Sandbag criticised Italy's strategy to meet its Kyoto targets in a new report published on 14 December, claiming that the government will have to spend as much as €1.8bn on international offsets between 2008 and 2012.
In addition, Italian companies will spend €500 million to fund emissions reductions in developing countries rather than invest at home, Sandbag said.
At the same time, the government will grant superfluous permits corresponding to 166 million tonnes of carbon for select installations under the EU's emissions trading scheme (EU ETS), the report shows.
The climate NGO argued that if Italy had made its installations participating in emissions trading shoulder greater emissions cuts instead of handing out surplus credits, the amount of offsets the country needs to buy would have fallen drastically from 181Mt to 15Mt. This would have saved Italian taxpayers €1.7bn in "unnecessary costs," it said.
"Ironically, while the Italian government will need to spend some €1.7 billion of public money on Kyoto compliance it will have given away €2.5 billion worth of carbon permits as windfalls to companies like Riva Group, Edipower and Italcementi," said Damien Morris, who authored the report.
Moreover, the report questioned the quality of offsets bought by Italy. It argued that in order to keep costs down, Rome is likely to prioritise so-called "hot air" credits from governments in Eastern Europe. These have ended up with large numbers of surplus Kyoto credits, probably as a result of post-communist de-industrialisation before the Kyoto commitment period started, it speculated.
Moreover, around 87% of international credits currently purchased by Italian companies come from controversial projects that destroy industrial gases HFC-23 and N2O, Sandbag noted.
Last month, the European Commission proposed to ban the use of such credits in the EU ETS after 2013 due to concerns that these projects have in fact increased greenhouse gas emissions.
Sandbag argued that while Italy's path is already set for 2012, it will need to change its "race to the bottom" strategy to avoid wasting billions more in offsets to meet its 2020 target.
The NGO called on the government to put in place stronger domestic climate policies to force Italian companies to invest in new energy infrastructure rather than paying for cheap offsets. Moreover, EU states should expand the scope of the EU ETS to encompass more sectors in order to make the obligations of the non-trading sector more manageable, it said.
"Companies follow ETS rules"
Italian energy giant Enel countered that the report had overlooked the fact that the allocations of ETS credits deemed excessive by Sandbag are more than offset by those facilities that are short of allowances. It pointed out that Italian ETS sectors are in fact short of around 40 million for 2012.
"Recommending not to make these allocations would go against the rules of the ETS as already approved and implemented. That would be paid for by those industry sectors that have been suffering most the current economic crisis," said Giuseppe Deodati, Enel's head of carbon strategy.
He argued that the weight of international offsets with respect to the compliance gap had increased because the economic crisis had brought Italy closer to its Kyoto target.
"However, this is not a sufficient reason to change the rules for the use of offsets, especially given the fact that the ETS is to continue beyond 2012 and that the amount of usable offsets will decrease dramatically," Deodati said.
He stressed that the use of international offsets is an additional instrument for Italy to meet its targets efficiently in the short term up to 2012. "In the long term Italy is investing substantial resources in clean technologies and energy efficiency incentives," he said.
"From the beginning, the EU ETS has allowed compliance entities, as the Kyoto Protocol allows Annex B [developed] countries, the ability to reduce costs buy buying emissions reductions from approved projects up to a certain limit. So this saves money, not wastes it," said Simone Ruiz, European policy director at the International Emissions Trading Association (IETA).
She argued that while Italy is dragging its feet in terms of banning industrial gas credits or resisting a move to a 30% EU emission reduction target for 2020, numbers show that it is in fact not the black sheep amongst EU nations.
Italy's 10% gap to its 2020 target in non-traded sectors falls far short of many others, including 25% in Ireland and 19% in Spain, Ruiz pointed out. Moreover, Italian companies have so far used just above 10% of the full amount of offsets they are entitled to use, she added.
In terms of overallocation of credits to specific sectors under the EU ETS, the IETA director said that it is "not an isolated phenomenon in the EU" but one that will hopefully disappear when the EU moves to a centralised form of allocation in 2013.
"It makes sense to expect the traded sector to provide a higher abatement share, as the EU ETS allows to do this in the most cost-efficient way," she agreed. But she doubted that it would be easy to expand the scope of the ETS once a decision has been taken not to put a higher burden on the traded sector, as Italy has done.
