Natascha Trennepohl 1
6 Design elements of a trading scheme
Every emission trading scheme needs to have some basic elements to correctly work and reduce emissions of GHGs. These basic elements include a cap that limits GHG emissions, a difference in the abatement costs to motivate participants to trade, a reliable monitoring system to assure the environmental integrity of the system, a structure to promote enforcement, and provisions to protect the local environ-ment.91
In addition to what was set by the Kyoto Protocol, there are European Community directives regulating the carbon market in Europe such as Directive 2003/87/EC92 and Directive 2004/101/EC of the European Parliament and of the Council. The former creates the scheme for GHG emission allowance trading within the Com-munity known as the European Union Emissions Trading Scheme (EU ETS) and established to avoid distortions of competition and to preserve the integrity of inter-nal markets.93 The latter deals with the use of CERs as a further measure to achieve the internal emissions reduction goal of each Member State. It is worth pointing out
89 Interministerial Committee on Climate Change, ‘National Plan on Climate Change: Executive Sum-mary’ (Brasilia, 2008) at 10.
90 Communication from the Commission to the Council and the European Parliament, ‘Towards an EU-Brazil Strategic Partnership’ (30 May 2007).
91 UNEP and UNCTAD, ‘An Emerging Market for the Environment: A Guide to Emissions Trading’, available at <http://www.unep.fr/energy/information/publications/risoe/pdf/EmissionsTrading-Feb03.
pdf> (visited 28 February 2011).
92 Amended by Directive 2004/101/EC of 27 October 2004, Directive 2008/101/EC of 19 November 2008, Regulation (EC) No 219/2009 of 11 March 2009, and Directive 2009/29/EC of April 2009.
93 See preamble 7 of the Directive 2003/87/EC, also called EU ETS Directive.
that each Member State has a limit for the amount of CERs they can use in their domestic policy.94
Moreover, the EU ETS Directive provides only the bases for trading and details like contractual and tax law remain the responsibility of the Member States.95 At the European level, Member States have to publish National Allocation Plans indicating how many allowances will be issued in a certain period and how they will be distrib-uted amongst installations.
Thus, to better understand this environmental policy, it is worth studying a Na-tional Allocation Plan (NAP) to see how and to whom the allowances were allocated in the first (from 2005 to 2007) and in the second phases (2008–2012) of the EU ETS.96 From the EU members, Germany’s National Allocation Plan was chosen as an example, in order to stress the lessons learnt since the beginning of the trading scheme.
The first key point in setting an emission trading scheme is the allocation of allow-ances because ‘it ensures the effectiveness of emissions trading as an environmental policy instrument’.97 An accurate inventory or data collection of emissions is es-sential. If some allowances are allocated through auctioning, the revenues can be used to support mitigation and adaptation measures. However, during the first period, also called the learning-phase, the German government decided to allocate free of charge 100 per cent of its allowances.98
The German NAP for the first phase (NAP I) had to consider the country’s reduction target in the second phase of the EU ETS (2008–2012), which corresponds to the first KP period. Therefore, the NAP I had to consider that Germany must reduce its GHG emissions by 21 per cent compared to 1990 levels by 2012.
Concerning its structure, the NAP I was divided into a Macroplan, which defined the national emissions budget and the amount of allowances to be allocated, and a Microplan, which defined the methods and rules of allocation.99 It can be
high-94 Bruno Sabbag, O protocolo de Quioto e seus créditos de Carbono (LTr, 2008).
95 Matthieu Wemaere and Charlotte Streck, ‘Legal Ownership and Nature of Kyoto Units and EU Allow-ances’, in David Freestone and Charlotte Streck (eds), Legal Aspects of Implementing the Kyoto Protocol Mechanisms (Oxford University Press, 2005) 35–53 at 49.
96 The first phase of the EU ETS is also referred as the ‘learning phase’ and the second phase corresponds to the first commitment period of the KP. For further information on the EU ETS, see the European Com-mission at <http://ec.europa.eu>.
97 Simon Marr, ‘Implementing the European Emissions Trading Directive in Germany’, in Freestone and Streck (eds), Legal Aspects of Implementing the Kyoto Protocol Mechanisms (Oxford University Press, 2005) 431–444 at 435.
98 See BMU, ‘National Allocation Plan for the Federal Republic of Germany (2005–2007)’, available at
<http://www.bmu.de> (visited 22 October 2010).
99 See ibid.
lighted that the NAP I divided the reduction target per sector and listed the instal-lations in a separate annex.
An important step taken during the elaboration of the National Allocation Plan that can certainly be seen as a good example of governance was the dialogue with several sectors of society, including environmental groups, policy-makers, researchers, busi-ness groups and so forth. The integration between federal and local authorities is also a fundamental part of the process. Another example is the description of installations subject to emissions trading divided into classes as it appears in the NAP I.100 Concerning the compliance with the rules established by the EU ETS and the NAP I, a fine to be paid for each tonne of CO2 that was emitted beyond that permitted was set to discourage transgressions, especially because the fine was higher than the value of a carbon unit (tonne of CO2) in the market. The NAP I set a fine of €40 per excess tonne of CO2 emitted in the first phase and a fine of €100 per excess tonne emitted in the second phase. Besides the fine, it was also necessary to reduce the amount of emissions that were exceeded in the next year.101
It is worth adding that banking and borrowing allowances were permitted within the first phase. Only banking is allowed between phase II and any subsequent periods.102 The importance of having accurate estimations of GHG emissions and this banking system becomes evident when one thinks of the price crash of carbon units (end of 2007).103 If emissions are not correctly estimated and there is an overallocation of units in the market, the environmental integrity of the scheme can be questioned.
However, another crash is unlikely to happen, even after the recent economic down-turn, because of the banking system between periods.104 Thus, the establishing of guidelines for the monitoring and reporting of GHG emissions is fundamental in any ETS to avoid overallocation of units.
Nowadays, the EU ETS is considered the flagship of EU climate policy and can certainly constitute ‘a role model and testing ground for the development of other national, regional, and international GHG emissions trading schemes worldwide’.105 Furthermore, Pohlmann adds that the establishment of the EU ETS was motivated
100 See ibid.
101 See ibid.
102 Markus Pohlmann, ‘The European Union Emissions Trading Scheme’, in David Freestone and Charlotte Streck (eds), Legal Aspects of Carbon Trading (Oxford University Press, 2009) 337–366 at 351.
103 According to the World Bank, the price of the European Union Allowances (EUAs), which are carbon credits traded in the EU ETS, went from a peak of over € 30 in April 2006 to under € 1 in early 2007.
See Karan Capoor and Philippe Ambrosi, ‘State and Trends of the Carbon Market 2007’ (World Bank, 2007), available at <http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:213197 81~pagePK:64257043~piPK:437376~theSitePK:4607,00.html> (visited 11 March 2011)s at 12.
104 Markus Pohlmann, ‘The European Union Emissions’, supra note 102, at 354.
105Ibid. at 339.
by the Kyoto Protocol, but the scheme is independent and projected to last even if a new international agreement is not reached.106
7 Conclusion
The future of the Kyoto Protocol is still uncertain. Consequently, it is not clear yet what will happen with market-based instruments such as the Clean Development Mechanism neither with the existing carbon markets. Moreover, it is unlikely that a new legally binding agreement will be reached at the international level before the KP first commitment period expires in 2012. However, the outcomes achieved in the COP16 from the negotiations held at the AWG-LCA and the AWG-KP for-mally acknowledge the pledges of emission reductions submitted to the Copenhagen Accord by both developed and developing countries.
Brazil has been a key player in the climate negotiations, not only as an important emerging economy, but also as a facilitator of the dialogue between north and south interests. The country has recently undergone a deep change in its attitude toward GHG emissions, culminating in the presentation of its reduction targets during the COP15.
Despite the fact that Brazil ratified the Kyoto Protocol and strongly supports a second commitment period, the country does not have binding targets set by the Protocol.
Moreover, the government emphasizes the fact that the commitments made to the international community through its submission to the Copenhagen Accord are voluntary.
Nevertheless, Brazil’s emission reduction target was included in the law that estab-lished the main framework of the National Policy on Climate Change and now it is expressly mentioned in a national law (Law 12.187 of 2009). The process that led to the design of the National Policy and that changed Brazil’s position from not accept-ing commitments to presentaccept-ing voluntary pledges had the involvement of several actors and sectors of the society.
It is true, though, that some challenges need to be overcome before the National Policy can be completely implemented and Brazil’s carbon market shifts from trading CERs in the EU ETS to developing a national platform adequate to respond to the commitments made through its submission to the Copenhagen Accord and law 12.187 of 2009.
In this sense, and considering the co mplexity of structuring a carbon market, lessons learnt during the development of other trading schemes, like the EU ETS, may be
106Ibid.
useful for policy-makers who are, or might be, considering setting this kind of scheme in their countries. In this scenario, important steps can be listed as examples and guide new frameworks, like the division of targets per sector, the clear rules for bank-ing, borrowbank-ing, and non-compliance, as well as the development of guidelines for the monitoring and reporting of GHG emissions in order to avoid overallocation.