The European Union expects to establish an emissions trading system for carbon dioxide by 2005. The trading scheme will impose quotas on the release of carbon dioxide from power stations, refineries and industrial concerns such as steel works. Owners of Installations who want to exceed their allowances would then be forced to purchase additional emission credits on the market.

Emissions trading is expected to form a crucial component of EU ambitions to meet its Kyoto treaty commitments on greenhouse gas emissions. This involves cutting EU emissions to 8 per cent below 1990 levels by 2012.

Under the EU proposals, a quota system will be established in 2005 and a trading system put in place to allow companies to buy additional emission credits from companies that do not require their full quotas. Until 2008, individual states would be able to exempt certain installations as long as equivalent cuts were being made elsewhere. Market conditions can also be invoked to award companies additional emission credits.

Where the emission quota is exceeded, companies face a fine of ¤50 for each tonne of carbon dioxide rising to ¤100. Governments will not be allowed to charge for issuing emission permits during the pilot phase of the project, covering the first three years.

A trading system is expected to cut the cost of complying with the Kyoto treaty. The European Commission has calculated that participating sectors could reduce their costs by as much as 33 per cent.