UK: UK Greenhouse Gas Emissions Trading Scheme - Assessing the Benefits from Participation

Last Updated: 26 February 2002

Introduction

In the run-up to the start of the emissions trading arrangements recently fleshed out at the Kyoto-Marrakech Climate Change talks there are emerging a number of quite detailed proposals for schemes at regional and at national level.

At regional level, for example, the European Commission has proposed a mandatory cap-and-trade emissions trading scheme, which it hopes may become operative from 2005. Unlike the United Kingdom scheme, which is to be the subject of this article, the Commission's proposal is for a scheme which is mandatory rather than voluntary; is limited to certain industrial sectors rather than 'open to all; will apply only to carbon dioxide emissions and not to the full range of greenhouse gases; and would treat emissions from electricity generators as directly within the proposed scheme, rather than as indirect emissions on the part of downstream consumers. A further difference is that under the Commission's proposals Member States will allocate 'permits' free of charge: compare here the 'auction' process which will be an important feature within the United Kingdom's financial incentive arrangements.

The European Commission's proposals are subject to ongoing discussion within the EU's policy-forming institutions, and may eventually emerge in rather different shape from that initially proposed by the Commission. For example, the Environment Council of December 2001 suggests that Ministers are divided on the issue whether the proposed trading scheme should be mandatory or voluntary during its initial three year phase-in period. Although the Commission has proposed that the scheme be mandatory from the very start, there does appear to be a significant minority of Member States - led by the United Kingdom and Germany - who will argue for voluntary participation. The United Kingdom has understandable concerns about the compatibility of a mandatory scheme with its own imminent voluntary scheme which, being planned to run initially until 2007, will overlap with the Scheme proposed by the Commission.

The EU proposals are likely in the coming year to gather substantial momentum. But in the meantime more immediate interest should focus on the imminent commencement of the world's first economy-wide trading scheme covering all greenhouse gases: the United Kingdom's own Greenhouse Gas Emissions Trading Scheme.

Imminent Commencement of United Kingdom Scheme

Greenhouse gas trading within the United Kingdom has come a significant step closer with the Department of Environment, Food and Rural Affairs (DEFRA) issuing, on February 25, 2002, the finalised Rules for the Emissions Trading Scheme.1

The implementation schedule is now for the auction of allowances (for certain categories of potential participants) to begin at 0900 hrs (GMT) on March 11, 2002, and for trading of emission allowances to begin from the full commencement date of April 2, 2002.

The purpose of this article is to:

  • Provide an outline of the Scheme
  • Suggest the benefits which may accrue to companies from participation - in one way or another - in the Scheme

The Scheme in Outline

The Scheme is made "for the purposes of:

  1. achieving reductions in emissions of greenhouse gases in a cost-effective manner;
  2. facilitating compliance with the UK’s obligations under the UN Framework Convention on Climate Change and the Kyoto Protocol; and
  3. implementing the UK's climate change programme".2

The Rules establish who can participate in the Scheme; how participants can participate in the Scheme; and will govern the operation of the Emissions Trading Registry which will be central to the operation of the Scheme.

The Framework Document explains the fundamentals of emissions trading as follows:

"Within a classic ‘cap and trade’ trading system, participants take on targets requiring them to reduce their emissions to a capped level. Each participant then receives allowances equal in number to its cap. Because it does not matter geographically where emission reductions are made within the trading scheme,3 participants have three choices. They can:

  • meet that cap by reducing their own emissions;
  • reduce their emissions below their cap and sell or bank the excess allowances; or
  • let their emissions remain above their cap, and buy allowances from other participants.

When demonstrating compliance, every single participant holds allowances at least equal in number to its quantity of emissions. The result will be that the total quantity of emissions will have been reduced to the sum of the capped levels". 4

A participant’s decision to buy, sell or bank allowances depends on how its costs of reducing emissions compare with those of other participants in the Scheme. All individual decisions to buy, sell or bank allowances lead to a market price for allowances being established. …… A participant reducing its costs [of emissions reduction] relative to other participants opens up the possibility of gains from trade".

The Scheme is to be introduced as a voluntary scheme – participation will be a matter of choice reflecting business judgment. Moreover, the voluntary scheme will, at least initially, operate without a foundation in primary legislation, reflecting the desire of Government to avoid delay as regards the inauguration of the Scheme.

The clear policy objective is that the UK should seek to ‘steal a march’ on competitors.

"If the UK can gain early experience of emissions trading, UK business and finance will be ready [subsequently] to exploit the opportunities available from an international market. Furthermore, the UK scheme will be able to influence the design of future national and international schemes".5

Mechanics of the Proposed Scheme

Participation in the Scheme

Companies may participate in the proposed Scheme as:

  • direct participants, by entering into a direct participant agreement (via the proposed financial incentive auction process) with the Secretary of State and taking on an emissions reduction target,6
  • agreement participants, by opening a compliance account in the Emissions Trading Registry with respect to a Climate Change Levy Agreement7;
  • trading participants, by entering into a trading participant agreement and opening a trading account in the Emissions Trading Registry; or
  • project participant, by entering into a project participant agreement and opening a trading account in the Emissions Trading Registry.

Any person (whether or not they are already a participant) may apply to open a trading account. It is only direct participants and agreement participants that will take on an emissions reduction target (and therefore open a compliance account in the Emissions Trading Registry) when entering the Scheme.

Taking a Target under the Financial Incentive

Who is eligible? In principle any entity which carries on activities within the United Kingdom which give rise to either direct8 or indirect9 greenhouse gas emissions. However, given the consensual nature of the Scheme participation will be limited to ‘those who are able to enter into a legally binding contract with the Government in respect of their participation’. Moreover, the Government has indicated that it will retain a discretion to refuse prospective participants direct entry to the Scheme in order to ‘safeguard the environmental integrity of the Scheme’. It appears that prospective direct entry participants will be ‘required to demonstrate that they intend to, and are capable of, complying with the rules of the Scheme’.10 No additional detail is, however, given as regards these requirements.

The Framework Document indicates that Government intends that it shall be possible for a single participant to take responsibility for the emissions of a group of individuals or organisations (so-called ‘group participation’). A Draft Guidance on Group Participation was released in late December 2001. In essence, an agent will be able to carry out "many or all of the functions required of a participant in the Scheme on their behalf." However, each company entering the Scheme as part of a ‘Group’ will have "its own separate baseline, source list, and emissions reduction target" as well as "its own compliance account in the Emissions Trading Registry." Each company in a ‘Group’ "will be solely responsible for complying with the Rules of the Scheme or it will face compliance penalties." This will allow the sharing of participation costs (to some extent) for those wishing to take part in the Scheme whilst clearly maintaining responsibility for compliance with emissions reduction targets with each individual member of the ‘Group’ for the emissions sources which it ‘controls and manages’.

From what baseline is the target to be assessed? Targets will be set in terms of reductions required from baselines set by reference to average emissions in the three years up to and including the year 2000 (with some modification to this period in cases where the required data for the full three years is unavailable).

What emissions are counted in assessing baselines? A company taking a target under the financial incentive may enter the Scheme in respect of all of its sources of emissions (ie entering all of its emissions), or it may enter in respect only of certain of those sources. However, here the definition of ‘source’ is important – preventing cherry-picking easily reducible emissions of gases within any particular source of the company’s emissions. For any site a source is ‘the collection of one or more point sources of the same type, where a point source is any separately identifiable point from which greenhouse gases are emitted’. Accordingly, to take an example, all indirect emissions from electricity usage within a site belonging to a participating company will represent a single source of emissions even where there may be separate metering of consumption within a site.

Emissions which are excluded: Not all sources of emissions are, however, eligible for entry into the Scheme for the purpose of baselines and targets. The following sources of emissions must be excluded when a participant’s emissions are calculated:

  • direct emissions from electricity or heat generation in so far as the power generated is used off-site: the power generators exclusion. These emissions from power generation are treated, instead, as indirect emissions of the consumers of that energy.11
  • Emissions from facilities within a target unit covered by a CCL Agreement12
  • transport emissions
  • methane emissions from landfill sites covered by the Landfill Directive
  • emissions from households

Inclusion of Regulated Emissions?

The Scheme contains some rather unclear statements in relation to ‘regulated greenhouse gas emissions’. Participants must inform the Government if any source which it wishes to bring into the Scheme (ie include within its baseline emissions) is subject to a regulatory limit on emissions of greenhouse gases.13 The Government will then ‘consider the eligibility of these for entry into the Scheme on a case-by-case basis’.

The implication would appear to be that if approved for entry within the Scheme the regulatory limit may no longer apply – although how this may be achieved under an informal non-statutory Scheme is not clear.

An alternative explanation may be that in a case where a company has been exceeding the maximum emission levels laid down there should be no financial incentive attributable to merely coming into line with legal obligations.

How are emissions to be measured and reported? This will be in accordance with the principles and protocols contained in the Guidelines Document. This Document remains in process of development. In particular it does not include provisions in relation to all the numerous processes which may give rise to direct emissions of the non-CO2 greenhouse gases. Rather than seek to produce such complete coverage the Government has opted for an approach of ‘respond to demand’. A participant who wishes to enter in respect of emissions of greenhouse gases from a process not covered by the Protocol will be expected to submit proposals as regards the measurement and recording of emissions from that process.14

Must participants count all ‘non-excluded’ greenhouse gas emissions from entered sectors of their operations? Emissions which are ‘non-material’ in quantity may be ignored. Moreover, a participant may opt to enter the Scheme and take a target in respect of CO2 emissions only. However, a participant who takes a target not limited only to CO2 may not be selective as between the various remaining greenhouse gases.

The Mechanism for Financial Incentive Target Setting: This will be by what is described as a ‘descending clock’ auction process. Put simply:

  • an ‘auctioneer’ will propose a price per tonne CO2 equivalent (tCO2e)
  • each bidder will indicate how many tCO2e it will take as a target reduction15 (on the basis of receiving that price for each tonne reduced)
  • bids will be aggregated and multiplied by the proposed price
  • an assessment will be made as to whether the potential ‘liability’ of the Scheme exceeds the sum of £30m pa for five years (after corporation tax) – ie. £215m.
  • if at the first proposed price the aggregate financial incentive figure would be exceeded, the auctioneer will propose a lower price and a second round of bids will be tendered. At the lower price somewhat smaller targets would be expected from bidders and so the aggregate ‘liability’ of the Scheme will reduce.
  • this interplay of ‘price proposal’ and ‘bidding’ will continue until the aggregate of ‘bids times price’ is equal to or less than £215m. At this point the targets taken (and price) will be known.

In order to provide some basis for the preliminary assessment by companies of the implications of the bidding process the Government has indicated that the auction will not begin with a call for bids at a figure which is higher than £100 per tCO2e (ie. this figure will represent the maximum possible financial incentive per tonne of target volunteered).

At the time of writing, forty-six companies had registered for the auction including Barclays, British Airways, BP, Caterpillar, Dalkia, General Domestic Appliances, Ineos Fluor, Rolls-Royce, Sainsbury's, Somerfield, Shell, TotalFinaElf and Whitbread Hotels.

The Timetable for ‘Direct Entry’: The mechanisms for entry are to commence quite soon. The auction-bidding process (initially scheduled for January 2002) will begin at 0900 hrs (GMT) on March 11, 2002.

Although the Scheme will not start operating until April 2, 2002, the first ‘commitment year’ began on January 1, 2002 and will conclude at the end of the year. The second (and subsequent) commitment years will each last a full calendar year up to the end of the ‘commitment period’ (i.e. the end of the fifth commitment year, namely December 31, 2006).

In the first three months of 2003, and each year following, there will be what is called a ‘reconciliation period’. This is the period within which emissions during the previous commitment year must be measured, verified and reported – and, where necessary, trading must occur to ensure that participants possess the required number of allowances to match those emissions.

Timetable for entrants via the CCL Agreement Route: A slightly different timetable applies as regards those who enter the Scheme by the CCL Agreement route (in order to dovetail with CCL Agreement timetables).16

CCL Agreement Participants: These companies may enter the Scheme either:

  • in order to purchase allowances in order to meet targets set under their particular CCL Agreement; or
  • in order to sell allowances which they have generated by having ‘over-achieved’ their targets. Targets are set under the CCL Agreements for every alternate year, and so tradable allowances will only be earned bi-ennially.

Absolute and Relative Targets: All ‘direct participants’ in the Scheme will take absolute targets17 as regards levels of emissions. However, most companies which have entered CCL Agreements have opted for what are called ‘relative’ targets – that is, targets defined in terms of emissions per unit of output.

It will be evident that relative targets may be met notwithstanding that the company concerned may actually have increased aggregate emissions.18 Such a company will, nevertheless, generate allowances under the proposed trading Scheme, and the environmental (ie aggregate emissions reduction) credentials of the trading Scheme would be undermined if those allowance were to be freely tradable to those with ‘absolute’ targets.

For this reason the Scheme will operate a ‘Gateway’: a valve-type mechanism under which (i) all trades between those with ‘absolute’ and those with ‘relative’ targets will be measured and aggregated, and (ii) the valve mechanism will operate so as to permit trades from the ‘relative’ sector to the ‘absolute’ sector only when, overall, the balance of such trading lies in the opposite direction.

Transfers and Trades: These are separate concepts. A transfer involves the movement of an allowance from one participant’s account at the Emissions Trading Registry to that of another. The transfer is to be carried out electronically, and in ‘real time’. A trade, in contrast, is a financial arrangement which may or may not involve a transfer between the parties to the arrangement – for example, forward sales and options. It is anticipated that forward and derivatives markets will emerge; these being encouraged as valuable mechanisms for risk management. The Emissions Trading Registry (to be established and maintained by the Secretary of State) will contain a number of accounts which will be used to record the allocation, holding, transfer, cancellation and retirement of allowances.

Banking: Unlimited ‘banking’ of allowances (ie the storing of allowances earned in one year for redemption in a later year) will be permitted until the end of 2007. This is the start of the period, between 2008-12, when achievement (or otherwise) by States of their Kyoto commitments will come to be assessed, and the Government wants to avoid the spectre of ghostly banked allowances emerging in uncontrolled fashion during this period, in place of continued emissions reduction.

Borrowing: Companies will not be allowed to ‘borrow’ in one year against allowance allocation in a subsequent year. The requirement at each reconciliation period will be to ‘pay debts as they arise’.

Project-based Credits: The Scheme is intended to integrate with a range of other domestic and international initiatives in the field of greenhouse gas emissions reduction.

At UK level, reference is made to credits being earned (and then being tradable into the market) by Approved Emission-Reduction Projects. This may provide a valuable incentive – in the form of the tradable credits earned – to sectors of industry and business, not otherwise involved in the Scheme, to incur expenditure on emission reduction projects.

For example, it is noted in the Framework Document that although the electricity generators are not eligible to enter their emissions into the Scheme as direct entrants19 (and so to seek a share in the financial incentive) those companies will be encouraged to generate tradable credits/allowances by an active involvement in ‘approved projects’.

The Framework Document explains that work is continuing to develop rules for such projects which will "ensure that [such] projects produce real environmental benefits".

At international level mention is made of linkage with the Kyoto ‘flexible mechanisms’. The document states:

"It is the Government’s intention to allow firms who have absolute targets under the UK Scheme to be able to use international emissions trading, or credits from JI20 or CDM21 projects to help them meet their domestic obligations".

It is too early to spell out details of how this might operate. However, the clear implication and intent is to seek to move towards ‘allowances’/’credits’ under such schemes forming an international energy ‘currency’, to be used to make ‘payments’ due under a range of commitments. As such an international currency develops, so too will develop the necessary cross-scheme trading mechanisms, aided by the usual financial and legal professional services.

Compliance Penalties: No substantial problem is envisaged as regards compliance as regards those companies who enter through the CCL Agreement route. They will trade in order to meet their CCL Agreement targets – and any failure so to do will result, under that scheme, in the removal of the 80% Climate Change Levy discount for the following two-year period.

In the case of ‘direct participants’, any who may prove unable, when so required, to match emissions with the requisite number of allowances will be subject to compliance ‘penalties’ of the following kinds:

  • non-payment of some part (or all) of the financial incentive even where emissions may have been reduced: for example, where a company has reduced its emissions but has also ‘over-sold’ allowances on the market, so producing a shortfall of allowances against emissions;
  • a reduction in the number of allowances allocated for the following commitment year;
  • recovery of incentive-money from previous years;
  • ‘naming and shaming’; or
  • expulsion from the Scheme.

The Government intends, in due course, to bring forward legislative proposals to bolster these non-statutory compliance mechanisms.

Tax Treatment of Trades: The Framework Document states:

"Allowances will be treated as revenue items for tax purposes. This means that companies purchasing allowances will receive tax relief on the cost. Any profits from the sale of allowances will be taxed as part of the company’s trading profits’.

It also provides reassurance that:

"Emissions allowances do not come within the present stamp duty remit, or the announced modernisation of stamp duty to cover electronic trading"

Regulatory Controls: The Framework Document states that ‘for the most part’ trading in emissions allowances will not fall within the remit of the Financial Services Authority.

"Trading in allowances in the spot or forward markets will therefore not require any specific authorisation".

However, with regard to trading in the derivatives markets "cases will need to be examined on their merits".

Benefits from Participation?

As the Scheme will be founded upon voluntary participation the following questions require careful consideration:

  • what may tempt companies to elect to participate in the Scheme?
  • what may be the benefits?
  • what may be the risks?

Participation (at any rate participation by way of taking an emission-reduction target) will certainly expose companies to a variety of risks22 and burdens23. It is, therefore, important for companies to seek to define and quantify the anticipated benefits.

How far companies will choose to become involved in the Scheme must be a matter for speculation. Many companies became actively involved in the detailed deliberations of the industry-led Emissions Trading Group. But whether that evidences real keenness to enter a pioneering trading system, or more simply a wish to have been ‘in the know’ remains to be seen.

Companies which are likely to be the most positive about the Scheme are likely to be those:

  1. who may wish to use purchased allowances to help meet their CCL Agreement targets;
  2. who may wish to generate tradable credits/allowances by way of ‘approved Energy Reduction Projects’; or
  3. who may wish simply to buy and sell allowances as a way of generating income by ‘playing the market’.

The more difficult question – but important as regards the environmental objectives of the Scheme – is how many companies will opt to take binding targets under the financial incentive mechanisms. Will the financial incentive being offered prove sufficiently alluring to encourage substantial emission-reduction targets to be volunteered? Responses to the Consultation Paper of November 2000 apparently voiced some doubts on this important matter.

Potential Benefits Itemised

We should deal separately with:

  • potential benefits from participation by way of taking an emissions reduction target; and
  • potential benefits from participation in trading by those who may not opt to take such reduction targets (what we may call ‘benefits from trading per se’).

Benefits from Taking an Emissions Reduction Target?

These may include:

Sharing in the ‘Kick-Start’ Financial Incentive: As described above the Government has undertaken to provide a financial incentive worth £30m (after Corporation tax) in each of the Scheme’s first five years, to be shared between companies which take on emissions reduction targets under the Scheme. This money will be allocated according to a bidding mechanism which will serve both to set the targets to which each participant taking a target will be committed24, and to allocate to each such participant its share in the incentive money (payable, year on year, to the extent to which its target is met).25

Sale of Surplus Allowances: A company which is able to reduce its emissions beyond its reduction target will have allowances to ‘spare’ when it comes to the periodic requirement to ‘match’ emission levels with allowances.26 It is these ‘not needed’ allowances which will form the subject-matter of the allowance trading and transfer mechanisms to be established; and companies for whom emission reduction may be relatively difficult or costly may elect to purchase such allowances as an alternative to making such actual reductions. Companies in a position to sell such surplus allowances will profit accordingly. As the Framework Document explains: "… a participant reducing its costs relative to other participants opens up the opportunity of gains from trading".

Participation and the CCL Agreements: Significant benefits may accrue to participants who are also party to CCL Agreements. These ‘agreement participants’ are not permitted to share in the ‘incentive’ money referred to above. However, the tradable allowances within the proposed Scheme will form a currency which may be used to demonstrate compliance with targets set within a CCL Agreement (and thereby generate the consequent benefit of the 80% ‘discount’ on the Climate Change Levy).

Involvement of CCL Agreement companies in the emissions trading scheme will not, however, be confined to this opportunity to meet CCL Agreement targets by the purchase of tradable allowances. For those ‘Agreement’ companies who may hope to reduce emissions beyond the level of their CCL Agreement targets there will be opened up possibilities of trading in the allowances which are generated by that overshoot. In this way the Scheme may both provide a way of meeting CCL Agreement obligations for companies which have failed to have reduced their own emissions to target levels; and also provide a potential source of additional profit for those which have more than met those targets.

Participation and IPPC: the Government proposes a light touch as regards IPPC energy-efficiency requirements for any participant which has taken on an emissions reduction target under the proposed scheme.27

Benefits from Trading per se

These may include:

Speculative Trading: Essential to success will be the emergence of an active ‘market’ in the tradable allowances. The Scheme will allow trading not just between those participants who have taken on targets: trading will also be allowed by persons who participate in the scheme simply to trade. The market will be open to all who may wish to register, for the purpose of trading, with the proposed Emissions Trading Registry.

The market price for allowances will, inevitably, fluctuate according to supply and demand and there will be clear opportunities for those who may wish to ‘speculate’ – the buying and selling of allowances thereby amounting to a form of business in itself, not linked to any need on the part of the speculator to reconcile emissions with allowances.

In this connection it should be noted that it is anticipated that forward trading and trading in derivatives should develop. The standard means by which the financial and commodity markets deal with risk in terms of price fluctuations should therefore develop within the emissions trading market.

Green Group Trading: The way will be open also to "green" groups to participate in the scheme, by buying allowances with the sole purpose of taking those allowances out of the ‘market’ (ie by not selling them on, or using them to match emissions). For each allowance so taken out of the trading market an additional quantity of actual greenhouse gas emission reduction will have to be achieved if, at the end of the day, the ‘books are to balance’.

Matters Outstanding

The publication of Rules relating to Agreement Participants and Project Participants is not expected until after the market has opened in April 2002.

In addition, it is clear from the drafting of the Rules that the Government will have quite wide powers to amend the Rules of the Scheme in order to deal appropriately with any ‘teething’ problems the Scheme may experience. It is hoped that greater certainty for participants, particularly with respect to non-compliance ‘penalties’, will be provided, and sooner rather than later, when legislative provisions to develop further the scope of the initial voluntary Scheme, are in due course put before Parliament.

That said, it is now up to each potential participant to assess whether, despite the broad discretionary powers of the Government (to protect the environmental and economic integrity of the Scheme), substantial benefits can be achieved from being a ‘direct participant’ or a ‘trading participant’ from the opening of the UK emissions trading market on April 2, 2002.


1 The Rules should be considered in conjunction with the Framework Document for the Scheme and the Guidelines Document for the Measurement and Reporting of Emissions in the Scheme (go to www.defra.gov.uk/environment/climatechange/trading/index.htm). Both the Framework Document and the Guidelines Document were published in August 2001 following the earlier more general consultation document of November 2000. The Government’s proposals build upon preparatory work done by the industry-led UK Emissions Trading Group.

2 Rule A1.

3 This is certainly the case as regards CO2. It is, however, a controversial statement as regards the other greenhouse gases, which may have localised air quality/pollution impacts in addition to contributing to the greenhouse effect.

4 The description above is a broadly accurate summary of the obligations which will be taken on, as explained below, by those who participate as ‘direct participants’, taking targets under the proposed ‘financial incentive’. However, it does not describe the manner of participation of those who enter the Scheme through the Climate Change Levy Agreements; and nor does it advert to the opportunities, which will be open to all, to trade in allowances irrespective of having taken on any emission reduction targets. See further, below.

5 On the international plane, note proposals for emissions trading under the Kyoto Protocol and proposals for emissions trading at EU level.

6 A draft of the Direct Participant Agreement is available at www.defra.gov.uk/environment/climatechange/trading/index.htm

7 The Climate Change Levy consists of a tax on energy use in the non-domestic sector (industry, commerce and the public sector). Companies that are subject to Parts A1 or A2 of the Pollution Prevention and Control (England and Wales) Regulations 2000 and which, as such, are subject to a legal requirement to use energy efficiently can enter into a Climate Change Levy Agreement (CCL Agreement) with the Secretary of State and obtain an 80 per cent discount from the levy provided they meet agreed challenging energy efficiency or emissions reduction targets.

8 Ie. On-site emissions

9 Ie. Off-site emissions associated with on-site usage of energy

10 Framework Document, P9

11 cf the proposals at EU level.

12 Given that a company may have one or more CCL Agreement target units it is not accurate to say that no company can benefit from the Scheme as both a ‘direct participant’ and an ‘agreement participant’. The true rule is that no entity can benefit from both a CCL discount and a share in the financial incentive in respect of the same source of emissions. Thus a company in a CCL Agreement may bid for the incentive in relation to emissions which are (i) not covered by the CCL Agreement targets even though from facilities within the CCL Agreement, or (ii) from facilities not covered by the CCL Agreement.

13 Excluding for this purpose the energy efficiency requirements of the IPPC Directive.

14 Submissions will need to be prepared as a matter of some urgency if approvals are to be obtained by the time of the financial incentive auction process.

15 Ie. From its verified baseline.

16 Whereas ‘direct participants’ will receive tradable allowances at the outset (the number being equal to their volunteered target), those who participate via the CCL Agreement route will generate allowances by going beyond the targets set within those Agreements. As such they will acquire their allowances at a later stage than those who enter the Scheme ‘direct’. This will not, however, preclude agreements being entered into as regards trades in these ‘future’ allowances.

17 Ie. A target set irrespective of output levels.

18 Ie. Where efficiency gains are at a level higher than the ‘relative’ target set, albeit that those gains do not ‘match’ output growth.

19 This is because the direct emissions from power generation for off-site usage are ‘counted’ as indirect emissions of the consumers of that power.

20 ‘Joint Implementation’

21 ‘Clean Development Mechanism’

22 Eg. The various adverse consequences of failure to meet a self-imposed target (see further, below).

23 Participation by way of taking a target will involve quite substantial burdens in terms of the measurement, verification and reporting of emissions for the purpose of the Scheme.

24 A participant who fails to meet the target will, it seems, suffer the following consequences: (i) it will not achieve entitlement in full to its share of the financial incentive; (ii) it will have to buy allowances to match actual emissions (which will have exceeded the allowances which it will have been earlier allocated); and (iii) it will find that its target for the following year will have been increased as a consequence of the previous year’s shortfall. Items (ii) and (iii) seem to involve the imposition of a double-penalty, for no clear ‘environmental’ reason: the ‘purchased’ allowances (which derive from exceedance of targets somewhere else in the system) should, perhaps, be regarded as an adequate substitute for the environmental gain which had been promised by the target-holder).

25 There are proposed limits on the maximum share of the incentive money which any single participant may earn (not more than 10% of the incentive money – ie not more than £21.5m over five years).

26 Strictly speaking, in the case of participants via a CCL Agreement the tradable allowance will have been generated by having exceeded the reduction target(s) within the CCL Agreement.

27 There may be some legal difficulties associated with such ‘light touch’ IPPC control as regards emissions of non-CO2 greenhouse gases (which gases may have localised pollution potential).

"© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us."

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The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.