DEFRA loses the initiative with delayed emissions allocation plan

The European Commission has decided that the UK's national allocation plan for the EU emissions trading scheme, submitted one month after the original deadline, is incomplete - and the plan is now unlikely to be approved until September. The Government has stuck to its intention of going beyond "business as usual" in the scheme's first phase - but has given itself a mountain to climb in the scheme's second phase if it is to get anywhere near its domestic target to cut CO2 emissions.

The UK was the first Member State to issue a draft allocation plan (ENDS Report 348, pp 18-22 ). But it has lost its early lead and was among ten of the original 15 Member States to miss the 31 March deadline for submitting plans to the European Commission.

The plan was eventually submitted at the end of April, and made public on 6 May.1 Unlike some other Member States, the UK appears to have avoided infringement proceedings by the Commission (see p 54 ).

However, in late May the Commission informed the Environment Department (DEFRA) that it considers the plan to be incomplete - mainly because it lacks a list of allocations for individual installations (ENDS Report 350, pp 47-48 ). The trading Directive gives the Commission three months to challenge allocation plans - but in the UK's case, the clock has been stopped until a detailed list is submitted in late July or early August.

The UK is now most unlikely to feature in the first "cluster" of plans which the Commission hopes to approve in July. This undermines DEFRA's hopes of influencing the shape of the trading scheme by setting the standard for allocation plans - and points to a fraught few weeks in advance of the 1 October deadline for final allocation.

Further problems are piling up over the UK's bid to secure opt-outs for companies under climate change agreements (CCAs) (see p 42 ).

The Government has stuck to the broad principle that allocations for manufacturing industry will be based on "business as usual", allowing for a planned tightening of CCA targets. It has also stuck to its plan to reduce the power generators' allocation by 5.5mtCO2 (million tonnes of CO2) over three years.

However, the total allocation has been increased by 21.5mtCO2, or 3% - mainly as a result of ongoing work by the Department of Trade and Industry to update its energy projections.

The DTI's work is running many months behind schedule. The new projections were originally supposed to be finalised in February - but the DTI now expects to issue a "working paper" in late May and to finalise its work "in the summer". The modelling process - in previous years a dry, academic exercise - has taken on enormous economic and political significance, and industry sectors have been challenging every detail of the DTI's assumptions.

The main changes in the DTI's projections are an upward revision in emissions from the offshore sector, a downward revision to power station emissions - despite a shift towards higher coal burn - revised industrial growth assumptions and the inclusion of new measures under the Government's energy efficiency implementation plan (see pp 45-46 ).

The upshot is that the UK is now on course for a 14.3% reduction in CO2 emissions by 2010, rising to 15.2% once the savings from the power generators are added. The draft allocation plan put the figures at 15.4% and 16.3%, respectively.

The Government has confirmed its intention to allocate in the scheme's second phase so as to be "consistent with" the UK's domestic goal of reducing CO2 emissions by 20% between 1990 and 2010

Friends of the Earth's climate campaigner Bryony Worthington said the Government's 20% goal "now appears to be nothing more than a distant dream. Ministers must now say where CO2 savings can be made to get us back on track."

FoE points out that the allocation plan implies a dramatic 5% reduction in the UK's CO2 emissions between 2008 and 2010 - but that the Government has "limited options" in the transport and domestic sectors.

In contrast, Digby Jones, head of the Confederation of British Industry, said the Government "deserves credit for listening to business concerns". British companies "still face tough targets", he said, while some other Member States are "shirking their duty" (see p 54 ).

The Chemical Industries Association also warned about the "sharp distortions developing between Member States." In an attack on DEFRA's highly complex proposals to address the messy interface between the EU trading scheme and the CCAs, it also urged the Government to "avoid the cat's cradle of red tape that it risks creating between its climate change instruments."

The plan identifies some 1,060 installations - several hundred fewer than originally expected. The Environment Agency has issued permits for some 800 installations in England and Wales, and is urging operators who have not yet applied to do so. The Scottish Environment Protection Agency has permitted 100 or so installations.

Several important shifts in policy were also put forward in a parallel fast-track consultation which closes on 4 June.2The main issues are:

  • Sectoral allocations: DEFRA's two-stage approach sets a top-down allocation for each sector. With the exception of the power generators, it aims "to provide each sector with an allocation based on need, taking into account existing policy commitments".

    The latest allocations (see table) remain provisional and further changes are expected in light of ongoing work on sectoral and sub-sectoral growth rates, and on renegotiating CCA targets.

    Nevertheless, the plan shows a significant 36% increase in the allocation for the offshore oil and gas industry, which had felt particularly aggrieved by the draft plan (ENDS Report 349, pp 5-6 ). The chemicals industry has also won a 43% increase, while the generators' allocation has been trimmed by 1.5%.

    In several sectors the plan now subdivides sectors so as to give separate allocations for installations within and outside CCAs. DEFRA is also considering creating a new sub-sectoral allocation for Northern Ireland's power industry, in recognition of its distinct character.

  • Breakdown by installation: DEFRA has proposed some important changes to the way in which the sectoral allocations are carved up between installations.

    The draft proposed that allocations should be shared out on the basis of installations' average emissions in 1998-2002, excluding the year with the lowest emissions. However, DEFRA now proposes extending the baseline period to include 2003. As before, the year with lowest emissions will be excluded.

    The change will require operators to resubmit 2003 data as part of the baseline verification process (see p 42 ). DEFRA says the longer averaging period should give a more representative, up-to-date picture and reduce the influence of 2002, which some sectors claim was an "anomalous" year.

    The inclusion of 2003 will tend to significantly increase coal-fired generators' share of the allocation for power generation. Coal burn, together with power sector CO2 emissions, shot up last year (ENDS Report 351, pp 11-12 ).

    For installations which started operation between 1998 and 2002, DEFRA proposes to use the average annual emission discounting the year with the lowest figure. However, emissions during commissioning should be excluded, provided a definition can be agreed, so as to prevent "significant" distortions. The allocation for installations which started operation in 2003 will be based on the methodology for new entrants (see below).

    One important new feature is a proposal to make some allowance for significant changes to installations during the baseline period.

    DEFRA also proposes to allow "flexibility" in a "limited number" of cases where companies have rationalised operations. This will apply where an operator completely stopped operations at an installation and transferred production to another facility. Operators will need to demonstrate that the resulting increase in emissions arose from rationalisation rather than merely increased use of existing capacity. The option will not be available for the electricity supply industry.

  • New entrants and plant closure:The plan retains the broad approach floated in the draft - namely that 7.7% of total allowances will be held in a reserve for free distribution to new entrants, with any surplus auctioned off at the end of each year.

    However, DEFRA has made some important refinements. Work on the size of the new entrant reserve (NER) is continuing - but DEFRA has already revised the sectoral split considerably, with very high levels of new entry envisaged in the iron and steel and cement sectors (see table).

    Allocations to new entrants will be given upfront based on a "benchmark" methodology reflecting technology, load and fuel. DEFRA aims to have a standardised methodology completed in time to submit to the Commission in the summer along with the full list of installations. Criteria will include minimising the risk of over-allocation, reinforcing security of energy supply and incentivising clean technology.

    One important clarification is that extensions to existing installations that result in an increase in nameplate capacity will be eligible for an allocation from the NER - a bid to avoid discrimination in favour of greenfield developments. Increases in emissions from changes in product type or product mix will not be eligible.

    DEFRA is also considering whether de-bottlenecking, site rationalisation, changing operating patterns or environmental investments that increase emissions should be treated in the same way as new entrants. This would appear to run counter to guidance from the Commission - and could introduce unnecessary complexity, not least because it would imply that changes in the opposite direction should result in a reduction in the number of allowances issued.

    A related question is the definition of closure or cessation - important because allowances will not be issued to installations in the years after their closure. DEFRA proposes a list of "indicators" of closure.

    Where a site is partially closed, DEFRA plans to reduce the issue of allowances "to reflect true scope" of activity. The consultation also proposes rules to restrict the issuing of allowances in prolonged periods of temporary closure - due to refurbishment, mothballing or a major accident - which would probably need a change to the emissions trading regulations.

    The consultation also suggests that a reduced allocation will be given in cases where testing and commissioning of new plant, or decommissioning of old plant, is expected to be lengthy.

    The Government intends to have an auction or sale of surplus allowances in the NER in each year, although there may be two auctions in 2007 to release the bulk of any surplus in good time for it to be used. It will consult later this year on proposed methodologies - but so far nothing has been said about the use of the potentially significant revenues.

  • Combined heat and power:The CHP industry - and manufacturing sectors such as the paper industry - have expressed concern that the trading scheme may disadvantage both new and existing CHP plant. Some have called for a separate sectoral allocation for CHP.

    The Government has stuck to its plans for a ring-fenced allowance for new CHP plant as part of the new entrant reserve - and the proposed rules to allow for significant changes to installations during the baseline period should also help. But it has concluded that allocations to existing CHP plants should be calculated on the same basis as other installations, and that CHP plants should be classified with the sectors they serve.

  • Flue gas desulphurisation (FGD):Several coal-fired power stations are likely to fit FGD to meet the large combustion plant Directive (ENDS Report 351, pp 40-41 ). FGD increases CO2 emissions by about 3% and will allow power stations to run at a higher load factor - leading generators to argue that allocations should be increased accordingly.

    DEFRA rules out increased allocations because fitting FGD is a "commercial decision for plant operators" and alternatives, such as burning gas or biomass, are available. But it then undermines this decision by saying that it is "seriously considering" whether plant fitting FGD should receive an allocation from the new entrant reserve.

    The move appears to be driven by concerns to protect security of electricity supply. But it could set awkward precedents for other types of installation - and perversely would prop up the use of a carbon-intensive fuel.

  • Biomass and co-firing:Emissions from combustion of biomass are "zero-rated" under the trading scheme. This has led to concerns that the growing number of coal-fired stations which are looking to co-fire biomass could be rewarded twice for doing so - firstly by freeing up allowances under the trading scheme, and secondly under the renewables obligation. DEFRA has, however, decided not to act - on the grounds that co-firing is taken into account in calculating the sector total for generation.

  • Baseline verification:DEFRA has also fleshed out its requirement for operators to verify their baselines.3 It sees this as an "important tool" for ensuring that allocations for both installations and sectors are calculated "on a fair and equitable basis".

    Verified baseline data must be submitted by 31 August, and DEFRA is considering amending the emissions trading regulations to make this a formal requirement with penalties for non-compliance.

    Verification will need to be carried out by an accredited verifier. The UK Accreditation Service will start to approve verifiers from the beginning of June, with the seven companies accredited under the UK emissions trading scheme being among the front runners. Even so, there are worries about whether sufficient capacity exists to complete the task in time.

    DEFRA promises a "light touch", risk-based approach to baseline verification. More stringent requirements, normally including a site visit, will apply to the 80 or so installations which emit more than 500,000 tonnes of CO2 per year, and which account for some 80% of total emissions. Less thorough verification will apply to two tiers of smaller installations.

    The Environment Agency has also confirmed that installations releasing more than 500,000 tonnes per year must submit monitoring and reporting plans by the end of June. Smaller installations have until 30 September.

    DEFRA stresses that the monitoring, reporting and verification requirements for annual emissions under the trading scheme will be considerably tougher, and the approach to baseline verification "does not in any way set a precedent".

    Discussions are under way with other Member States about ways to ensure consistent standards of verification, and mutual recognition of accredited verifiers to allow companies to compete in the EU market.

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