The International Energy Agency (IEA) and ParisBourse operated a simulated electricity and CO2 emissions trading scheme between 18 May and 13 July this year and a report has been issued by the electricity trade associations Unipede and Eurelectric.

The simulation allowed members of the European electricity industry – including companies operating in Central and Eastern Europe – to judge whether trading is technically feasible and cost effective.

“We put this together in about five weeks,” John Scowcroft of the electricity trade associations Unipede and Eurelectric told edie. The simulation set virtual companies CO2 emission reductions, whereas in reality, under the Kyoto Protocol, it is nations that are being given emission reduction targets.

The exercise has shown that emissions trading would not present many technical difficulties to industry and could have the added benefit of lowering CO2 compliance costs. With the EC Environment Minister due to issue a Green Paper on Emissions Trading early in 2000, the electricity industry is hoping its simulation will improve the standing of emission trading within the EU.

On the central issue of how effective trading might be in reducing CO2 emissions, the report on the simulation acknowledged that “some virtual companies relied heavily on trading to comply with their CO2 objectives. Those companies for which the agreed CO2 targets were most stringent particularly benefited from being able to trade”.

No cap was made on what percentage of a company’s CO2 emission reduction could be achieved through CO2 credit purchases. Sellers of CO2 credits were, however, held liable if they sold credits and then found themselves unable to meet their CO2 reduction requirements.

Of the 16 virtual companies, four achieved compliance with CO2 emission reductions by “a significant margin”, ten with more or less basic compliance and two failed to comply. Regarding the two that failed to reduce CO2 emissions below the required target, “this was due in part to the design of the simulation and also because some virtual companies examined the implications of high-risk strategies that they would not necessarily have pursued if the targets had been real,” stated the Unipede/Eurelectric report.

The simulation involved virtual companies being given limits on CO2 emissions based on their 2000 levels:

  • Between 2005 and 2007, a 2% reduction from 2000 CO2 emissions was required
  • Between 2008 and 2012 , a 5% reduction from 2000 CO2 emissions was required

Under the Kyoto Protocol, EU member states must reduce their national CO2 emissions by an average of 5.2% between 2008 and 20012.

Virtual financial penalties were imposed for failure to comply with CO2 emissions, but the report on the simulation states that its penalty system should not be seen as a model and that further work must be done on penalties.

Commenting on the potential for a CO2 emission trading system, John Walter of Greenpeace International told edie that, on an international scale, Greenpeace and other environmental organisations are worried that countries like the United States will be allowed to avoid any and all domestic CO2 emission reduction by purchasing CO2 credits from countries where economic collapse could create a CO2 credit glut. Russia is one such country that, under a global emissions trading system, a large number of CO2 credits could be available for purchase by countries that wish to avoid domestic measures to curb CO2 emissions.

Greenpeace would like to see any future emission trading systems to include a cap on the percentage of CO2 credits any country is allowed to purchase in order to meet its overall Kyoto Protocol climate change target. The United States opposes the use of such caps.

Unipede/Eurelectric hopes to run another trading simulation soon. “We’re out talking to our members about what we would want to change if we run it again,” said Scowcroft. The most likely change will be the inclusion of participants from other industries.

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