UK carbon mountain levels off

The over-supply of allowances in the UK emissions trading scheme appears to have reached a plateau thanks to tighter targets taken on last year by a handful of key participants. The Environment Department is now working on a possible successor to the existing scheme.

Under the pioneering UKETS, 32 organisations took on emission targets in return for incentives totalling £215 million over five years. However, in the scheme's first two years they notched up massive net over-compliance of nearly 8,000ktCO2e (thousand tonnes of CO2 equivalent) (ENDS Report 353, p 4 ).

Last December, six major companies volunteered additional reductions in a bid to restore the scheme's credibility (ENDS Report 359, pp 15-16 ). The details were kept confidential, but entailed a mixture of tighter targets for future years and some surrender of banked surplus allowances.

Results for 2004, released by DEFRA in June,1 confirm that this move should at least prevent the bank from growing much further. Net over-compliance in 2004 was reduced to a relatively modest 282ktCO2e (see table). Fourteen participants - nearly half of the total - needed to use bought or banked allowances to meet their targets.

Chemical firm Rhodia agreed to a particularly dramatic reduction in its targets. Even so, the company beat its revised target for 2004 by a very healthy margin thanks to a new incinerator to destroy HFC emissions at its Avonmouth site. The Government will give Rhodia incentive payments totalling £26 million - dwarfing the £1.3 million capital cost of the incinerator.

Oil giant BP and British Airways also surpassed their new targets with ease. However, revised targets for chemical companies Ineos Fluor and Invista - which together accounted for more than half of the surplus in 2002 and 2003 - appear to be more demanding.

For example, Invista would have beaten its original, very generous target by 641ktCO2e. In fact, the company overshot its tightened target by 559ktCO2e. The overshoot was largely attributable to a 50% increase in nitrous oxide emissions from the company's Wilton site, and may not be repeated in future years.

Only one major player, Shell, has consistently fallen short of its emission targets. Even so, the company's annual incentive payments of £4.7 million have greatly outweighed the cost of buying allowances to make up the shortfall. UK allowances traded at £3.5-4/tCO2 for most of 2004.

One notable feature is that many of the smaller players in the scheme have struggled to meet their targets. This includes most of the participants which had been relying on energy efficiency measures in buildings and property - including "clubs" brought together by service providers such as Dalkia and Battle McCarthy.

DEFRA is now considering options for extending the UKETS beyond 2006 as part of its review of the climate change programme (ENDS Report 359, pp 48-49 ). Key issues will be whether any future scheme will be mandatory - an option which would avoid many of the failings of the existing UKETS - and which sectors could be brought in. Another important question is whether any remaining surplus from the existing UKETS would be carried over - potentially undermining the effectiveness of a successor scheme from the outset.