The European Union and Kyoto
The European Union is committed to reducing its 1990 levels of greenhouse gas emissions by 8% between the years 2008-2012 under the Kyoto Protocol on climage change. Meeting this target without damaging European competitiveness poses a major challenge. The European Union is determined to take the lead in the fight against climate change and has ratified by 1 June 2002 the Kyoto Protocol - a first step in a longer-term global environmental effort to protect our planet.
The protocol stes limits on greenhouse gas emissions for industrialised countries and the transition economies of Russia and the EU applicants in central and eastern Europe for a five-year period beginning in 2008.
In 2001, the European Commission has tabled in its report on its European Climate Change Programme and in a Communication to Council and Parliament a series of actions for the next two years that will help to reduce green house gas emissions. These actions concern the energy sector, transport and industry as well as so called cross cutting issues, which will have effects on all sectors.
Emissions trading
The proposal for a Directive on emissions trading is currently the most prominent climate change action for the Community. Emission trading can minimise the costs of compliance with the Kyoto Protocol and the European Commission, after extensive consultation with industry and Member States is proposing that an emission trading scheme, mainly for large energy intensive installations, should be introduced in 2005.
The scheme would apply to between 4,000 and 5,000 individual energy-intensive plants ( above a certain size ). Between them, these account for nearly half of the Union's total carbon dioxide emissions.
The scheme would cover electricity generators and producers of iron and steel, glass, cement, pottery and bricks. For the time being, it would not include the chemical industry, which is responsible for barely 1% of all direct emissions, nor the waste and transport sectors. Small and medium-sized businesses would also be largely excluded.
Under the proposal, every large industrial and energy installations covered by the scheme would be issued with a permit certifying its annual CO2 emission levels. If it succeeds in emitting less, it may sell its surplus certificates to an operator that has gone above the permitted ceiling. Financial penalties would be imposed on plants whose emissions exceeded the allowances they had been allocated or purchased.
The system's value is that it uses market forces to transfer the ability to reduce emissions to those who can achieve this most cheaply, and, by requiring producers to pay for extra allowances that may be required, is consistent with the 'polluter pays' principle.
Kyoto and competitiveness
Reducing compliance costs in meeting the 8% Kyoto target is essential if the international competitiveness of European companies is not to be undermined. This is especially true since US withdrawal from the process suggests that American businesses may face few costs in implementing their climate change measures.
Competition may also come from Russia. The collapse of its economy in the past decade means that its current level of emissions is way below the 2008-2012 Kyoto target. This could give its industry a potential advantage and encourage the country either to sell its surplus allowances or use them to attract inward investment in some industrial sectors.
The fact that Kyoto commits only industrialised countries to quantitative emission reduction targets may give the developing world a competitive edge with regard to greenhouse gas emissions. This could encourage some companies based in Europe to consider moving their operations overseas. However, distance from the EU market, a different regulatory environment and smaller pool of qualified labour should offset any such tendencies.
Another factor influencing competitiveness is the possibility available under the Kyoto Protocol to offset tree planting efforts and forestry management against emission reduction targets. Countries such as Canada, Japan and Russia will benefit proportionately more than the EU from this opportunity.
Costs of Kyoto
Leadership in the fight against climate change does not come without a price, although this would have to be balanced against the effects of inaction if no measures are taken against greenhouses gases emisssions. Because of the many variables involved, such as energy inputs, growth of GDP and trade-offs with other policy areas, it is impossible to give firm figures for the costs of compliance.
However, estimates for the annual cost to the Union as a whole range from less than 0.1% to nearly 1% of GDP. The relative costs for individual sectors will depend on whether some are called on to make greater reductions than others or whether a flat rate target is set across the board.
Energy-intensive sectors such as steel, basic chemicals and pulp and paper, precisely because they have already made significant emission reduction efforts, and face trough international competition, could incur higher marginal reduction costs.
On the other hand, companies moving early to develop, patent and implement the necessary technology to reduce emissions or produce alternative forms of energy may gain a competitive advantage.
The overall economic effects of addressing climate change under the Kyoto Protocol are very difficult to quantify. It is clear that there are risks. However, there are also potential opportunities.
Everything is possible, from triggering relocation of some industry to outside the EU to winning a competitive advantage by creating a stimulus for the development of new leading-edge technology.
This is why it is so important to start off on the right foot and keep a proper balance between the environmental and economic dimensions of the problem. This is in the best spirit of the Union's commitment to the principle of sustainable development by taking into account the economic, social and environmental dimensions in its decision-making process.. This in turn requires the early development of performance structures to carry out reliable impact assessments.
The European Commission Enterprise and Industry, Reports and Estudies
