EUROPE'S CARBON TRADING LEAVES A NASTY SMELL

The Sunday Telegraph, 2 July 2006
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Companies have made millions selling excess permits - while hospitals and schools have to buy them, reports Robert Watts

When it was launched with a fanfare last year the European Union's Emission Trading Scheme was trumpeted as a way to curb the damage big business does to the environment. Today, 18 months after its launch, the farcical side-effects of the scheme are starting to become clear.

According to a report to be published this week, some of the world's most powerful energy companies - including BP and Esso - have already made millions of euros from the scheme. Meanwhile, -Britain's cash-strapped hosp-itals have been forced to spend an extra £1.3m a year at a time when they are being forced to sack nurses and other key staff.

"Not only is it expensive and an administrative nightmare, but this botched attempt at central planning is having all sorts of perverse results," says Neil O'Brien, the director of Open Europe, the Westminster think-tank, which conducted the study.

This, of course, was never the intention. Under the scheme, the European Commission gives member states targets for the quantity of carbon dioxide they can -produce. The member state governments then set individual targets for companies and other organisations for how much carbon dioxide they are permitted to produce. The scheme allows those who exceed their pollution targets to buy carbon permits from companies that have not used their full allocation.

Overnight a so-called "carbon trading" market sprang into life, with banks, accountancy groups and other companies charging chunky fees to put vendors in touch with sellers.

"On paper it's been an extremely good system," says Professor Michael Grubb, the chief economist at the Carbon Trust, the organisation the Government set up to encourage businesses and other organisations to slash their emissions.

"It's just that the governments in all the member states nearly all have ended up being too generous in giving out these allowances. Most of the facilities ended up with surpluses last year. There was definitely naivety at the outset."

When the scheme started, the price of the credits was EUR8 (£5.54) and passed EUR30 two months ago. In May, however, after it became apparent that there were far more carbon credits in circulation than had previously been thought, the price collapsed to less than EUR10. The price has recovered somewhat since and so far, the average price of the credits has been EUR18.20.

So how much carbon di-oxide has each company been emitting? A document on the commission's website gives a breakdown of every UK organisation covered in the scheme. This says how many tonnes of carbon dioxide the Department for Environment Food & Rural Affairs has allowed companies and other organisations to produce and, crucially, how much they actually produced last year.

For instance, GlaxoSmithKline's operations centre in Dartford used only a fifth of its allocation. Smith & Nephew, the medical giant, used only half of its total allocation. Corus's plant in Stocksbridge used only a third of its credits. Any surplus carbon credits, of course, could be sold on the open market.

Grubb suggests that some companies have deliberately overestimated the amount of carbon dioxide they will produce. There is also the suspicion within government that advisors and companies selling carbon credits have deliberately ramped their price. After all, the larger the carbon credit price, the bigger the commission.

So how much have businesses made from selling these surpluses? Open Europe's report highlights the enormous surpluses of the two oil companies, BP and Esso. Using the average price of EUR18 over the life of the scheme, Open Europe calculates that if they have sold all their surplus credits, the scheme has boosted BP's profits by £5m and Esso's by £5.8m.

The Carbon Trust is adamant that too many companies have made a fast buck from the scheme and want this stopped. "Those who were smart enough to understand the market and realise they had a surplus did very nicely," says Grubb. "And that does have to be fixed."

But the even grimmer irony of this scheme is the effect on the British taxpayer and our public services. Open Europe's report highlights the little-known fact that almost 150 schools, universities, military bases and even some prisons have also been obliged to sign up to the scheme because they have a power station or boiler with a capacity of 20MW or more.

Whereas most private sector organisations have surpluses, the opposite is true of organisations in the public sector. As a result, many hospitals, universities and army bases have been forced to buy carbon credits from businesses to meet their allocation targets.

Our tables show that, while some companies are making millions of pounds, a huge amount of taxpayers' money is being spent buying carbon credits from the private sector. Open Europe estimates that this astonishing situation will cost the NHS about £1.3m a year between 2005 and 2008.

Surely not-for-profit public services should be excluded from the potential costs and administrative burden of carbon trading? "I think one should look at whether some of those entities should be allowed to opt out," says Grubb. "These organisations are not part of the market economy and not used to hand-ling these kind of systems at all. It's a valid case."

An official at Defra admitted to The Sunday Telegraph last week that there were more sensible ways to get the public sector to cut its emissions than via the scheme.

One other issue for Britain is that unlike other EU member states, the UK has been far tougher in setting overall emission targets. "The UK has chosen very tough targets which use past emissions as a base line," says O'Brien. "Other member states - including some of the richest members - have given firms far more generous allowances. This means that UK firms have been buying carbon credits from rival firms in other member states."

The bar chart illustrates how some countries have made hundreds of millions of pounds from the scheme. So although some companies have made a lot of money out of it, UK companies as a whole could, according to Open Europe's report, be worse off to the tune of £470m because of it.

Last week, David Miliband, the environment minister, announced that the Government will issue 3 per cent fewer credits a year to UK businesses in the second phase of the scheme, which will run from 2008 to 2012. This should ensure that those UK companies that have been reaping enormous profits will not continue to do so.

But the Carbon Trust is adamant that the situation will not really improve until other member states slash the number of permits they issue to their companies.

"The UK government is going to be tougher," says Grubb. "But, unless other member state governments do the same, too many companies will still profit from a scheme that is supposed to be about improving the -environment."