Commission tries to hold the line on emissions allocation plans

The European Commission has announced infringement proceedings against six Member States that have yet to submit national allocation plans for the EU emissions trading scheme. The Commission has also criticised many Member States for over-allocating to their industries - pointing to a tough battle over the scheme's environmental credibility in the coming weeks.

The first phase of the trading scheme is due to start on 1 January 2005, and Member States are supposed to finalise allocations to their industries by 1 October. The deadlines were always going to be challenging - but may have been pushed out of reach by Member States' slow progress and minimalist approach.

The original 15 Member States were supposed to submit national allocation plans to the Commission by 31 March. The plans set out how governments intend to distribute emission allowances for the first phase of the trading scheme.

Just five Member States met the deadline - Germany, Austria, Ireland, Finland and Denmark. By late May - seven weeks after the deadline - four more of the original EU-15 had submitted plans, including the UK (see pp 41-44 ).

On 18 May, Environment Commissioner Margot Wallström restated her determination that "the EU will be ready to start trading on 1 January" - and announced that the Commission has begun infringement proceedings against the six remaining Member States.

Ms Wallström refused to elaborate on the performance of individual Member States - not least because the information is price-sensitive. However, ENDS has seen an internal Commission document which gives a brief assessment of likely submission dates and the adequacy of Member States' plans.

Four of the laggards - Belgium, France, Portugal and Spain - have told the Commission that their plans should be in by the end of June, though there are grounds for thinking that some at least are being optimistic. Plans from Greece and Italy may not arrive until September.

The 10 new Member States are also due to join the trading scheme from the outset, but were given a later deadline of 1 May to submit allocation plans. So far, just three - Slovenia, Lithuania and the Slovak republic - have done so.

For the moment, the Commission has given the new Member States a further grace period before taking enforcement action. Poland is expected to submit its plan shortly, but Hungary's is not expected until September.

The Commission has made clear that many plans submitted to date fall short of expectations. The emissions trading Directive requires the Commission to assess plans against several criteria - including whether they offer unfair state aid, give adequate progress towards the Member State's burden-sharing target under the Kyoto Protocol or allocate more allowances than are likely to be "needed".

Ms Wallström said: "My first impression is that many of the notified plans go for a rather high quantity of allowances. This is disappointing and makes the Commission's scrutiny of plans all the more important."

Many Member States - including Austria, Finland, the Netherlands, Portugal and Italy - plan to let their industries increase emissions even though they are badly adrift from their Kyoto targets. Some appear to be placing unrealistically heavy burdens on their household or transport sectors.

Others are relying on plans - often poorly substantiated - for Government-funded purchase of emission credits under the Kyoto Protocol's project mechanisms. The Netherlands set up such a scheme several years ago, but Italy, Ireland, Austria and Belgium are all hoping to follow suit. It is far from clear that sufficient credits will be available in the scheme's first phase, not least because companies will also be trying to buy them under the newly agreed "linking" Directive (ENDS Report 351, pp 52-53 ).

Italy's draft plan is perhaps the worst offender - allowing emissions to rise to 280mtCO2 compared to 256mtCO2 in 2000. Italy is meant to reduce emissions to 6.5% below 1990 levels by 2008-12 - but the latest figures show it to be 8.7% above. It has also come up with plans to buy 60mtCO2 of Kyoto credits.

The Commission is hoping to ensure that new Member States such as Poland and Hungary - which have huge surpluses against their Kyoto targets - will allocate on the basis of installations' "need". If it fails, concerns about over-allocation in the trading scheme will become still more acute.

So far, the UK and Sweden are the only states to use the plan to go beyond their Kyoto target. Environment Secretary Margaret Beckett - taking her cue from complaints by both British business and environment groups - urged the Commission "to scrutinise thoroughly the national allocation plans and ensure that [they] deliver on the EU's Kyoto goal."

The Environment Department (DEFRA) has engaged consultants Ecofys to assess other Member States' plans - a process which could inform any future challenge.

However, the UK's bid for the high ground has been undermined by shortcomings in its own plan. The Commission has told the UK that its plan is incomplete because it fails to offer a list of allocations for individual installations - and the UK is unlikely to feature in the first "cluster" of plans which the Commission hopes to approve in July (see pp 41-44).

The Commission has written to all EU-15 States which have submitted plans seeking further clarification. The emissions trading Directive gives the Commission three months to reject a plan - but ENDS understands that the clock will stop until the Member State provides a satisfactory response.

The perceived over-allocation has led to a steep fall in the market price from about €13/tCO2 to €6-7/tCO2. Some experts believe the price will collapse unless the Commission gets tough.

In late April, James Cameron of merchant banking group Climate Change Capital wrote to Prime Minister Tony Blair warning of "a real danger that the price will fall towards €2 per tonne, in which case the whole carefully designed policy will fail.... [This] would invariably lead many to question the viability of market-based instruments per se as a means to secure environmental policy goals."

Peter Vis, a senior official in the Commission's Environment Directorate, told a House of Lords inquiry in late May that there will be little incentive for companies to change behaviour without a "meaningful" price. "In the absence of such a price, people will really wonder what the point of the exercise was," he said.

Ms Wallström raised another issue which may yet cause serious problems - different interpretations over what installations are covered by the scheme. Most notably, some Member States, including the UK, have adopted a narrow definition of "combustion plant" (ENDS Report 345, p 3 ). Ms Wallström wants to see agreement on a common interpretation - and there is a risk that this could send the UK's plan back to the drawing board.

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