The Government remains confident that there is a "strong case" for participants in CCAs and direct participants (DPs) in the UK emissions trading scheme to be excluded from the first phase of the EU scheme, which runs from 2005-7.
However, to secure the opt-outs the UK must convince the European Commission and other Member States that installations will be subject to equally stringent emission controls, monitoring requirements and penalties for non-compliance.
The Government faces a fundamental problem in trying to satisfy the criteria for environmental equivalence. The UK emissions market is chronically over-supplied (ENDS Report 340, pp 4-5 ). The Commission could argue that because companies have the option of buying cheap "hot air" - most of which relates to gases other than CO2 - UK targets are inherently less stringent than under a robust EU trading scheme.
The Environment Department (DEFRA) plans to adjust targets for DPs and CCA companies, partly to demonstrate environmental equivalence. It is also looking for a way to reduce the massive surplus being notched up by a handful of DPs (see p 34 ) - a move which could enhance the credibility of its opt-out applications.
The draft national allocation plan, issued in January, invited companies to indicate whether they would seek an opt-out. The vast majority chose to keep their options open - leaving the Government's plans in a pickle.
DEFRA is now taking a two-pronged approach:
DEFRA proposes a methodology to adjust DPs' targets which, it claims, will ensure that "total abatement of greenhouse gases under the UK scheme will always be greater" than under the EU scheme. Companies that opt out will need to monitor, report and verify total emissions under the UK trading scheme - and do the same for the subset of emissions which would be covered by the EU scheme.
The application is likely to be considered by an EU "comitology committee" in June, and other Member States will vote on whether to accept it. If it is approved, the 11 companies will transfer to the EU trading scheme in January 2007 when the UK scheme expires.
Four of the 15 DPs which are covered by the EU trading scheme appear to be happy to transfer immediately. DEFRA estimates that the "overlap" between the UK and EU trading schemes accounts for 40% of DPs' total emissions.
One major stumbling block is that there is only one CCA "milestone" year, 2006, in the trading scheme's first period. The process has also been complicated by the renegotiation of CCA targets, which is not expected to be complete until the end of July at the earliest.
At the end of April, DEFRA submitted an informal "blanket application" for an opt-out. This argued that all CCAs - adjusted to have "composite" EU and non-EU targets - would meet the environmental equivalence criteria "in principle".
However, the Commission insisted that any opt-out application must contain a definitive list of installations. DEFRA is now hoping to submit an application in the summer - but the comitology committee will not be able to consider this until its September meeting - very late in the day to resolve any challenges to the opt-out application.
ENDS understands that some Member States are not keen to see half of the UK's installations jump ship from the trading scheme's first phase - and may be looking to give the application a rough ride.
Some other Member States are also seeking opt-outs. The Netherlands is trying to exempt installations which emit less than 25,000 tonnes of CO2 per year. Its case looks weak - not least because there are no penalties if such installations miss targets.