Scheme to curb greenhouse gas emissions 'set to fail'

A European Union-wide emissions trading scheme, designed to combat global warming, could push up industry's costs without achieving its goal of curbing greenhouse gases, business groups and energy experts warned yesterday.

A European Union-wide emissions trading scheme, designed to combat global warming, could push up industry's costs without achieving its goal of curbing greenhouse gases, business groups and energy experts warned yesterday.

The scheme is due to take effect next January and will penalise those industries which produce excess amounts of carbon dioxide but reward those who beat their emissions targets by enabling them to trade surplus pollution permits. Transport and domestic emissions are excluded from the scheme.

The UK has agreed to cuts in its CO ₂ emissions which are 12.5 per cent greater than the targets it is committed to under the Kyoto agreement - raising fears that the scheme will put British industry at a competitive disadvantage with rivals inside the EU as well as in the rest of the world. The US, China, Russia and India have not signed up to Kyoto and have no plans to introduce any schemes to combat greenhouse gas emissions.

The scheme will cover 12,000 energy-producing and energy-intensive industries, such as steel, aluminium, glass and paper manufacturing, but in the first three years it will be limited largely to power stations. The UK will have to reduce CO ₂ emissions from power stations by 30 million tonnes a year, to 132 million tonnes.

The scheme is likely to increase the cost of wholesale electricity by between 10 and 30 per cent, based on power plants having to pay €8 to €10 for each tonne of CO ₂ they produce above their allocation.

Jeremy Nicholson, the director of the Energy Intensive Users Group, said a trading scheme was preferable to straightforward taxation of carbon emissions, but the impact could still be to drive investment offshore. "The scheme will place an administrative and financial burden on energy intensive companies which they will not be able to pass on to the end consumer because of the competitive nature of the markets in which they operate, and that means investors may choose to site developments in countries other than the UK." He went on to caution that a "botched introduction of the new trading scheme would not command industry's confidence and will undermine its environmental objectives".

John Bower, a senior research fellow at the Oxford Institute for Energy Studies, forecast that the scheme would struggle to achieve its objective of cutting greenhouse gases because it would still pay generators to produce as much electricity as possible from cheap coal-fired stations and then buy permits to cover the excess amount of CO ₂ produced.

He said there was even less chance of the scheme encouraging developers to build new and more environmentally friendly gas-fired plants given the current level of wholesale gas prices. The cost of the permits, he added, would have to rise to nearer €40 per tonne of CO ₂ in order to penalise coal-fired plants sufficiently. "Unfortunately, that would increase electricity prices so much that it would kill off industry," Mr Bower said. "There is the dilemma - how to reduce carbon emissions without damaging industry."

Geraint Day, the head of health, environment and transport policy at the Institute of Directors, said: "This policy is supposed to be about improving the environment, but if it doesn't do that then we will need to return to the drawing board."

Matthew Farrow, the head of environment at the CBI, said many of its members had reported energy price increases of 30 to 40 per cent in the past year, and any price rises caused by the trading scheme would be on top of those. "Firms will not be able to pass those extra costs on." Mr Bower said one means of achieving the Government's targets would be to introduce a direct tax on carbon emissions instead of a trading scheme. But that, in turn, would require cuts in existing energy taxes such as VAT and road fuel duty.