DoE in talks with industry on SO2 permit trading

Official moves towards setting up a trading system in sulphur emission quotas finally got under way in March at a seminar between the Department of the Environment (DoE) and industry. The concept appears to have received a cautiously favourable response from industry - but the DoE has yet to make clear how a permit trading system could be reconciled with regulation of SO2 emissions from large boilers under integrated pollution control (IPC).

The Government's intention to consider the introduction of a trading system for SO2 was announced in its 1992 progress report on the 1990 White Paper on the environment. This promised a consultation paper on the issue in 1992. The DoE now intends to go out to consultation this autumn.

In 1992, the Government had two objectives in mind for a permit trading or "quota switching" system. First, by allowing larger emitters to buy and sell SO2 quotas, the emission targets laid down in the 1988 EC Directive on large combustion plant could be achieved more cost-effectively.

At present, only the main power generators have separate company "bubbles" setting an overall ceiling on their SO2 emissions, within which emissions from individual power stations can be increased or decreased as long as a company's total emissions do not exceed its ceiling. This flexibility is not infinite, in that last year HM Inspectorate of Pollution (HMIP) introduced limits on each station's annual SO2 emissions under IPC, with the tightest constraints being imposed on plants causing local air quality problems or making significant contributions to acid deposition on sensitive ecosystems (ENDS Report 219, pp 15-16 ).

Secondly, the Government suggested in 1992 that quota switching rules could be devised so as to encourage maximum emission reductions at those plants contributing most to acid rain damage - or, to use the jargon, to exceedances of "critical loads" of sulphur deposition.

A paper tabled by the DoE for this month's seminar with industry suggests some shifts in the DoE's thinking since 1992.

These have in part been driven by changes in the regulatory background. In particular, a new Europe-wide UN protocol on sulphur emissions, due to be signed this summer, will require the UK to cut its SO2 emissions by 80% by 2010 from a 1980 baseline (ENDS Report 227, p 42 ). This will replace the EC Directive, which requires only a 60% cut in SO2 emissions by 2003 from existing large combustion plant alone, as the target to be achieved by any quota switching system.

The DoE also now has reservations about the ease with which "critical loads" considerations could be built into a quota switching system.

"In principle," its paper says, "it should be possible to devise some system of weighting or exchange rates in the quota switching to reflect the capacity of individual plant to cause critical load exceedances. However, the Department's initial view is that a sophisticated weighting or exchange rate system could prove an impediment to developing a viable quota market and would be likely to be very difficult to administer.

Nevertheless, consideration needs to be given to whether a simple and workable scheme which recognises environmental impacts in at least a crude way is feasible."

Environmental organisations, including the statutory nature conservation bodies, are likely to demand something firmer. They may well remind the DoE that the UK was foremost in insisting during the negotiations on the UN protocol that it be based on critical loads rather than technology-based controls or arbitrary emission reduction targets.

A move away from the critical loads approach could also prejudice HMIP's plans to incorporate it in IPC authorisations for power stations and other major SO2 sources, using a proposed "BPEO Index" (ENDS Report 222, pp 16-19 ).

HMIP, though, faces a potentially bigger threat from a quota switching system. This is because it would force the DoE to take an explicit stand on whether its goal should simply be to achieve compliance with the 80% reduction target set by the UN protocol, or whether to allow further emission reductions to be secured by the application of BATNEEC - the best available techniques not entailing excessive cost - under IPC.

The former policy could in principle be applied simply by progressively tightening the overall emission quotas available for trading in the period to 2010. It is difficult in this scenario to see a continuing need for BATNEEC.

HMIP is clearly alert to this possibility. Its Director, Dr David Slater, reportedly told the discussion meeting that he favours an approach in which a company would be allowed to trade only in the emissions left over after the application of BATNEEC, unless it was already committed to emit less than this quantity because it had sold some of its quota allocation.

The DoE's paper is silent on the relationship between BATNEEC and quota switching, touching on it only obliquely in commenting that "any scheme which can be brought into play quickly will need to operate within the existing regulatory framework."

However, it may be no coincidence that a consultation document on the issue will not be published until the autumn. HMIP has just received proposals from National Power and PowerGen for upgrading their existing power stations to BATNEEC standards applicable to new plant, and decisions on these will probably be taken by the autumn.

Among the main issues discussed at the meeting was how emission quotas might initially be allocated. The two principal options are an allocation based on current emissions - "grandfathering" - or an auction. Most industry representatives are believed to dislike the idea of an auction if the revenues were to go to the Treasury.

Another key issue is whether quota switching should be allowed across the whole of the UK, or restricted geographically or by industrial sector. The view reportedly expressed by most industry representatives is that a UK-wide system should be set up to develop the largest possible market for quota trading, but with National Power and PowerGen excluded because this would tend to create a duopoly.

One problem highlighted in this area by the DoE is that a UK-wide trading system would run up against the different rates of SO2 emission reduction set for England and Wales, Scotland and Northern Ireland in the official plan for implementing the EC Directive, as well as variations in the reduction targets which have been set for different industrial sectors. Tidying these up might well provoke protests from some emitters.

Other questions raised by the DoE were whether a quota switching system should apply only to existing plant and, if not, how much headroom should be left within the overall national emission ceiling for new entrants. Whether companies should be allowed to keep quotas for plant which is closed or sold is another important detail - particularly with the generators' recent commitment to sell off some of their existing capacity so as to promote competition in the electricity sector.

The paper adds that the DoE has no immediate plan to develop a quota switching system for nitrogen oxides. However, the possibility of doing so "in due course" has not been excluded.

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