Climate change

Briefing for Environmental Audit Committee – NAO Review of European Union Emissions Trading Scheme

This briefing by the National Audit Office has been carried out in response to a request from the Environmental Audit Committee to provide an update on the European Union Emissions Trading Scheme covering developments since the Committee last reported on this topic in 2007.

The European Union Emissions Trading Scheme (EU ETS or ‘the Scheme’) aims to reduce emissions of greenhouse gases from industrial sources across the European Union (EU). It provides for carbon dioxide (CO2) emissions from large scale industry to be capped, by requiring companies to submit allowances sufficient to cover their verified emissions and setting a fixed total for the number of allowances issued. Companies can buy allowances from other operators or sell surplus allowances as they require. They may also use project credits to cover their emissions – these generally represent emissions reductions achieved in developing countries, as allowed under the Kyoto Protocol. The Scheme operates in distinct compliance periods. Phase I operated from 1 January 2005 to 31 December 2007. Phase II commenced on 1 January 2008 and will end on 31 December 2012. Phase III will operate from 2013 to 2020.

This briefing by the National Audit Office has been carried out in response to a request from the Environmental Audit Committee (‘the Committee’) to provide an update on the European Union Emissions Trading Scheme covering developments since the Committee last reported on this topic in 2007, as summarised in Appendix 1. We report on the operation and performance of the EU ETS incorporating the full emissions data from Phase I. We also report the outcome of the recent negotiations on Phase III of the Scheme in order to provide the Committee with an overview of how far the Committee’s concerns have been addressed.