(3) 
The EU's Emissions Trading System (ETS) is a cornerstone of the EU's efforts to meet itsobligation under the Kyoto Protocol. It covers more than 11,500 energy intensive facilities acrossthe 25 EU Member countries, including oil refineries, powerplants over 20 megawatts (MW) incapacity, coke ovens, and iron and steel plants, along with cement, glass, lime, brick, ceramics, andpulp and paper installations. Covered entities emit about 45% of the EU's carbon dioxide emissions.The trading program does not cover emissions of non-CO 2 greenhouse gases, which account forabout 20% of the EU's total greenhouse gas emissions. The first trading period began January 1,2005. A second trading period is scheduled to begin in 2008, covering the period of the KyotoProtocol, with a third one planned for 2013. In deciding on its trading program, the European Commission (EC) adopted a"learning-by-doing" approach to prepare the EU for the Kyoto Protocol's emissions limitations. TheEU does not have major experience with emissions trading, and the EC felt an initial programbeginning in 2005 would give the EU practical familiarity in operating such a system. At first glance, it would appear that the EU would have little difficulty meeting its Kyoto Protocol requirements during the second trading period. Theanticipated deficit between the second trading period for the original 15 MemberStates can be covered by trading with the newer Member States that anticipate asurplus. Asnoted earlier, the ETS only covers a percentage of the overall greenhouse gasemissions in the various Member States of the EU. However, some sectors not covered by the ETS may growfaster than sectors covered by the ETS, creating difficulties for compliance. However, there are other considerations. The availability of surplus credits created via JI and CDM is restricted by the EC linking directive that requires thatsuch credits be "supplemental" to a country's domestic efforts. Each country is tospell out what "supplemental" means in its NAP for the second trading period.Individual countries are likely to define that term differently -- restricting allowancetrades and purchases in some countries. Another consideration is the overall commitment of the Kyoto Protocol. In particular, the transportation area is already a major source ofconcern. A final consideration for the ETS is its suitability for directing long-terminvestment toward a low-carbon future -- the ultimate goal of any climate changeprogram. It is too early to tell whether the ETS market signal and individualcountries' NAPs will move investment in the appropriate direction. The early signsare not particularly encouraging, with the 2005-2008 NAPs producing anover-allocation of allowances, and one major Member State, Germany, attemptingto direct its second NAP toward carbon-intensive, coal-fired electric generatingfacilities rather than low-carbon alternatives. Reluctance by countries to redirecttheir NAPs and an inconsistent price from the ETS make the long-term effect of theETS uncertain.
The European Union's (EU's) Emissions Trading System (ETS) is a cornerstone of the EU'sefforts to meet its obligation under the Kyoto Protocol. It covers more than 11,500 energy intensivefacilities across the 25 EU member countries, including oil refineries, powerplants over 20megawatts (MW) in capacity, coke ovens, and iron and steel plants, along with cement, glass, lime,brick, ceramics, and pulp and paper installations. Covered entities emit about 45% of the EU'scarbon dioxide emissions. The trading program does not cover emissions of non-CO 2 greenhousegases, which account for about 20% of the EU's total greenhouse gas emissions. The first tradingperiod began January 1, 2005. A second trading period is scheduled to begin in 2008, with a thirdone planned for 2013. In deciding on its trading program, the European Commission (EC) adopteda "learning-by-doing" approach to prepare the EU for the Kyoto Protocol's emission limitations. TheEU does not have major experience with emissions trading, and the EC felt that an initial programbeginning in 2005 would give the EU practical familiarity in operating such a system.
At first glance, it would appear that the EU may have little difficulty meeting its KyotoProtocol requirements during the second trading period. The anticipated deficit between the secondtrading period for the original 15 Member States can be covered by trading with the 10 newerMember States that anticipate a surplus. Also, credits are likely to be available through JointImplementation (JI) and Clean Development Mechanism (CDM) projects sanctioned under theProtocol.
However, there are other considerations. The availability of surplus credits created via JI andCDM is restricted by the EC requirement that such credits be "supplemental" to a country's domesticefforts. Each country is to spell out what "supplemental" means in its National Allocation Plans(NAPs) for the second trading period. Individual countries are likely to define that term differently-- restricting allowance trades and purchases in some countries.
Another consideration is the overall commitment of the Kyoto Protocol. As noted earlier,the ETS covers only a percentage of the overall greenhouse gas emissions in the various MemberStates of the EU. Some sectors not covered by the ETS may grow faster than sectors covered by it,creating difficulties for compliance. In particular, the transportation area is already a source ofconcern.
A final consideration for the ETS is its suitability for directing long-term investment towarda low-carbon future -- the ultimate goal of any climate change program. It is too early to tell whetherthe ETS's market signal and individual countries' NAPs will move investment in the appropriatedirection. The early signs are not particularly encouraging, with the 2005-2008 NAPs producing anover-allocation of allowances and one major Member State (Germany) attempting to direct its secondNAP toward carbon-intensive, coal-fired electric-generating facilities rather than low-carbonalternatives. Reluctance by countries to redirect their NAPs and an inconsistent price signal fromthe ETS make the long-term effect of the ETS uncertain.