Question marks over EU CO2 trading scheme

Asked whether over-allocation by member states could be a reason for nations falling short on their quotas, a Commission spokesman said that "it could be of course" but that one would need to look at emissions from each industrial installation individually before drawing conclusions. He rather suggested that the lower than expected emissions figures could find other explanation such as successful implementation of the EU-ETS or a general rise in energy prices providing industry with incentives to cut down on consumption.

UK environment minister Ian Pearson said "the results across the EU do raise questions about the stringency of the caps in some member states". "I will be encouraging the Commission to use this information to improve the enforcement of tough caps for Phase II so that the scheme provides the appropriate incentives for investment in clean technology".

Most market analysts cited by Bloomberg news agency agree that over-allocation is the main reason why most EU countries fell short of planned quotas. "It's clear that most countries were too generous when handing out allowances," said David Foster, head of emissions and weather derivatives at Calyon, part of Credit Agricole SA. "There's no doubt [EU countries] had an incentive to exaggerate emissions," said Per Lekander, an analyst with UBS AG in London.

For environmental groups, the data brings confirmation that EU member states have "abused the Emissions Trading System" by granting their industries "far too generous carbon emission allowances in the period 2005-07". 

One key issue highlighted by the WWF is that emission allowances for that period were not determined based on real "historic" emissions but on assumed future emissions, giving big polluters an incentive to exaggerate projections. Another is that about 90% of CO2 pollution permits were given away to businesses free-of-charge, allowing them to accumulate windfall profits from selling their permits. The way the permits were distributed was also not transparent, they say, and the actual emissions were not verified independently.

"Member states should make use of auctioning to the 10% maximum allowed", to reinvigorate the market, the WWF argues. They should also "create a clear link between allocations and cleaner production" with "fuel-based benchmarking" which would for example allow comparing a coal-fired power plant with gas-fired power plant, the WWF says.

According to the WWF, CO2 emission would need to be cut by a further 9% to be in line with Kyoto emissions targets. "The European Commission should reject all NAPs without ambitious emission caps," it said.