The European Commission has published the 2005 CO2 emissions data and compliance status of more than 9400 installations covered by the EU Emissions Trading Scheme. The figures show a significant over-assessment of emissions and therefore of allowances, even though four member states – Cyprus, Luxembourg, Malta and Poland – have yet to send the information because their emission allowance registries are not yet operational.

The 21 member states with active registries have allocated an annual average of 1829.5 million allowances to installations in the scheme’s first trading period, covering 2005 to 2007. In addition they have put aside an annual average of some 73.4 million allowances for new installations or for auctioning purposes. Independently verified emissions data for installations representing more than 99% of emissions in these 21 member states amounted to approximately 1785.3 million tonnes for 2005.

Preparation for the scheme’s second trading period, from 2008 to 2012, is now well under way. As required by the Emissions Trading Directive, member states are drawing up national allocation plans for the 2008 to 2012 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 so provides member states with a factual basis for deciding upon the caps in their forthcoming national allocation plans for the second trading period, when the Kyoto targets have to be met. The plans are subject to approval by the Commission, which will also be making extensive use of the 2005 emissions data.

Later this year the Commission will launch a review of the scheme and the Directive to see whether adjustments to the scheme’s design should be introduced after 2012. The main purpose of the review is to ensure that the scheme, seen across the world as being the nucleus of a future international carbon market, delivers emission reductions in the most cost-effective way possible into the medium and long-term.

But the signs are not encouraging. This first report on the effectiveness of the system showed that only six countries, Austria, Ireland, Italy, Slovenia, Spain and the UK of the 21 to issue permits required polluters to cut emissions. Across the EU, industrial plants pumped out 1.785 billion tonnes of CO2 in 2005, while national authorities had given them allowances for 1.829 billion tonnes. The resulting capacity for increased pollution under the scheme is now likely to lead to a fierce round of negotiations in Brussels, with governments urged to stand up to big business and to demand more challenging caps on CO2.

Reaction to the figures from energy experts and individual governments has been energetic, sometimes angry. The UK’s CBI (Confederation of British Industry) strongly criticised the EC for not insisting that all members tied allocations to Kyoto GHG targets. UK ministers, under pressure from UK companies that have to face carbon bills equivalent to the 33 million tonnes of over-emission, came close to accusing member states of colluding with their own industrialists to produce advantageous allowances; environmental lobbyists have accused the EU of feebleness in its dealings with member states, of in effect handing them a licence to pollute. The basis of this claim is not merely that 19 states have fallen short of their

allowances, but that those allowance were in the first place a wildly overgenerous interpretation of the historical emissions record. It means that pollutant emitters in such states can actually emit more than formerly, and still not fall foul of the rules on emissions limits; and that inevitably Kyoto targets have been ignored.

In advance of the figures’ being released, leaks and speculation about their contents caused carbon prices, which had risen to record levels, to plunge by more than a third as preliminary data revealed that France, Spain, Belgium, the Netherlands, the Czech Republic and Estonia would announce actual emissions in 2005 of significantly less than the allowances allocated.

With carbon credits under the EU ETS trading at nearly Euros30 in the spring of 2005, helped by the increasing coal-gas differential and warmer than expected weather, their impact was lifting electricity generation prices across Europe. And although lower gas prices and the availability of E. European source EUAs caused a sharp drop in July, the price had rallied by April 2006 to more than r30. However, as initial data from phase 1 was revealed, the price plunged to around Euros11/MWh, later bouncing back to around Euros13. It fell 35% in a single day in late April to Euros15/t after the publication of figures from the Czech Republic, Estonia, France, and the Netherlands. Environmental groups have said that at such levels the EU’s efforts to cut greenhouse gases under the Kyoto Protocol are bound to fail.

Underlining the volatility of the ETS, carbon prices shot up by 80% after Germany, the biggest polluter, said that it would cancel millions of credits allocated to companies last year. The Commission admitted that some countries appeared to have over-allocated permits and said that there would be stricter scrutiny of future allocations.