New carbon market takes shape

On 13 July 2007, the European Commission adopted a series of decisions on revised carbon permit allocation plans of five EU member states for the second phase of the EU emissions-trading scheme. The decisions are part of an ongoing and contentious process to establish a viable EU carbon market.

The 13 July decisions concern the amended national allocation plans (NAPs) of Ireland, Latvia, Lithuania, Luxembourg and Sweden for the second phase (2008-2012) of the EU emissions-trading scheme (EU ETS). Decisions on the revised proposals of Germany and Slovakia are still pending.

In an unexpected move, the Commission has decided slightly to increase CO2 allowances for Ireland and Latvia. Allowance increases under the Joint Implementation (JI) and Clean Development Mechanism (CDM) were also approved for Latvia and Lithuania, while Ireland’s allowances were reduced. 

Luxembourg was granted an exemption from a requirement to auction allowances, but it must also withdraw certain industrial installations from its NAP. 

None of Sweden’s proposed amendments was approved. 

During the first phase of the EU ETS, from 2005-2007, the price of CO2 per tonne reached €30 but collapsed to near zero, due in part to an over-allocation of carbon allowances by member states (EURACTIV 02/05/06). The Commission hopes to avoid a repeat of market failure for the second phase, and is looking to reign in allowances and to establish a stable CO2 per tonne price of around €25.

In November 2006, the Commission adopted decisions on the proposed NAPs of ten EU member states, disapproving of seven of the ten initial NAPs, namely those of Germany, Ireland, Latvia, Lithuania, Luxembourg, Slovakia and Sweden. 

Considerable allowance reductions were demanded from Latvia (57%), Lithuania (47%) and Luxembourg (32%). In a surprise move, Germany was also asked to reduce its allowances. Overall, the Commission demanded a 7% reduction in allocations by these member states.

In response, each of member state submitted an amended proposal. Slovakia, which had its requested annual allowances cut by one quarter, also took matters a step further and commenced legal action against the Commission, arguing that the EU executive’s decision failed to take rapid economic growth into account and would harm industrial development (EURACTIV 17/04/07). 

In total, 16 NAPs were rejected by the Commission. The Commission is expected to decide on the remaining amended NAPs after Summer 2007, and is expected to propose a Directive on a revised EU-ETS for 2008-2012 before the end of 2007. 

Read more with Euractiv

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