EU Greenhouse-Gas Emissions

EU Greenhouse-Gas Emissions
Rose 1.1% Last Year

The European Union's greenhouse-gas emissions from key industries rose 1.1% last year, despite its antipollution policies, demonstrating the difficulty in meeting international commitments to fight climate change.

Carbon-dioxide emissions reached 1.914 billion metric tons last year in the sectors covered by Europe's Emission Trading Scheme, according to an analysis of data by Oslo-based Point Carbon, a carbon market-research and consulting firm. The data released Wednesday aren't complete, because some companies' results are still trickling in, but it represents about 93% of the total, according to the EU Web site.

For the past three years, Europe has been trying to reduce emissions by imposing a market-based cap-and-trade system. Industries such as power generators, steel, cement and aluminum are supposed to cap the amount of carbon dioxide they spew. If they can't make their targets, they must buy permits to emit carbon on the open market.

By forcing companies to buy and sell the right to pollute, Europe's system is supposed to give them a financial incentive to clean up their acts. It is also supposed to provide European countries with a way to meet their commitments to the Kyoto Protocol, the United Nations accord that set emissions-cutting targets for the 175 nations that ratified it for the period between this year and 2012.

Some 11,500 factories, oil refineries, steel mills and other installations are covered by the EU scheme, accounting for about half of Europe's total emissions. There is still no limit on the other half, produced by everything from cars and planes to buildings and retail outlets.

But the caps that the EU set for different industries turned out to be too high. As a result, instead of shrinking, as was originally envisioned, emissions in these industries have crept up by about 1% each year since the program began.

Europe's struggle to make its cap-and-trade program work shows just how hard it will be for the industrialized world to achieve any meaningful reduction in greenhouse-gas emissions. Japan isn't faring any better: Its Kyoto targets call for it to reduce emissions by 6% below 1990 levels, but emissions are actually increasing there as well.

The issue is taking on greater importance in the U.S., the world's biggest economy and still the largest emitter of carbon dioxide, the main global-warming gas. All three leading presidential candidates say they are in favor of establishing a cap-and-trade system similar to Europe's, and the Senate is expected to consider cap-and-trade bills this summer.

Europe's cap-and-trade system has been plagued with design and implementation problems from the start. Chief among them: National governments issued too many carbon permits -- essentially a license to pollute -- to regulated industries. As a result, companies had no real incentive to revamp their factories. Regulators in Europe have tried to get the scheme back on track by forcing governments to ratchet down the number of permits they issue during the program's second phase, from 2008 to 2012.

Although the scheme has so far failed to reduce emissions, it has spawned a fast-growing market for trading carbon permits. Last year, the value of all the carbon credits traded in Europe topped $40 billion, up 55% from the previous year. Hedge funds, investment banks and brokers trade carbon permits as they would any other commodity, like gold or oil. And while the data released Wednesday might fuel pessimistic predictions about the effectiveness of the scheme in holding back emissions, financial players were bullish about what it meant for the carbon market.

Patrick Weber, a carbon trader for Allianz AG's investment-banking unit Dresdner Kleinwort in London, spent the day fielding phone calls from German utilities and industrial companies regulated by Kyoto. "We still think there will be a net shortage in carbon credits through 2012, so prices should go up from here," he said.

The price for a carbon permit for delivery in December 2008 increased 4% to €23.45 ($36.58) at the close of trading Wednesday on the European Climate Exchange, up 93 European cents from Tuesday's close at €22.52

Companies such as German utility RWE AG and steelmaker ArcelorMittal are expected to be big buyers of carbon credits in the next phase of the scheme, and an increase in carbon prices could sharply boost their cost of complying with Europe's carbon-emissions caps.

According to an analysis of the EU data by Point Carbon, the German power sector is expected to emit 310 million metric tons of carbon dioxide in 2008. But emissions for the sector are capped at 236 million metric tons for 2008, meaning power companies like RWE and Eon AG will have to make major cuts to their emissions or buy carbon permits on the market. In previous years, power companies had more permits than they needed because of the design flaws in the scheme.

"We see the same picture all across Europe," said Henrik Hasselknippe, analyst at Point Carbon. "The power sector will have to reduce its emissions either by switching from burning coal to natural gas, building renewable energy, or by buying massive amounts of carbon credits."

For its part, RWE expects to have annual emissions of around 140 to 147 million metric tons of carbon dioxide from 2008 to 2012, but only anticipates being given 75 to 80 million tons worth of carbon permits. To make up the shortfall, RWE says it is upgrading its power plants, urging its customers to be more energy-efficient, starting a renewable-energy subsidiary and buying 18 million metric tons worth of carbon permits from projects done in the developing world. "We have an ambitious strategy," said an RWE official.

Write to Leila Abboud at leila.abboud@wsj.com¹

Posted by: oldasyoufeel on 4/6/2008 2:54:35 PM , 0 comments