PREPARING FOR THE EUROPEAN EMISSIONS TRADING SCHEME

The European Emissions Trading Scheme (ETS)-scheduled to start January 1, 2005-has been cited as the European Union's principal tool to meet its greenhouse gas (GHG) emissions reduction targets under the Kyoto Protocol. In this Decision Brief, CERA presents the current status of the ETS, analyzes the critical decisions that the new European Commission faces, and identifies the new signposts to watch. CERA's conclusions are the following:

- Aggregate CO2 cap will not be very tight. CERA's analysis shows that the allocation process is moving away from stringency. Owing to the lack of a stringent cap, it is unlikely that CO2 allowances will have a significant economic impact on the energy industry before the next round of the ETS begins in 2008.
- The ETS will have a bumpy start. Many countries will not complete the required legislative framework and infrastructure by January 1, 2005. Much work remains to be done, and there is strong potential for material change between now and 2005. Lawsuits represent a real threat to the ETS.
- CO2 allowances represent a new variable cost that should be incorporated into company operations. Companies are entering the scheme from many different perspectives but they all need to learn how to navigate in this new environment. CO2 allowances will now represent a new commodity added to the already long list of products whose price volatility directly impacts a company's financial position.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.