The European Union Emissions Trading Scheme (EU ETS), the
largest emissions cap-and-trade scheme in the world, commenced on
January 1, 2005. In addition, the United Kingdom's Climate
Change Act 2008 has established the world's first legally
binding emissions-reduction target, which requires at least an 80%
reduction on 1990 emissions levels in the United Kingdom by 2050.
The following article gives a brief overview of the EU ETS and of
some of the steps being taken to reach the 80% reduction target
under the Climate Change Act 2008.
The EU ETS, entered into under the provisions of the European Union
(EU) Emissions Trading Directive, represents one of the steps taken
by the EU to meet its greenhouse-gas-emissions reduction target
under the Kyoto Protocol. In accordance with the Kyoto Protocol,
the EU is aiming to attain an 8% reduction on 1990 emissions levels
during the Protocol's first "commitment period"
(2008-2012), while the UK itself is seeking to achieve a 12.5%
reduction in that period. The EU ETS is being rolled out in phases,
the first of which ran from 2005 to 2007 and the second of which is
running from 2008 until 2012. In preparation for the third phase,
commencing in 2013, the EU is reviewing the Emissions Trading
In connection with the 80% reduction target under the Climate
Change Act 2008, the United Kingdom government intends to
publish, with the advice of the Committee on Climate Change, a
series of five-year "carbon budgets," the first of which
covers the first Kyoto Protocol "commitment period"
(2008-2012). The government has also produced the UK Low Carbon
Transition Plan, describing how the United Kingdom will meet the
cut in emissions set out in the budget, which requires a reduction
of 34% on 1990 levels by 2020. A key objective of the United
Kingdom's low-carbon industrial strategy is to try to ensure
that British businesses and workers are equipped to maximise the
economic opportunities and minimise the costs involved in moving to
a low-carbon economy.
Currently, the EU ETS applies to four areas of industrial activity:
energy activities (including, in particular, electricity
generation); production and processing of ferrous metals; mineral
industries; and pulp-and-paper industries. It is currently expected
that aviation will be added to the list beginning in 2012. UK law
requires all installations carrying out any of the above activities
to hold a Greenhouse Gas Emissions Permit and to monitor and report
EU Member State governments are required to set emissions limits
for all installations in their country covered by the scheme, and
each installation is then allocated allowances equal to that cap
for the phase in question. Under the current UK National Allocation
Plan, the Government allocated most of the emissions allowances
among the installations affected by the scheme without charge, but
7% of the allowances - which would in the main have gone to large
electricity producers - were auctioned. It is currently expected
that the percentage of total emissions allowances to be auctioned
will increase over time. Allowances in the EU ETS are held in
electronically registered accounts , overseen by a central EU
As with other cap-and-trade schemes, the broad objective of the EU
ETS is to provide an incentive-based system that will trigger
investment in future energy efficiency and cleaner technology.
Under the scheme, installations can meet their cap either by
reducing their emissions below the cap - in which case, they are
then free to sell any surplus - or, to the extent their emissions
exceed their cap, by buying emissions allowances from others
(including certain carbon credits derived from certain
international climate-change projects) to cover the difference. As
a result, a secondary market in allowances has developed.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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