European Commission plots emissions trading overhaul

The European Commission is planning to significantly toughen its emissions trading scheme (ETS) from 2013, according to a draft proposal seen by research firm Point Carbon.

The leaked draft, which is scheduled to be released on 23 January when the Commission publishes its climate change plans for the period from 2013 to 2020, proposes a major tightening of emission caps for firms in the scheme and a huge increase in the number of auctioned carbon credits.

Henrik Hasselknippe, director of emissions trading analysis at Point Carbon, said that the document sets out a goal of reducing the emissions cap by 21 per cent on 2005 levels by 2020.

He added that it also proposes ending free allocation of carbon allowances to power companies from 2013 and increasing the proportion of auctioned allowances to other firms in the scheme year-on-year to ensure all free allocations are ended by 2020. Such a move would force all firms in the scheme to buy allowances at auction to cover their carbon emissions, effectively creating a Europe-wide tax on carbon.

Phase two of the scheme, which began last week and runs until 2012, has been praised by carbon market watchers for delivering more demanding emissions caps than phase one of the scheme, but it now looks as though the Commission is prepared to slash caps further still, as it seeks to live up to its reputation as a global leader in the fight against climate change.

The Commission proposal also reserves the right to lower the cap by up to 30 per cent on 2005 levels if the EU can secure a commitment from the US and other countries to cut their emissions by similar levels.

"It looks like the Commission has done a really good job," said Hasselknippe. "It is difficult to say at the moment how many of the proposals will survive when they reach the European Parliament… but there is a lot of political will behind delivering a far more tighter trading scheme and I would expect several of the main points to survive."