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Domestic Emissions Trading Programs for Greenhouse Gases

A /llImber of coLintries around the world have been seriously considering the use of emissions
trading programs to reduce greenhouse gases. These include Australia, Canada, Denmark, the
Europeall VI/ion. Netherlallds, New Zealand, Norway, Slovakia. and the United Kingdom. The
Jl)l/ml'illg prOl'ides II brie/review ofthe domestic programs tllat are furthest along.

Denmark Status: Commenced January 1,2001.

Introduced a Bill on C02 Quotas/or Electricity Production (#235) with the goal of reducing CO 2
emissions from electricity production by I million MT a year from 2001-2003. A ceiling has been
~stablished for total electricity-sector CO 2 emission of 22 million tons in 2001, 21 million tons in
2002, arid 20 million tons in 2003. This should be seen in relation to CO 2 emission of 27.3
million tons in 1990 (adjusted for exports/ave. temp) and 20.4 million tons (actual).

The ceiling is expressed in CO 2 quotas which are grandfathered among the production companies
(including the two production associations). Coverage: 85% of Danish electricity production;
90% of emissions from the sector. Plants with emissions below 100,000 tons/yr are exempted.
Banking is allowed, and no additional provisions are made regarding set-asides for new entities.
If the annual quota is exceede'd, the production companies must pay to the state the sum of DKK
40/ton CO 2 (approx US$6) in the years 2001-2003.

United Kingdom Status: To commence in April 2002.

The UK emissions trading scheme is a voluntary program that is open to all companies who
commit themselves to binding GHG limits agreed by the Government. Four categories of
parti~ipation are availlible: (i) The 'absolute sector' in which participants agree to undertake
absolute emission reductions. The government has committed 30 million pounds to provide
companil:s with incentives to take on such targets: (ii) The 'relative sector' in which participants
agree to undertake reductions in their emissions per unit of output; (iii) Firms that develop
projects that make emissions savings and thus generate 'carbon credits'; and (iv) Others who
would like to open an account and buy and sell allowances on the, market.

The program is expected to run alongside the U.K. climate change levy, the levy agreements for
energy intensive users, and the IPPC energy efficiency regulation. The program is expected to
deliver savings of 0.5-2 MtC by 2010. Furthermore, the structure of the program is expected to
change after 1 January 2008 (first Kyoto commitment period), so as to be compatible with ED
and Kyoto emissions trading frameworks.

European Union Status: To commence in 2005.

Published a Green Paper on an EC-wide GHG ET Program (03/08/00), have established a

';,orking group on flexible mechanisms to explore design and implementation issues, and plan to
publish a proposal for a Directive within the next few months. Existing background papers
include an assessment of: relative vs absolute targets, allocation methodologies and credit for
early action, fair competition and state aid rules, linkages with Joint Implementation and the
Clean Development Mechanism. monitoring, reporting, verification, and compliance.

Sector coverage likely to include heat and power sector with plants with thermal capacity of
grt:atcr than 50 MW, iron and steel, refining, inorganic chemicals, glass, pottery and building
moteriob, and paper pulping sectors, Coverage: 4000-5000 sources accounting for 40% of ED

CEQ 007570
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CO~ emiSSIons. Allocation methodology may include both grandfathering and auctioning.
Progressive evolution towards auctioning is expected over the longer-term. Credits/offsets from
project-based mechanisms will not be interchangeable with allowances initially (a separate
instrument may include provisions for this in the future i.e., after 2008). Non-compliance
penalties are expected to include a 1: 1 allowance to be retired (making environment "whole")
r 'us a minimum penalty of EURO 200 per excess ton (estimated to be 10 times higher than .
average price of allowance).

New Zealand Status: Legislation expected in 2002.

In July of 2000, the Cabinet of New Zealand agreed that New Zealand will participate in any
international emissions trading system under the Kyoto Protocol that has environmental integrity.
At that time, the Cabinet directed officials to undertake further work on the design of a mandatory
emissions trading system to interface with the international· emissions trading system. New
Zealand has been investigating and holding consultations on issues associated with the design of a
domestic emissions trading system, including points of obligation (i.e. who would be subject to
an emissions cap). allocation of emission allowances, legal framework for establishing and
rracking emission rights. and compliance penalties. Sectors under consideration for emissions
trading include oil and transport, coal, gas, geothermal, waste, industrial, and agriculture.

New Zealand expects emissions trading to be a central measure for meeting their Kyoto emission
reduction obligations during the commitment period 2008-2012. They expect to take decisions
by the end of 200 I on the legal framework, points of obligation, and allocation of emissions
allowances for the trading system and plan to introduce legislation to parliament in early 2002 so
that it can be enacted in mid 2002.

Status: Under consideration.

Slovakia, Poland, and the Czech Republic are each undertaking analysis and consulting with
stakeholders ~n design issues for GHG emissions trading programs in their countries.

Australia has indicated that they would implement a GHG emissions trading program by 2008 if
they ratify the Kyoto Protocol. They have had on-going consultations with domestic stakeholders
on the design features for an emissions trading system.

The Netherlands has included em iss ions trading as part of their' innovative package' (i.e. longer-
term objectives) of their domestic climate policy, and has established a commission to prepare a
report on design issues by late 200 I. The Kyoto mechanisms (lET, 11, CDM) are expected to
achieve 50°1\, of their emissions reduction objective, and a separate domestic emissions- trading
system IS expected to apply to electricity, gas, and motorfuel distributers (via the use of auctions).

Canada has undertaken pilot trading programs with a project-based crediting approach and has
had extensive consultations with stakeholders on emissions trading design issues.

The Norwegian government completed a study on the use of domestic emissions trading as part
of their strategy to meet Kyoto commitments, but no decisions have been made to date.

CEQ 007571