IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group III: Mitigation of Climate Change

7.9.4 Regional and national GHG emissions trading programmes

Several established or evolving national, regional or sectoral CO2 emissions trading systems exist, for example in the EU, the UK, Norway, Denmark, New South Wales (Australia), Canada and several US States. The International Emissions Trading Association (IETA, 2005) provides an overview of systems. This section focuses on issues relevant to the industrial sector. A more in-depth discussion of emission trading can be found in Section 13.2.1.

The results of an assessment of the first two years of the UK scheme (NERA, 2004) show that reduction of non-CO2 GHG emissions from industrial sources provided the least cost options. It also found that the heterogeneity of industrial emitters may require a tiered approach for the participation of small, medium-sized and large emitters, that is in respect to monitoring and verification, and described the impacts of individual industrial emitters gaining dominating market power on allowance prices.

In January 2005, the European Union Greenhouse Gas Emission Trading Scheme (EU ETS) was launched as the world’s largest multi-country, multi-sector GHG emission trading scheme (EC, 2005). A number of assessments have analysed current and projected likely future impacts of the EU-ETS on the industrial sector in the EU (IEA, 2005; Egenhofer et al., 2005). Recurring themes with specific relevance to industry include: allocation approaches based on benchmarking, grand-fathering and auctioning; electricity price increases leading to so-called ‘windfall profits’ in the utility sector; competitiveness of energy-intensive industries; specific provisions for new entrants, closures, capacity expansions, and organic growth; and compliance costs for small emitters. The further refinement of these trading systems could be informed by evidence which suggests that in some important aspects participants from industrial sectors face a significantly different situation from those in the electricity sector (Carbon Trust, 2006):

  • The range of products from industry sectors is generally more diverse (e.g., in the paper, glass or ceramics industry) making it difficult to define sector specific best practice values to be used for the allocation of allowances (see discussion in DTI (2005)).
  • While grid connections limit electricity to regional or national markets, many industrial products are globally traded commodities, constrained only by transport costs. This increasingly applies as value per mass or volume goes up, that is from bulk ceramics products and cement, to petrochemicals, to base metals, making the impacts of trading schemes on international competitiveness a matter of varying concern for the different subsectors.
  • Only a few industrial sectors (e.g., steel and refineries) are prepared to actively participate in the early phase of trading schemes, leading to reduced liquidity and higher allowance prices, suggesting that specific instruments are needed to increase industrial involvement in trading.
  • Responses to carbon emission price in industry tend to be slower because of the more limited technology portfolio and absence of short term fuel switching possibilities, making predictable allocation mechanisms and stable price signals a more important issue for industry.

The EU Commission recently published its findings and recommendations based on the first year of trading under the EU-ETS (EC, 2006a). An EU High Level Group on Competitiveness, Energy and the Environment has been formed to review the impacts of the EU-ETS on industry (EU-HLG, 2006). Issues highlighted in these EU processes include the need for the allocation of credits to be more harmonized across the EU, the need to increase certainty for investors, that is through long-term clarity on allocations, extension of the scheme to other sectors and alleviation of high participation costs for small installations. Industrial sectors sources considered for inclusion in the EU-ETS include CO2 emissions from ammonia production, N2O emissions from nitric and adipic acid production and PFC emission from aluminium production (EC, 2006b).