What is emissions trading?
Emissions trading is a market-based instrument that serves to protect the climate. The principle behind it is very simple: greenhouse gas emissions from installations covered by emissions trading are limited to a total amount - the so-called cap - and distributed in the form of tradable allowances. Installations releasing greenhouse gases into the atmosphere require allowances. Therefore, the lower emissions are the more money the company saves. Those that reduce their greenhouse gas emissions can sell the corresponding surplus allowances. Emissions trading is therefore trade in allowances to emit greenhouse gases. It is one of the so-called Kyoto Mechanisms. Emissions trading was introduced in the European Union in January 2005. The Kyoto Protocol also allows international trade in greenhouse gases.
How exactly does emissions trading work?
1. Determining the permissible amount of emissions
The state and the EU, respectively, regulate the total amount of greenhouse gases that may be emitted by installations covered by emissions trading in a certain period. However, they do not specify who has to reduce how much and where. This creates a large degree of flexibility for achieving goals and an incentive to search for and implement the most cost-effective reduction. The permitted amount of emissions is reduced after or during each trading period. The first trading period comprised the years 2005 to 2007, the second trading period the years 2008 to 2012. The third trading period has started in 2013 and will end in 2020. However, the respective provisions will also be valid beyond 2020, unless reviewed in the meantime. Currently provisions stipulate that the total amount of emissions permitted will be reduced by 1.74 percent per annum.
2. Allocating emission allowances
Companies require certificates for the approved amount of greenhouse gas emissions, so-called emission allowances. An allowance gives the owner the right to emit one tonne of carbon dioxide (CO2) or CO2 equivalent, respectively. Companies can trade in these allowances. In the first two trading periods, national allocation plans specified both the total amount of allowances and their distribution. This was stipulated in the European Emissions Trading Directive. In Germany, the provisions of the National Allocation Plan were implemented through Allocation Acts. In the second trading period, the allowances were no longer allocated 100 per cent free of charge but around 10 per cent of allowances were auctioned. Emissions trading will be more harmonised throughout Europe as of 2013 onwards in order to secure uniform competitive conditions within the EU. To this end there is an EU-wide cap and EU-wide uniform allocation rules with the majority of emission allowances being auctioned rather than allocated free of charge. The various sectors of industry will gradually be included in the auction system; for a transitional period, there will be an allocation of allowances free of charge for those sectors of industry which are facing strong international competition. This allocation free of charge will be based on ambitious reference values, so called benchmarks. They reflect the average of the 10 per cent best technologies in a sector EU-wide.
3. Sale of surplus allowances or purchase of additional allowances
If a company achieves its required emission reductions through its own cost-effective CO2 reduction measures it can sell surplus allowances on the market. Alternatively, it can purchase allowances on the market if implementing its own reduction measures would be more expensive. Companies covered by emissions trading are obliged to register their emissions annually and to surrender the corresponding amount of allowances to the German Emissions Trading Authority (DEHSt). If a company does not comply with its obligation to surrender allowances, sanctions will be applied. Emissions trading therefore makes it both ecologically and economically attractive to a company to reduce its emissions.
Who participates in emissions trading?
Operators of 1800 installations are currently taking part in emissions trading in Germany, in particular all large combustion plants (with more than 20 megawatts of thermal output) and large installations of energy-intensive industries such as steelworks, refineries and cement works. As of 2013 additional greenhouse gases and sectors have been included. As of 2012 air traffic, to the extent that it lands at/ departs from EU airports, has also been included in the emissions trading scheme. However, the stipulations governing air traffic are currently under review.
Emissions trading is one of the Kyoto Protocol's flexible mechanisms, geared towards a lasting reduction in greenhouse gas emissions:
- In 1997 the industrialised countries involved committed themselves under the Kyoto Protocol to reducing emissions of climate-damaging gases by around 5 per cent by 2008-2012 compared with 1990.
- The European Union pledged to cut its emissions by 8 per cent during the period 2008 to 2012 compared with 1990 levels.
- In the framework of EU effort sharing under the Kyoto Protocol, Germany committed itself to cutting its emissions of climate-damaging gases by a total of 21% in the period 2008 to 2012 compared with 1990. With this commitment Germany is in the vanguard.
The German government's policy
With emissions trading the German government is successfully implementing an instrument for achieving ambitious German emission reduction targets. In the second emissions trading period from 2008 to 2012, installation operators had to cut greenhouse gas emissions by 57 million tonnes annually. Compared with the level of emissions released by installations covered by emissions trading in the first trading period 2005 to 2007, the amount allocated was reduced by more than 7 per cent. In the second trading period further types of installations were included in emissions trading, primarily crackers in the chemicals industry, processing installations in the steel industry and installations producing soot. In the third trading period, additional sectors and greenhouse gases will be covered, i.a. installations producing aluminium and in the chemicals industry.
Everyone benefits from emissions trading. It is an efficient and cost-effective instrument for avoiding greenhouse gas emissions and protecting our climate. With the revenues from emissions trading the German government has been able, since the start of 2008, to promote a wide range of climate measures - in industry, local authorities and for consumers. It supports, for example, investments in greater energy efficiency and therefore creates the basis for lower heating costs in private households.