Foundations of Emissions Trading
Emissions Trading Legislation
Emissions trading within the European Union began on 01/01/2005. It is a European instrument, developed not in isolation, but as one approach within the context of international climate protection efforts.
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The European commitment to emissions trading in 2003, even before the Kyoto Protocol came into force, is an essential European contribution to global climate protection.
The European Emissions Trading Scheme is based on the Kyoto Protocol of 1997, which came into force on February 16th 2005, an additional protocol to the UN Framework Convention on Climate Change of 1992. The protocol is the internationally binding legal framework in which 39 industrial states among the approximately 190 signatory states commit themselves to reduce and stabilize their emissions of the six greenhouse gases carbon dioxide (CO2), methane (CH4), nitrous oxide/laughing gas (N2O), perfluorocarbons (PFCs), partially fluorinated carbons (HFCs) and sulphur hexafluoride (SF6). See also Umweltdaten Deutschland Online (only available in German).
In addition to domestic emissions abatement, which must have priority, the Kyoto Protocol describes what it calls flexible mechanisms. These can be used by countries as well as private companies and individuals and include
- Joint Implementation (JI)
- Clean Development Mechanism (CDM)
- International Emissions Trading between states.
Emissions Trading between States
The international trade with emission certificates provides an essential instrument for industrial nations to meet their commitments, as set out in the Climate Framework Convention and the Kyoto Protocol. Accordingly, Kyoto emissions trading refers to trading between states and is based on the idea of creating a flexible "cap and trade" scheme. The Kyoto Protocol stipulates that each industrial country is assigned a defined quantity of certificates (Assigned Amount Units, AAUs) that entitle it to emit a defined quantity of greenhouse gases. If the actual emissions exceed the limit, governments have a choice. They can either take action in their own country (such as setting incentives for technological innovation) to bring down emissions to cap level, or they can buy additional certificates from other industrial states. Certificates (AAUs) become available if a state does not use up its emission budget. The surplus certificates can be sold by one state to another, resulting in an inter-state market for emission certificates. Further emission certificates can be earned by participating in the project-based mechanisms JI and CDM.
The original proposition of emissions trading in the Kyoto Protocol was to deliver an additional instrument for participant industrial nations to fulfil their national emission abatement commitments. Beyond that, the Kyoto Protocol gives states the opportunity to build up networks or bubbles to collectively meet their commitments, which is what the European Union has done. Within the framework of the Kyoto Protocol, it committed its then 15 EU Member States to reduce emissions by 8 percent with respect to the 1990 baseline emissions. In the EU Burden-Sharing agreement of 1998, each Member State was assigned an individual cap. Germany committed itself to a reduction of greenhouse gas emissions by 21 percent
Emissions Trading between Companies
As its most important instrument to meet communal emissions reduction obligations, the European Union introduced the European emissions trading scheme between companies. The EC Emissions Trading Directive laid its legislative foundations in 2003, followed by the Linking Directive, which linked JI and CDM as further instruments to EU emissions trading. Thus, these project-based instruments have also become available to companies in EU Member States as additional ways of obtaining emission allowances abroad to meet their annual surrender obligations. A uniform registry system for Europe is based on the EC Registry Regulation, which sets out legal requirements for national registries and the communication between national registries via the EU's communal registry CITL (Community Independent Transaction Log). It also specifies reporting duties, types of accounts and pathways of transaction as well as covering security aspects. The registry ultimately documents the implementation of Europe's emissions reduction commitment.
The Monitoring and Reporting Guidelines of the EU are guidelines on the monitoring and reporting of greenhouse gas emissions, in compliance with the Emissions Trading Directive.
EU Legislation and National Implementation
The European Union provides a legal framework, which is then implemented by the Member States through national legislation.
The Greenhouse Gas Emissions Trading Act (TEHG) is the original statute for the implementation of the EC Emissions Trading Directive in Germany. In connection with further legislation in 2004, it laid the foundation for the trade in emission allowances (certificates) in Germany. The Project Mechanisms Act (ProMechG) is based on the Linking Directive and enables those companies in Germany that participate in emissions trading to use the project-based mechanisms CDM and JI to fulfil their abatement obligations. The National Allocation Plan (NAP), the Allocation Act (ZuG) and the Allocation Ordinance (ZuV) specify the allocation rules and the amounts of allowances to be allocated to participating companies in Germany. The NAP is not a stand-alone legal provision, but a plan submitted by the German Government and approved by the Commission. It has a central role as a macro economic plan for the distribution of emission allowances in Germany before they are allocated to individual installation operators. The Allocation Act (ZuG), in turn, provides the legal basis for the implementation of the allocation plan, defining the total amount of emissions allowances and the rules by which they will be distributed to the participating installations in the energy sector and the emission-intensive industries. The Allocation Ordinance (ZuV) is the implementation regulation that contains detailed rules on individual allocations and the verification of allocation applications by installation operators.
An overview of individual National Allocation Plans can be found on the webpages of the European Commission.
The legislation is complemented by the Emissions Trading Cost Ordinance (EHKostVO) and the Project Mechanisms Fee Ordinance (ProMechGebV). The EHKostVO specifies fees charged for official procedures carried out by the German Emissions Authority (DEHSt) at the Federal Environment Agency, including provisions for reduced fees and waivers, whereas the ProMechGebV contains specifications of fees arising from official procedures carried out by the German Emissions Trading Authority in compliance with the Project Mechanisms Act ProMechG.