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The CO2 deal

the European Union (eu) environment ministers have come to an agreement to create the world's first international greenhouse gas (ghg) emissions trading system. Scheduled for final approval from the European parliament, the scheme will come into effect from 2005.

The plan aims to cap the amount of carbon dioxide that big factories and power plants can emit. Each country's limit on industries' emissions will be fixed domestically. Through this system, an industry that emits more than its quota can buy emission rights from an industry emitting less than its share. Trading will be possible across countries in the 15-nation bloc. "The quota system will allow enterprises in Europe to reduce emissions in the most cost-effective manner,' said Danish environment minister Hans Christian Schmidt. Denmark currently holds the rotating eu presidency.

Till 2007, the scheme will apply only to carbon dioxide emissions. It has been decided that other ghgs will be included after the commission submits a proposal for the same.

Initially, firms will not have to pay for emission allowances. National governments will distribute them to factories every year for free until 2007. The scheme will become compulsory in 2008 but till then countries can seek exemption for some sectors.

From 2008, however, countries can choose to auction up to 10 per cent of the emission allowances/credits if they wish to. In the period 2005 to 2007, the penalty rate will be 50 euros per tonne of carbon dioxide equivalent emitted in excess of the allowance. It will double thereafter.

According to PointCarbon, an Oslo-based research group on emissions trading, the eu's decision could create a euro eight billion market by 2007. The group estimates an average price of 4.8 euros per tonne of carbon dioxide equivalent.

The European Environment Agency says that the eu will be unable to meet its Kyoto target without the help of new policies such as emissions trading. The latest projections provided by member states show that existing policies will achieve a total cut of only 4.7 per cent by 2010. This would put the eu in trouble vis-a-vis the Kyoto Protocol.

Under the Kyoto Protocol, the eu is expected to cut emissions by eight per cent below 1990 levels in the period 2008 to 2012. A burden-sharing agreement amongst eu countries, one that allocates responsibilities in a horizontal fashion, would make it possible for the entire bloc of countries to achieve this target.

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