Emissions trading, or “cap-and-trade” as also commonly known, is becoming a key market-based approach for the control of pollutants through the provision of economic incentives to limit or reduce emissions.
General information on emissions trading with particular reference to the European Union’s emissions trading scheme may be found here. More detailed information on specific matters related to implementation and compliance may be found in the following sections:
What is Emissions Trading?
The underpinning rationale of emissions trading is that emission reductions are achieved where the cost of the reduction is lowest, thus lowering the overall cost of mitigation efforts against climate change.
Principles of the cap-and-trade approach were existent and being modeled as early as the middle 1900’s, with the concept being put in practice first in the United States in the early 1990s (US Acid Rain Program).
Emissions trading was then adopted as a principal means for controlling emissions of greenhouse gases. In fact, emission trading principles became the basis for international emissions trading as established by Article 17 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change – trading of emission entitlements between parties with quantified emission limitation or reduction targets.
An authority (for example an international or regional body in the case of a multinational scheme, or a government in the case of a national scheme) sets a cap on the total amount of pollutant that can be emitted under the scheme. Parties or companies participating in an emissions trading scheme are each allocated a quantity of tradable emission permits (also referred to as allowances), the sum of which would be equivalent to the overall cap. Each emission permit or allowance is equivalent to a specific amount of pollutant; in the case of greenhouse gas emissions trading schemes, one permit or allowance is normally equivalent to the emission of 1 tonne of carbon dioxide equivalent. Schemes may also include a decrease in the cap over time.
Entities participating in such a scheme, and thus allocated emission permits, have the flexibility of determining how and where emission reduction will take place. An entity is allowed to emit in excess of the allocation of permits it has been issued by purchasing additional permits from an entity that emits less than its allocation and thus has surplus permits to sell (Figure 1). Thus entities can either reduce emissions on site or else buy permits, depending on which approach is the most cost-effective for that entity. The buyer of permits or allowances is effectively paying for polluting, while the seller is rewarded for reducing its emissions by more than was needed.
Most importantly, the overall environmental outcome is however not affected as the total amount of permits or allowances in the scheme, therefore the overall limit on emissions, remains fixed.
Figure 1 – diagrammatic representation of how emissions trading works in practice
What is the European Union Emissions Trading Scheme?
The European Union has established the largest multi-country (to date covering 27 EU Member States, with the participation also of Norway, Iceland and Liechtenstein) and multi-sector emissions trading scheme, covering large, stationary, greenhouse gas-emitting industrial installations (since 2005) and, as from 2012, aviation activities.
The first greenhouse gas addressed by the scheme was carbon dioxide, with nitrous oxide and perfluorocarbons from certain sectors being added with time.
“The EU Emissions Trading System (EU ETS) is a cornerstone of the European Union’s policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively.”
Directive 2003/87/EC – an overview.
The EU ETS Directive, Directive 2003/87/EC sets out the legal framework for the implementation of the EU emissions trading scheme in Member States. The roles and responsibilities of the principal players in the scheme, including competent authorities and operators are described in the directive, which also provides harmonized rules relating to the main functions of the scheme.
The directive has been updated a number of times, through amending directives. These are:
Directive 2004/101/EC (also called “the Linking Directive”) which allows operators in the scheme to use, subject to a number of restrictions, credits derived from projects implemented under the Kyoto Protocol project mechanisms for compliance with their surrendering obligations. These credits are the Certified Emission Reduction units (CERs) generated by Clean Development Mechanism projects (CDM) and the Emission Reduction Units (ERUs) generated from Joint Implementation (JI) projects;
Directive 2008/101/EC which provides for the inclusion of aviation activities in the scheme. For this sector, this amending directive introduced a number of concepts, such as EU-wide harmonized cap setting and allocation rules, mandatory partial auctioning of allowances and, use of benchmarking where free allocation is applicable, which concepts were later expanded for industrial sectors;
Directive 2009/29/EC, forming part of the Climate Change and Energy Package of 2009, it brought into effect a number of important changes particularly with respect to industrial installations. The scope of the scheme was expanded to include new industrial sectors and new gases from certain sectors. The setting of an EU-wide allowance cap and mandatory auctioning of allowances and free allocation by benchmarking, as allocation methods for stationary installations, and the establishment of a single Union registry are among the more fundamental changes brought about by this amending directive.
Implementing the EU ETS Directive in Malta
Legal Notice 434 of 2013 transposes Directive 2003/87/EC into local law in so far as it relates to stationary installations.
Legal Notice 403 of 2012 transposes the directive in so far as it relates to aviation activities.
The competent authority responsible for the overall implementation and administration of the EU ETS in Malta is the Malta Resources Authority.
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