Preliminary data from the first year of the EU's greenhouse gas trading scheme has highlighted problems in the allocation of plant outputs and in the tracking of carbon dioxide (CO2) emissions.
The data indicates that the European Commission had set allocation limits at too high a level. Figures published today show that CO2 emissions were 44 million tonnes under the level permitted in 2005. Early reports last week that Germany's industry released far less carbon dioxide than allowed under the trading scheme resulted in carbon prices falling by about 20 per cent on 12 May.
The data might result in regulators speeding up the programme to slowly lower allocations and put more pressure on industry to pollute less.
By the compliance deadline of 30 April 2006 a total of 849 installations were identified as not having surrendered a sufficient number of emission allowances. Many of these have subsequently fulfilled their surrender obligation over the last two weeks, the Commission noted in a press release.
The preliminary statistics submitted by a number of countries also reveals how some of the EU's largest food and drink companies are faring under the EU's Emissions Trading Scheme (ETS).
The data could provide ammunition for the bloc's food and drink industry's association (CIAA), which has been lobbying the European Commission to exempt small and medium sized businesses in the sector from the ETS.
ETS is part of the bloc's plan to reduce greenhouse gas emissions to meet international commitments under the Kyoto Protocol. The "cap-and-trade" scheme, which took effect from January 2005, allows companies to buy and sell CO2 emissions rights on specially constructed Internet sites.
Plants that emit more CO2 than their allocation need to buy allowances to cover the extra emissions. Companies that emit less than their allocation are able to sell the allowances to companies that need them.
The food processing industry is a major energy consumer and discharger of greenhouse gas through its reliance on cooking, refrigeration, freezing and air compressor systems. The increased costs have added to the costs companies must pay to stay in business.
The ETS currently covers around 11,500 installations that account for about half of the EU's CO2 emissions. Arriving at an EU-wide definition of which installations fall under the scheme is part of the challenge regulators face in complying with the agreement.
The UK's minister for environment and climate change, Ian Pearson, said that nearly all UK companies have complied with the ETS' requirements, but warned that other states needed to crack down on polluters.
In the UK, about 99.6 per cent of operators submitted their verified emissions reports and surrendered the correct number of allowance. Just three of around 690 installations are facing possible enforcement action for not complying with the deadlines, Pearson said.
Under the scheme companies can be fined about €40 per excess tonne of CO2 emitted, a price above allocations being traded on the market.
"While the system appears to be functioning effectively, the results across the EU do raise questions about the stringency of the caps in some member states," he stated today in a press release. " We will be looking very carefully at these results over the next few weeks, in particular in the context of the plans for the next phase which are currently under development. I will be encouraging the Commission to use this information to improve the enforcement of tough caps for phase two so that the scheme provides the appropriate incentives for investment in clean technology."
ETS covers about 1000 installations in the UK, including Unilever Bestfoods UK, Nestlé, Gerber Foods Soft Drinks Ltd. and Dairy Crest among others.
Bestfoods had an allocation of 13,588 tonnes and used 10,179 tonnes. Gerber Foods Soft Drinks went over its allocation 5,988 tonnes, using 8,532 in the period to the end of April 2006. Dairy Crest's plant in Crudgington used 8,364 tonnes of its 17,410 tonne allocation.
Nestlé's boiler house in Fawdon used 9,228 tonnes of its 10,310 tonne allocation. The company's facility in Dalston used 9,139 tonnes of its 12,670 tonne allocation. Nestlé Rowntree boiler in Girvan used just 4,145 tonnes of its 13,916 tonne allocation.
Weetabix went far over its 9,870 allocation, producing 17,047 tonnes of CO2 emmissions during the reporting period. Horlicks' factory had an allocation of 7,822 tonnes and used 7,747 tonnes.
In the dairy sector the Caledonian Cheese Co. in Stranraer used 11,958 tonnes of its 12,885 tonne allocation. Glanbia Cheese went over its 12,310 tonne limit, using 13,236 tonnes during the period.
In the ingredients sector, Archer Daniels Midland in Erith used 110,294 tonnes and had a 93,519 tonne limit. Tate and Lyle Sugars used 164,985 tonnes out of its 188,198 tonne allocation. Tate & Lyle citric acid plant had a 39,257 tonne allocation and used 39,543 tonnes. DSM Dairy had an allocation of 195,248 and used 195,791 tonnes.
In the brewing segment Scottish Courage, Fountain Brewery had an allocation of 15,663 tonnes and used 2,610 tonnes. Boddingtons Brewery had an allocation of 6,613 tonnes and used only 375 tonnes.
The 2005 data is the first verified emissions information for installations. The preliminary data released by the Commission today covers about 9,400 of the 11,500 installations falling under ETS in the EU's 25 members. Four members – Cyprus, Luxembourg, Malta and Poland – released no information to the Commission as their allowance registries are not yet operational.
The 21 member states with active registries have allocated an annual average of 1,829 million allowances to installations in the scheme's first trading period, covering 2005 to 2007.
Some of the remaining installations that have yet to fulfil their obligations have reportedly encountered technical difficulties with the national registries. The Commission plans to contact member states to identify the reasons and to ensure action is taken if needed.
The EU ETS regulations require operators of installations in the scheme to monitor and report their emissions each year, and to have their emissions independently verified. They must then surrender sufficient allowances to cover their verified emissions.
The deadlines for reporting and surrendering allowances each year are 31 March, when operators must report the verified emissions for the previous year, and 30 April, when they must surrender allowances to cover their verified emissions.
The EU ETS Directive requires the European Commission to publish compliance data for each installation on 15 May each year.
The Commission is now preparing for the scheme's second trading period, from 2008 to 2012. As required by the directive, member states must draw up
national allocation plans for the period for notification to the Commission by 30 June.
These plans are important climate policy tools since collectively they will determine the total permitted level of CO2 emissions from installations across the EU as well as how many allowances each installation receives individually.
The new 2005 emissions data gives independently assessed installation-level figures for the first time and provides governments with a factual basis for deciding upon the caps in the second trading period, when the Kyoto targets have to be met.
The Commission plans to launch a review of the scheme and the directive later this year to see whether adjustments to its design should be introduced after 2012.
In the second phase member states and companies will come under increasing financial and administrative pressure to reduce CO2 emissions. They will have to buy credits if they want to expand.
In the guidance the Commission says the legislative framework for small installations will remain unchanged during the drawing up of national allocation plans. To ease the burden on small companies the Commission called on member governments to use the legislative flexibility already offered under the current plan.
It is also considering looking at measures to make the situation easier for small installations in its forthcoming review of the ETS. It will consider proposing an amendment to the directive to enable the removal of some small installations in the course of the second trading period, the Commission stated.
The Commission plans to revise the rules for monitoring and reporting of emissions in a bid to ease the administrative burden for small installations.
The Commission aims to have the changes in place by the start of the second trading period.
Making ETS less complex is another tack taken by the Commission. A guidance document last year proposes a set of standardised tables to help companies present important information, such as projected emissions, assumptions regarding fuel prices and the reductions expected from other policies and measures.
In November the EU's food and drink association told FoodProductionDaily.com that the scheme is being applied inconsistently across the bloc, hurts smaller companies and should not be expanded to other types of emissions. The Confederation of Food and Drink Industries in the EU (CIAA) is lobbying for changes to the agreement.
The CIAA says a more fairer definition needs to be applied across the bloc of what plants are caught under the ETS.
The CIAA says the scheme requires a harmonised definition of “combustion installation” across the EU, as some countries have used the loose definition to exclude certain sectors of the food and drink industry. This gives competitors in those countries an advantage over other CIAA members in more restrictive states.
Under the current scheme the ETS is mandatory for many industries, including “combustion installations" with a rated thermal input exceeding 20MW.
Under the scheme EU member state governments are required to set an emission cap for all installations covered by the programme. Each plant will then be allocated allowances for the particular commitment period. The number of allowances allocated to each installation for any given period will be set down in a document called the National Allocation Plan.
However in their NAPs, member states have applied two different definitions of the term “combustion installation”.
Due to differences between member states the Commission has allowed two different definitions of "combustion installation" that exceed the 20MW threshold.
One is a medium definition as advocated by the UK and others. This covers boilers and small-scale combined heat and power (CHP) installations that use electricity and steam heat.
The UK definition excludes fryers, dryers and ovens. However the wider definition, as applied by countries like the Netherlands, does not make such a distinction. The difference in application would presumably give companies excluded under the UK scheme a competitive advantage over those included under the Dutch method.
"Given the disproportionate costs of the ETS for many small installations, CIAA considers it vital to ensure that the necessary harmonisation of the definition of 'combustion installation' does not result in an extension of the ETS scope to additional small sites," the association said. "Therefore, the harmonisation must be consistent with the exclusion of small sites from the ETS."
The CIAA also wants the ETS to exclude more of its smaller members by setting a minimum emmission level of about 25 kt CO2/year.
"Monitoring, reporting and verification requirements cause significant financial and administrative burdens that are often disproportionate to the low level of actual emissions caused by these installations," the CIAA argues. "For example under the UK NAP, 59 per cent of covered installations produce less than 25,000 tonnes CO2/year. Together these installations account for only 2.4 per cent of the total emissions covered by the UK's NAP."
The coverage of low emitters is also out of line with ETS' goal of providing operators with an incentive to reduce emissions, the CIAA stated.
The CIAA also opposes an extension of the ETS to additional activities, installations or gases during the second phase of the scheme.
During the second phase the Commission plans to include additional, smaller sites below the current capacity threshold. Below a rated thermal input of 20 MW, actual direct emissions would typically be less than 5,000 tonnes CO2/year.
Again, the CIAA argues that the cost burden associated with monitoring, reporting and verification under the ETS would be disproportionate to the marginal level of emissions from these sites.
The CIAA also notes that the primary source of greenhouse gas emissions from the food and drink industry is CO2 from combustion processes already covered under the current ETS.
Another problem concerns the national allocation plans, which the CIAA says show great diversity in the methodologies to allocate allowances to installations. Such exclusions such as benchmarking versus grandfathering, the treatment of new entrants, auctioning, plant closure and allowance transfer and voluntary inclusions are applied inconsistently across the bloc.
On 23 November, in a case brought by the UK against the Commission, the EU Court of First Instance ruled the country should have been allowed to request an increase in air-pollution permits from regulators.
Earlier last year the Commission rejected the UK's request for a 2.7 per cent rise in free carbon-dioxide permits for energy and manufacturing companies
The market in trading emission rights is estimated at about €35 billion (US$43bn) per year.
In the UK a total of 48 food and drink plants are covered by ETS, but 73 have opted-out of the scheme in the first trading period 2005 from 2007.
The numbers refer only to companies covered by the UK Food & Drink Federation. There are also other non-member food and drink sites not covered by the association.
The opt-out option would not be available in the second phase of the ETS scheme.
In France 159 food and drink installations are covered by ETS out of 1100 total plants. The sites represent 14 per cent of the total sites covered by ETS in France and 4,76 per cent of total CO2 emissions under the French National Allocation Plan (NAP).
In the Czech Republic 33 food and drink installations are covered. In Belgium 46 food and drink sites are covered and in Finland 10 sites, he said.
The main food and drink sectors covered by the ETS include plants making sugar and starch, vegetable oils, milk and malt. Breweries are also covered. In general, food and drink sites are covered by the ETS if they are operating combustion installations exceeding 20 Megawatt rated thermal input.
Under the UK NAP 59 per cent of all covered sites, including the food and drink sector, produce less than 25,000 tonnes CO2 a year and together account for 2.4 per cent of total emissions.
All of the EU's 25-member countries ratified the Kyoto Protocol on 31 May 2002. In 1996 the EU adopted a target of a maximum 2°C rise in average global temperature.
Trading in EU allowances may exceed $5 billion this year, according to the Amsterdam-based European Climate Exchange.
Member state reports can be downloaded from the Commission's Climate Change website .