Posted by Robert Milnes, Consultant - Economics & Emissions Trading on 25 May 2012
The EU Emissions Trading System (EU ETS) has been widely criticised for imposing an excessive administrative cost on small emitters, and for the inclusion of hospitals. The move into Phase III of the EU ETS, which will run from 2013 – 2020, provided Member States with an opportunity to remedy the situation. Indeed, if they could come up with an alternative mechanism to encourage small emitters and hospitals to reduce emissions, the European Commission (EC) would allow those organisations to drop out of the EU ETS for Phase III.
After a lengthy negotiation the Department of Energy and Climate Change (DECC) has now agreed an alternative scheme with the EC. The newly launched Small Emitter and Hospital Opt-out Scheme has been designed to cuts costs for participants by eliminating third party verification of emissions and by simplifying monitoring and reporting requirements.
In return for this administrative simplification, and to ensure that emissions reductions incentives are maintained, participants in the new scheme must commit to cutting their emissions, and pay a penalty if they fail to do so. And they have a choice of targets to set: the level of free allowance allocation they would have got under the EU ETS or a reduction in emissions in line with the overall EU ETS cap.
With targets similar to those in EU ETS, and lower admin costs, what’s the catch? Would you be better off in or out of the EU ETS?
Imagine you join the Small Emitter and Hospital Opt-out Scheme and over-achieve your target. Great, but you won’t be able to sell credits on the carbon market, as you would have been able to do in the EU ETS. You could bank the credits for later years of course, but there would be limits on what you could bank and there is no value in banking credits if you keep below future targets and never have the opportunity to use them. So, understanding your future emissions is critical to your choice. If you plan to cut your future emissions, it may just be worth sticking with EU ETS. In fact, I reckon if you make the wrong decision it could cost up to £400,000 over the period to 2020.
Other questions such as your risk of carbon leakage (see my earlier post - Carbon leakage: has Europe scored an own goal?), the amount of allowances you have stockpiled from previous years (or not) and your business growth and CSR plans will also influence your decisions.
Will small emitters get a fairer deal? They will if they make the right decision for their organisation. In fact, DECC estimates that the new scheme will offer savings to industry of up to £80 million, but what is right for one installation will not necessarily be right for another.
Critically, there are only 8 weeks for eligible operators to decide whether to opt out, and if so which target to accept - decisions which will affect them for the next 8 years.