmental laws might mean that emissions trading saves the German industry millions per year.

In March 2002, Germany was the first major industrialized country to formally ratify the Kyoto Protocol on climate change.