Controversy clouds formal start to emissions trading

The European Union Emissions Trading Scheme (EU ETS) officially began this week on January 1st 2005, amid threats of legal action from the UK over its watered-down final draft allocation plan, and allegations that the World Bank is using its size to crowd out private sector players on projects to reduce emissions in the developing world.

The UK has threatened legal action against the European Commission if it does not back Britain’s final draft allocation plan, according to reports by Reuters and the Financial Times. Britain amended the allocation plan in October (see related story) allowing for higher levels of gases to be emitted than in the previous plan published in May.

May’s plan itself was a watered down version of the initial draft-plan published in January last year. At the time, environmental groups accused the Government of signing a “polluter’s charter” and siding with the DTI and industry over environmental and Defra concerns.

The Government said at the time that its new allowance was merely an “amendment” to the previous plan, not a resubmission, so would definitely be accepted by the Commission.

However, that now looks hopeful on the Government’s part and, according to reports, the Commission is waiting for additional information that Britain had promised to send to justify the changes.

The European Commission accepted a third set of five national allocation plans in late December 2004, four of which – Cyprus, Hungary, Lithuania and Malta – were accepted unconditionally, while Spain’s plan was approved on the condition that technical changes were made.

New environment commissioner Stavros Dimas said: “These decisions leave us four plans short. We will process these outstanding plans as soon as possible in order to make sure that these Member States can take part fully in the European emissions trading scheme, which has now formally started.”

Mr Dimas added that there were now a few thousand plants which didn’t yet know their allocations but that these should be resolved as soon as possible.

Conservation group WWF has said that nearly all of the EU countries have been over generous in their allocations due to lobbying from industry groups.

Despite this, the EU says it is on course to meet its Kyoto commitments for emissions reduction through the published plans.

In addition to the European NAP problems, a variety of private-sector participants are accusing the World Bank of crowding them out of investment markets in the developing world which can generate tradable carbon credits through the use of the Kyoto Protocol s Clean Development Mechanism, and Joint Implementation initiatives.

The Bank aims to have a US$1 billion under investment in the next few years in these carbon mitigating projects, but private-sector brokers and financiers say this monopolises the market as they can’t offer the same favourable market terms that the World Bank can.

Larry Philip, managing director of emissions brokerage house CO2E Spain said: “The World Bank has played a key role in pioneering collective investment for emissions reductions. But, due to its present market dominance, the bank is stifling the very innovation and efficiency that only markets could bring to bear to combat climate change.”

However, this charge has been refuted by the World Bank. In an interview with the Asian Wall Street Journal, Ken Newcombe, Head of Carbon Finance Business at the World Bank said the Bank would give at least some of the credits from any project to the private sector.

“We’re constantly reminding governments that this must be a private market, that our role and theirs must be transitional. We must mitigate climate change through the market,” he said.

The negotiations and investments are set to grow even more when the Kyoto Protocol enters into force fully on February 16th.

By David Hopkins

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