Press releases
07.November 2003 - 05:31
The Commission responded to MEP Korhola’s questions concerning emissions trading – Commissioner Wallström does not admit problems in emissions trading
The Commission has provided a joint answer to Eija-Riitta Korhola’s questions about possibly remaining problems in the emissions trading system.
The answers given by Environment Commissioner Margot Wallström on behalf of the Commission (7 November 2003)
In the answers, Commissioner Wallström denies the issues remaining open in the Directive that Korhola brought up as causes for concern.
Banking rules in EU emissions trading: Member States’ right to bank emission allowances
Korhola’s question E-2789/03: Under Article 3(13) of the Kyoto Protocol, Parties may bank emission allowances from one period to the next. Under the EU Emissions Trading Directive, decisions may be taken at national level regarding the possibility of banking to be afforded to operators.
Does the Commission consider that Member States are entitled to bank emission allowances, which have not been allocated, even though the directive applies only to operators (plants)? Does it believe that Member States will already have that right during the time span covering the EU internal emissions trading period (2005-2007) and the first Kyoto period (2008-2012)?
Should the Emissions Trading Directive be amended in order to bring it into line with the Kyoto Protocol?
The Commission’s answer: The Kyoto Protocol’s first commitment period is from 2008-2012, and the Protocol provides that Parties may bank assigned amount units from 2008-2012 into the next commitment period in the case that Parties have reached their Kyoto target. The Emissions Trading Directive (Directive 2003/87/EC of 13 October 2003, OJ L 275, 25.10.2003) is in line with the Kyoto Protocol by providing for banking of allowances by persons from the 2008-2012 period into the next period.
The Kyoto Protocol’s quantified emission cuts and reduction requirements do not apply before 2008, and the Emissions Trading Directive allows Member States to decide individually whether to provide for the banking of allowances by operators from the first period, 2005-2007, into the period 2008-2012. Under the Emissions Trading Directive, operators are allocated allowances, and transfers of allowances from 2008 will be accompanied by corresponding transfers of assigned amount units.
The question is based on a false link between the Kyoto Protocol and the Union Emissions Trading Scheme. Member States do not have to keep trading scheme allowances, they issue them to plant operators when and as appropriate without any formal link to the obligations or the flexibility mechanisms of the Kyoto Protocol.
Korhola’s comment on the Commission’s answer: Since the allowance transfers made during the EU internal emissions trading period (2005-2007) do not affect “real” emissions trading, i.e. emissions trading in accordance with the Kyoto Protocol, starting in 2008, Commissioner Wallström’s answer has to be read as follows: Member States should distribute their entire available quotas to their firms during the EU internal emissions trading period, for, on the basis of the answer, Member States do not seem to be able to bank them for the period starting in 2008. For the same reason, countries having so-called “hot air” will lose the share of the emission allowances, which have not been allocated or sold, by the beginning of 2008. The countries, which buy emission allowances – such as Finland – should therefore prepare for the fact that in 2008, there will be less emission allowances on the market than anticipated, and their price will accordingly be higher than expected.
Banking rules in EU emissions trading: invariability of AAU (BSA) amounts
Korhola’s question E-2790/03: Under the EU Emissions Trading Directive national decisions concerning the possibility for operators to bank emission allowances will be permitted during the time span covering the EU internal emissions trading period (2005-2007) and the first Kyoto period (2008-2012). In every Member State there may be companies which, prompted by substantial fluctuations in their annual output, for example, might wish to bank emission allowances even if they were prohibited from doing so in their home country. This creates an incentive to transfer the allowances in question temporarily to another Member State.
However, cross-border transfers during the internal emissions trading period will not lead to changes in the emission allowance (AAU or BSA amount) allocated to an individual country, contrary to what will happen from the beginning of the first Kyoto period.
Does the Commission consider it a problem that a transfer to another country purely for banking purposes and back again from that country to the country of origin in the Kyoto period will unfairly alter the aggregate emission allowances of the country which has allowed banking and enable the emission allowance to be doubled in the country of origin as far as the banked amount is concerned? Should the rules on adjustment of AAU and BSA amounts be revised when the EU Emissions Trading Directive is reviewed in 2004 or 2006, before the first transfers are made between Member States for banking purposes?
The Commission’s answer: The Emissions Trading Directive provides for transfers of allowances between Member States, in order to achieve cost-effective reductions of greenhouse gas emissions. As transfers of allowances from 2008 will be accompanied by corresponding transfers of assigned amount units, the Commission has explained to Member States the potential effects of allowing banking of allowances from 2005-2007 to 2008-2012. The Council and the Parliament have decided that Member States may allow the banking of allowances from 2005-2007 to 2008-2012, and agreed a recital wich indicates how Member States may decide to allow the banking from 2005-2007 to 2008-2012. The Commission does not intend to re-open this issue.
Korhola’s comment: Member States should take into consideration the situation presented in the question, when deciding on the banking option. On the one hand, Finland should allow banking, for there might be companies in Finland, which will have excess emission allowances from 2007 for the year 2008. On the other hand, if many Swedish companies bank emission allowances in Finland in 2007 and take them back to Sweden in 2008, we will lose the corresponding, already scarce, amount of emission allowances which was agreed in the Kyoto Protocol to belong to genuinely Finnish companies. Therefore it is crazy if the Commission’s stand is as cynical as could be concluded from Wallström’s answer.
The problem of “double accounting” in emissions trading
Korhola’s question E-2791/03: From 2008 national AAU (BSA) will be adjusted to take account of cross-border transfers of emission allowances so as to ensure that a selling country’s AAU (BSA) amount is decreased and that of the buying country increased by the quantity transferred. The selling country’s authorities will correspondingly have that much less to allocate in the next emissions trading period. Given that the authorities presumably cannot treat firms differently, according to whether they sell emission allowances within their home country of beyond its borders, a seller’s emission allowance in the next period should logically be reduced in every case. This would also be consistent with the principle that emission reductions should be taken into account only once.
However, a firm can choose between the strategies of selling and banking emission allowances so as to derive greatest benefit. If a firm is able to bank its emission allowance in order to secure a better (or unchanged) share in the next period, the authorities should treat firms which have banked emission allowances and firms which have sold them in the same way and hence in both cases deduct the amounts sold or banked from their new initial allocations (unless allowances have been banked purely because of fluctuations in a firm’s output for reasons related to the business cycle). Otherwise it would be in a firm’s interest to postpone selling and bank emission allowances, in which case it would obtain twice as much to sell in the next period.
Does the Commission see a problem as regards equal treatment of firms? Should the Member States all give instructions for the amounts of emission allowances banked or sold to be deducted from the next allocations for the firms concerned, thus ensuring that the problem of double accounting would not arise? Should this matter be raised when the directive is reviewed?
The Commission’s answer: The Commission does not see a problem of double accounting nor one in respect of the equal treatment of firms. The Assigned Amount of each Party to the Kyoto Protocol is fixed. The addition and subtraction of Kyoto units will be taken into account in the compliance assessment by the Kyoto Protocol’s Compliance Committee, but will not change the Assigned Amount of each Party to the Kyoto Protocol. Allocations to operators after 2012 will take into account the commitments of Member States for periods after 2012. Deducting allowances from an operator’s subsequent allocation would furthermore imply that banking is de facto not possible.
Korhola’s comment: Wallström is right in that deduction would render banking useless. On the other hand, in a reversed situation there is an incentive to bank and not to sell. From the point of view of firms, which need emission allowances this is worrisome, for as supply decreases, availability will weaken and the price will go up.
Wallström’s advice to firms seems to be: postpone environmental investments until the beginning of 2008. Then there will be emission allowances to sell for five successive years: thoughtless and sad from the viewpoint of the environment.
Opportunities for aggressive speculation in emissions trading
Korhola’s question E-2792/03: From 2008, national assigned amount units (AAU or BSA amounts) will be adjusted to take account of cross-border transfers of emission allowances so as to ensure that a selling country’s AAU (BSA) amount is decreased and that of the buying country increased by the quantity transferred.
If, however, a cross-border transfer of emission allowances in the period beginning in 2008 is due to the fact that the allowances in question were originally just banked in the country concerned, the country of origin will obtain the amount of banked allowances twice over. Broadening out the problem onto a large scale, it is hard to believe, especially in the light of their governments’ action, that the Member States will start to engage in speculative transfers of this kind, but any non-EU Annex I country (if it acceded to the Kyoto Protocol and joined the EU Emissions Trading Scheme before 2007) or a company from such a country would be able, by proceeding as described above, to double the amount of allowances for sale. It will also be possible in a way to exploit market forces if emission allowances have been banked in a rival selling country (for instance in a transfer from Ukraine to Germany). The rival seller’s market position will consequently be weakened, whereas the market player in question will benefit twice over.
Another typical form of aggressive speculation could occur if the kind of practice seen on the foreign exchange markets some years ago were to be repeated on the emissions trading market. In theory, a non-EU operator could thus hamper a competitor operating within the EU (and within the Emissions Trading Scheme).
Has the Commission made plans to deal with aggressive speculation of this type in emissions trading? If so, what plans?
Does it still see no need for the idea of employing market intervention (using an EU central register, for example) to stabilise disturbances on the emissions trading market?
The Commission’s answer: The Union Emissions Trading Scheme is designed as a market based instrument to lower compliance cost for participating actors and for society. The nature of a market instrument is to use the individual decisions actors take in their efforts to optimize their profits from the system. As on all markets there may be speculation also on this one. One important issue when designing the scheme was therefore to make this market as broad and stable as possible. As there should be several thousands of actors already from the start this market could be expected to be reasonably stable. Of course, signs of market domination abuse must, as always, be monitored and addressed appropriately.
The rules of the EC Treaty on anti-competitive behaviour apply in any case, and the Commission does not intend to intervene unless those rules are breached.
Korhola’s comment: It is clear that regarding the 15 EU Member States, the Commission’s assumption of market stability is certainly adequate. However, if the system is acceded by countries such as Russia and Ukraine (and companies in those countries), which possess considerable amounts of hot air, i.e., saleable emission allowances, I find that the stability outlook changes. This prevents, for instance, a large Russian energy company from banking such an amount of emission allowances to Germany and Great Britain (the only significant sellers among the EU countries) that the entire amount of saleable emission allowances of the latter will dwindle due to the speculative utilisation of the transfer rule. Of what help will, in that case, the rules of the competition rules of the EC treaty be?
Definition of hot air and ban under the Kyoto Protocol
Korhola’s question E-2793/03: At present the obstacles to allocation to companies posed by the EU Emissions Trading Directive and the rules on competition laid down in the EC Treaty (Articles 87 and 88) probably go beyond what is necessary. That is why it is considered unlikely that ‘hot air’ (in other words emission allowances whose sale is not due to actual reductions in emissions) will come onto the market. The Kyoto Protocol itself does not prohibit the sale of or define hot air.
Does the EU have any means of preventing Member State governments from selling hot air directly (without first allocating it to companies)?
If not, does the Commission consider it necessary, not least in order to guarantee consistent international practice, to devise a definition of hot air and propose that the Kyoto Protocol be amended in such a way as to incorporate that definition and a ban on the sale of hot air?
The Commission’s answer: Member States can buy and sell assigned amount units in accordance with the rules agreed under the Kyoto Protocol and its implementing provisions. The Commission does not consider it appropriate to propose an amendment to the Kyoto Protocol relating to a definition and a ban of the sale of ‘hot air’.
Korhola’s comment: Within the EU and internationally, everyone is ready to admit the problems caused by hot air. However, not even the EU is ready to take the bull by the horns: preparing a definition of hot air would entail having the problem rolled out. Is the unwillingness of the Commission related to the negotiations with Russia – maybe Wallström does not want to forbid or admit at this stage that the participation of Russia in the Kyoto Protocol (and thus the coming into force of the Protocol) is in a critical phase?
Publication of the EU’s Kyoto target as a five-year moving average
Korhola’s question E-2794/03: The Kyoto Protocol stipulates that compliance with commitments is to be gauged according to the average for the years from 2008 to 2012. This is reasonable because weather conditions, for example, can have a great impact on annual emissions, linked among other things to the small quantities of hydroelectric power generated in dry years. The developments as regards achievement of the Kyoto target by the EU and its Member States have recently been the subject of conflicting assessments stemming in part from weather conditions, as mentioned above. The press, to say nothing of the public at large, cannot understand such fluctuations or ascertain whether the trend after smoothing is encouraging or gloomy.
Has the Commission thought of changing its reporting by publishing, in addition to the annual statistics, an indication of the distance to target, calculated from a five-year moving average? Does it think that this would put the public in a better position to understand the real direction in which developments were moving, viewed over a time span longer than a year?
The Commission’s answer: The Commission has made its position on reporting clear in its proposal for a decision on the monitoring of greenhouse gas emissions and the implementation of the Kyoto Protocol (COM(2003) 51 final). The Council and the Parliament are in the process of reaching agreements at first reading on this proposal, and have not proposed that this reporting should take place using the calculation of a five-year moving average.
Korhola’s comment: The Parliament and the Council have not made a stand on the reporting of the Commission or its units It is clear that Member States report the annual emissions to both the Commission and the UN. However, in informing the public, the problems presented in the question should be taken into account. Especially, as the proposed manner of communication would serve the appropriate understanding of the matter and also be consistent with the manner of examination as laid out in the Kyoto Protocol.
Emissions trading: problem of period-based allocation
Korhola’s question E-2795/03: Under the Emissions Trading Directive a firm’s allocation is intended to cover three (first emissions trading period) or five years (second period). It is thus in the firm’s interest to refrain from selling its excessive allowances at the end of an emissions trading period if in that way it can secure an unchanged amount for the whole of the following five-year period. This likewise creates an incentive (unfortunate from the environmental point of view) for the firm to postpone environmental investment until the start of the first period, or beyond the beginning of 2008, to enable it to sell surplus emission allowances in as many years as possible.
Does the Commission consider the allocation rule described above to be compatible with the single accounting principle?
Does it believe that, when the directive is reviewed, the allocation rules should be assessed and, if necessary, amended in such a way as to ensure that the allocation for a firm selling emission allowances is altered without delay, in proportion to the quantity offered for sale, in the year following the sale, even though the emissions trading period might not yet have ended?
The Commission’s answer: The Emissions Trading Directive has not laid down any specific allocation rule, including the one outlined in the written question.
A Member State has to develop periodically a national allocation plan adhering to the criteria laid down in Annex III of the Emissions trading Directive.
In the review in mid-2006 the Commission will, on the basis of the experience gathered by then, consider the further harmonisation of the allocation method and the criteria in Annex III.
The Commission disagrees with an allocation rule which would result in the reduction of an operator’s allocation within an ongoing trading period after the operator has sold some allowances. Such a rule is not in line with the provisions of the Directive and would not be desirable from an economic point of view either.
Korhola’s comment: Wallström clearly fears that the already irritated firms will lose their optimism regarding emissions trading completely. It seems that the commitment in the single accounting principle as laid out in the Kyoto Protocol is not feasible in practice. Therefore – I am afraid – it will open up an opportunity for speculation, and unfortunately the delay of investments, which are important for the environment, will be the price to be paid for it.
Published: November 7, 2003
http://www.korhola.com/2003/11/komissio-vastasi-paastokauppakysymyksiin/
The Commission has provided a joint answer to Eija-Riitta Korhola’s questions about possibly remaining problems in the emissions trading system.
The answers given by Environment Commissioner Margot Wallström on behalf of the Commission (7 November 2003)
In the answers, Commissioner Wallström denies the issues remaining open in the Directive that Korhola brought up as causes for concern.
Banking rules in EU emissions trading: Member States’ right to bank emission allowances
Korhola’s question E-2789/03: Under Article 3(13) of the Kyoto Protocol, Parties may bank emission allowances from one period to the next. Under the EU Emissions Trading Directive, decisions may be taken at national level regarding the possibility of banking to be afforded to operators.
Does the Commission consider that Member States are entitled to bank emission allowances, which have not been allocated, even though the directive applies only to operators (plants)? Does it believe that Member States will already have that right during the time span covering the EU internal emissions trading period (2005-2007) and the first Kyoto period (2008-2012)?
Should the Emissions Trading Directive be amended in order to bring it into line with the Kyoto Protocol?
The Commission’s answer: The Kyoto Protocol’s first commitment period is from 2008-2012, and the Protocol provides that Parties may bank assigned amount units from 2008-2012 into the next commitment period in the case that Parties have reached their Kyoto target. The Emissions Trading Directive (Directive 2003/87/EC of 13 October 2003, OJ L 275, 25.10.2003) is in line with the Kyoto Protocol by providing for banking of allowances by persons from the 2008-2012 period into the next period.
The Kyoto Protocol’s quantified emission cuts and reduction requirements do not apply before 2008, and the Emissions Trading Directive allows Member States to decide individually whether to provide for the banking of allowances by operators from the first period, 2005-2007, into the period 2008-2012. Under the Emissions Trading Directive, operators are allocated allowances, and transfers of allowances from 2008 will be accompanied by corresponding transfers of assigned amount units.
The question is based on a false link between the Kyoto Protocol and the Union Emissions Trading Scheme. Member States do not have to keep trading scheme allowances, they issue them to plant operators when and as appropriate without any formal link to the obligations or the flexibility mechanisms of the Kyoto Protocol.
Korhola’s comment on the Commission’s answer: Since the allowance transfers made during the EU internal emissions trading period (2005-2007) do not affect “real” emissions trading, i.e. emissions trading in accordance with the Kyoto Protocol, starting in 2008, Commissioner Wallström’s answer has to be read as follows: Member States should distribute their entire available quotas to their firms during the EU internal emissions trading period, for, on the basis of the answer, Member States do not seem to be able to bank them for the period starting in 2008. For the same reason, countries having so-called “hot air” will lose the share of the emission allowances, which have not been allocated or sold, by the beginning of 2008. The countries, which buy emission allowances – such as Finland – should therefore prepare for the fact that in 2008, there will be less emission allowances on the market than anticipated, and their price will accordingly be higher than expected.
Banking rules in EU emissions trading: invariability of AAU (BSA) amounts
Korhola’s question E-2790/03: Under the EU Emissions Trading Directive national decisions concerning the possibility for operators to bank emission allowances will be permitted during the time span covering the EU internal emissions trading period (2005-2007) and the first Kyoto period (2008-2012). In every Member State there may be companies which, prompted by substantial fluctuations in their annual output, for example, might wish to bank emission allowances even if they were prohibited from doing so in their home country. This creates an incentive to transfer the allowances in question temporarily to another Member State.
However, cross-border transfers during the internal emissions trading period will not lead to changes in the emission allowance (AAU or BSA amount) allocated to an individual country, contrary to what will happen from the beginning of the first Kyoto period.
Does the Commission consider it a problem that a transfer to another country purely for banking purposes and back again from that country to the country of origin in the Kyoto period will unfairly alter the aggregate emission allowances of the country which has allowed banking and enable the emission allowance to be doubled in the country of origin as far as the banked amount is concerned? Should the rules on adjustment of AAU and BSA amounts be revised when the EU Emissions Trading Directive is reviewed in 2004 or 2006, before the first transfers are made between Member States for banking purposes?
The Commission’s answer: The Emissions Trading Directive provides for transfers of allowances between Member States, in order to achieve cost-effective reductions of greenhouse gas emissions. As transfers of allowances from 2008 will be accompanied by corresponding transfers of assigned amount units, the Commission has explained to Member States the potential effects of allowing banking of allowances from 2005-2007 to 2008-2012. The Council and the Parliament have decided that Member States may allow the banking of allowances from 2005-2007 to 2008-2012, and agreed a recital wich indicates how Member States may decide to allow the banking from 2005-2007 to 2008-2012. The Commission does not intend to re-open this issue.
Korhola’s comment: Member States should take into consideration the situation presented in the question, when deciding on the banking option. On the one hand, Finland should allow banking, for there might be companies in Finland, which will have excess emission allowances from 2007 for the year 2008. On the other hand, if many Swedish companies bank emission allowances in Finland in 2007 and take them back to Sweden in 2008, we will lose the corresponding, already scarce, amount of emission allowances which was agreed in the Kyoto Protocol to belong to genuinely Finnish companies. Therefore it is crazy if the Commission’s stand is as cynical as could be concluded from Wallström’s answer.
The problem of “double accounting” in emissions trading
Korhola’s question E-2791/03: From 2008 national AAU (BSA) will be adjusted to take account of cross-border transfers of emission allowances so as to ensure that a selling country’s AAU (BSA) amount is decreased and that of the buying country increased by the quantity transferred. The selling country’s authorities will correspondingly have that much less to allocate in the next emissions trading period. Given that the authorities presumably cannot treat firms differently, according to whether they sell emission allowances within their home country of beyond its borders, a seller’s emission allowance in the next period should logically be reduced in every case. This would also be consistent with the principle that emission reductions should be taken into account only once.
However, a firm can choose between the strategies of selling and banking emission allowances so as to derive greatest benefit. If a firm is able to bank its emission allowance in order to secure a better (or unchanged) share in the next period, the authorities should treat firms which have banked emission allowances and firms which have sold them in the same way and hence in both cases deduct the amounts sold or banked from their new initial allocations (unless allowances have been banked purely because of fluctuations in a firm’s output for reasons related to the business cycle). Otherwise it would be in a firm’s interest to postpone selling and bank emission allowances, in which case it would obtain twice as much to sell in the next period.
Does the Commission see a problem as regards equal treatment of firms? Should the Member States all give instructions for the amounts of emission allowances banked or sold to be deducted from the next allocations for the firms concerned, thus ensuring that the problem of double accounting would not arise? Should this matter be raised when the directive is reviewed?
The Commission’s answer: The Commission does not see a problem of double accounting nor one in respect of the equal treatment of firms. The Assigned Amount of each Party to the Kyoto Protocol is fixed. The addition and subtraction of Kyoto units will be taken into account in the compliance assessment by the Kyoto Protocol’s Compliance Committee, but will not change the Assigned Amount of each Party to the Kyoto Protocol. Allocations to operators after 2012 will take into account the commitments of Member States for periods after 2012. Deducting allowances from an operator’s subsequent allocation would furthermore imply that banking is de facto not possible.
Korhola’s comment: Wallström is right in that deduction would render banking useless. On the other hand, in a reversed situation there is an incentive to bank and not to sell. From the point of view of firms, which need emission allowances this is worrisome, for as supply decreases, availability will weaken and the price will go up.
Wallström’s advice to firms seems to be: postpone environmental investments until the beginning of 2008. Then there will be emission allowances to sell for five successive years: thoughtless and sad from the viewpoint of the environment.
Opportunities for aggressive speculation in emissions trading
Korhola’s question E-2792/03: From 2008, national assigned amount units (AAU or BSA amounts) will be adjusted to take account of cross-border transfers of emission allowances so as to ensure that a selling country’s AAU (BSA) amount is decreased and that of the buying country increased by the quantity transferred.
If, however, a cross-border transfer of emission allowances in the period beginning in 2008 is due to the fact that the allowances in question were originally just banked in the country concerned, the country of origin will obtain the amount of banked allowances twice over. Broadening out the problem onto a large scale, it is hard to believe, especially in the light of their governments’ action, that the Member States will start to engage in speculative transfers of this kind, but any non-EU Annex I country (if it acceded to the Kyoto Protocol and joined the EU Emissions Trading Scheme before 2007) or a company from such a country would be able, by proceeding as described above, to double the amount of allowances for sale. It will also be possible in a way to exploit market forces if emission allowances have been banked in a rival selling country (for instance in a transfer from Ukraine to Germany). The rival seller’s market position will consequently be weakened, whereas the market player in question will benefit twice over.
Another typical form of aggressive speculation could occur if the kind of practice seen on the foreign exchange markets some years ago were to be repeated on the emissions trading market. In theory, a non-EU operator could thus hamper a competitor operating within the EU (and within the Emissions Trading Scheme).
Has the Commission made plans to deal with aggressive speculation of this type in emissions trading? If so, what plans?
Does it still see no need for the idea of employing market intervention (using an EU central register, for example) to stabilise disturbances on the emissions trading market?
The Commission’s answer: The Union Emissions Trading Scheme is designed as a market based instrument to lower compliance cost for participating actors and for society. The nature of a market instrument is to use the individual decisions actors take in their efforts to optimize their profits from the system. As on all markets there may be speculation also on this one. One important issue when designing the scheme was therefore to make this market as broad and stable as possible. As there should be several thousands of actors already from the start this market could be expected to be reasonably stable. Of course, signs of market domination abuse must, as always, be monitored and addressed appropriately.
The rules of the EC Treaty on anti-competitive behaviour apply in any case, and the Commission does not intend to intervene unless those rules are breached.
Korhola’s comment: It is clear that regarding the 15 EU Member States, the Commission’s assumption of market stability is certainly adequate. However, if the system is acceded by countries such as Russia and Ukraine (and companies in those countries), which possess considerable amounts of hot air, i.e., saleable emission allowances, I find that the stability outlook changes. This prevents, for instance, a large Russian energy company from banking such an amount of emission allowances to Germany and Great Britain (the only significant sellers among the EU countries) that the entire amount of saleable emission allowances of the latter will dwindle due to the speculative utilisation of the transfer rule. Of what help will, in that case, the rules of the competition rules of the EC treaty be?
Definition of hot air and ban under the Kyoto Protocol
Korhola’s question E-2793/03: At present the obstacles to allocation to companies posed by the EU Emissions Trading Directive and the rules on competition laid down in the EC Treaty (Articles 87 and 88) probably go beyond what is necessary. That is why it is considered unlikely that ‘hot air’ (in other words emission allowances whose sale is not due to actual reductions in emissions) will come onto the market. The Kyoto Protocol itself does not prohibit the sale of or define hot air.
Does the EU have any means of preventing Member State governments from selling hot air directly (without first allocating it to companies)?
If not, does the Commission consider it necessary, not least in order to guarantee consistent international practice, to devise a definition of hot air and propose that the Kyoto Protocol be amended in such a way as to incorporate that definition and a ban on the sale of hot air?
The Commission’s answer: Member States can buy and sell assigned amount units in accordance with the rules agreed under the Kyoto Protocol and its implementing provisions. The Commission does not consider it appropriate to propose an amendment to the Kyoto Protocol relating to a definition and a ban of the sale of ‘hot air’.
Korhola’s comment: Within the EU and internationally, everyone is ready to admit the problems caused by hot air. However, not even the EU is ready to take the bull by the horns: preparing a definition of hot air would entail having the problem rolled out. Is the unwillingness of the Commission related to the negotiations with Russia – maybe Wallström does not want to forbid or admit at this stage that the participation of Russia in the Kyoto Protocol (and thus the coming into force of the Protocol) is in a critical phase?
Publication of the EU’s Kyoto target as a five-year moving average
Korhola’s question E-2794/03: The Kyoto Protocol stipulates that compliance with commitments is to be gauged according to the average for the years from 2008 to 2012. This is reasonable because weather conditions, for example, can have a great impact on annual emissions, linked among other things to the small quantities of hydroelectric power generated in dry years. The developments as regards achievement of the Kyoto target by the EU and its Member States have recently been the subject of conflicting assessments stemming in part from weather conditions, as mentioned above. The press, to say nothing of the public at large, cannot understand such fluctuations or ascertain whether the trend after smoothing is encouraging or gloomy.
Has the Commission thought of changing its reporting by publishing, in addition to the annual statistics, an indication of the distance to target, calculated from a five-year moving average? Does it think that this would put the public in a better position to understand the real direction in which developments were moving, viewed over a time span longer than a year?
The Commission’s answer: The Commission has made its position on reporting clear in its proposal for a decision on the monitoring of greenhouse gas emissions and the implementation of the Kyoto Protocol (COM(2003) 51 final). The Council and the Parliament are in the process of reaching agreements at first reading on this proposal, and have not proposed that this reporting should take place using the calculation of a five-year moving average.
Korhola’s comment: The Parliament and the Council have not made a stand on the reporting of the Commission or its units It is clear that Member States report the annual emissions to both the Commission and the UN. However, in informing the public, the problems presented in the question should be taken into account. Especially, as the proposed manner of communication would serve the appropriate understanding of the matter and also be consistent with the manner of examination as laid out in the Kyoto Protocol.
Emissions trading: problem of period-based allocation
Korhola’s question E-2795/03: Under the Emissions Trading Directive a firm’s allocation is intended to cover three (first emissions trading period) or five years (second period). It is thus in the firm’s interest to refrain from selling its excessive allowances at the end of an emissions trading period if in that way it can secure an unchanged amount for the whole of the following five-year period. This likewise creates an incentive (unfortunate from the environmental point of view) for the firm to postpone environmental investment until the start of the first period, or beyond the beginning of 2008, to enable it to sell surplus emission allowances in as many years as possible.
Does the Commission consider the allocation rule described above to be compatible with the single accounting principle?
Does it believe that, when the directive is reviewed, the allocation rules should be assessed and, if necessary, amended in such a way as to ensure that the allocation for a firm selling emission allowances is altered without delay, in proportion to the quantity offered for sale, in the year following the sale, even though the emissions trading period might not yet have ended?
The Commission’s answer: The Emissions Trading Directive has not laid down any specific allocation rule, including the one outlined in the written question.
A Member State has to develop periodically a national allocation plan adhering to the criteria laid down in Annex III of the Emissions trading Directive.
In the review in mid-2006 the Commission will, on the basis of the experience gathered by then, consider the further harmonisation of the allocation method and the criteria in Annex III.
The Commission disagrees with an allocation rule which would result in the reduction of an operator’s allocation within an ongoing trading period after the operator has sold some allowances. Such a rule is not in line with the provisions of the Directive and would not be desirable from an economic point of view either.
Korhola’s comment: Wallström clearly fears that the already irritated firms will lose their optimism regarding emissions trading completely. It seems that the commitment in the single accounting principle as laid out in the Kyoto Protocol is not feasible in practice. Therefore – I am afraid – it will open up an opportunity for speculation, and unfortunately the delay of investments, which are important for the environment, will be the price to be paid for it.
Published: November 7, 2003
http://www.korhola.com/2003/11/komissio-vastasi-paastokauppakysymyksiin/