Newsroom / News / Media / Info Magazine LGP NEWS 02/2021 / Emissions trading supports climate neutrality

Emissions trading supports climate neutrality

Emissions trading supports climate neutrality

The European Union is increasingly obliged to act in the face of advancing climate change. Through setting a sustainable, annually decreasing maximum emission level for COand other greenhouse gases and facilitating certificate trading, the EU has created an incentive to reduce emissions where it is economically most advantageous. 

In mid-June 2021, the EU Commission presented its “Fit for 55” package, which aims to eliminate 55% of carbon dioxide (CO2) emissions by 2030. Numerous measures to reduce greenhouse gases in all sectors of the economy were proposed in order to come one step closer to the overarching goal of climate neutrality by 2050. However, the European Union‘s climate efforts have been gaining momentum for several years. The “Emissions Trading System”, which operates according to the so-called “Cap & Trade” principle, was launched as a central instrument of European climate policy in 2005. 

According to EU Directives 2003/87/EC and 2009/29/EC, participation in the greenhouse gas emissions trading system is in principle mandatory for energy-intensive plant operators from the industrial and energy sectors (e.g. iron and steel industry or refineries) and aircraft operators within the European Economic Area. The aforementioned directives were implemented in Austria through the Emission Certificate Act. This regulates which operators require a plant-related permit to emit greenhouse gases. A permit must be issued by the competent authority if an operator is able to monitor its greenhouse gas emissions and submit an emissions report by 31 March of the following year. An authorisation – also called a permit – contains the respective conditions (e.g. on monitoring method and frequency) as well as an obligation to surrender allowances equating to the amount of the total annual emissions of the installation within 4 months of the following year. One certificate – also called an allowance – entitles plant or aircraft operators to emit one tonne of carbon dioxide. The Federal Ministry for Climate Protection, Environment, Energy, Mobility, Innovation and Technology allocates a limited quantity of free emission allowances to energy-intensive installations that have a permit and are at risk of relocating their production facilities to countries with lower greenhouse gas emission requirements. The allocation is based on a national allocation plan. Through this plan, the Member States must determine how many emission allowances they will allocate in the respective commitment period. The remaining emission allowances are sold via an auction platform. 

If a plant has emitted more greenhouse gases than it is entitled to within a year, it must purchase additional certificates, otherwise it faces a penalty of EUR 100 per tonne of CO2. Conversely, a plant that produces fewer greenhouse gases than it is entitled to can sell surplus emission certificates. Allowances can be traded within the EU and with countries that have joined or are linked to the EU ETS through an exchange, broker or over-the-counter (OTC) system. The price of an emission allowance is determined by supply and demand. Since the successive reduction in the total number of available emission allowances will be increased by 2.2% annually from 2021 onwards and the oversupply of allowances on the market will be reduced, a correspondingly constant increase in the price is to be expected. If the price of a tonne of CO2 rises, the incentive for plant operators to reduce their emissions and invest in climate-friendly technologies will in turn be stronger. 

In addition to the European Union’s efforts to minimise greenhouse gases, the private sector can also play a central role in climate protection. Companies that are not currently obliged to participate in the emissions trading system can also voluntarily buy emissions certificates to reduce their carbon footprint. This option is increasingly used, as companies offset their CO2 emissions by buying emission certificates from climate-friendly projects and can thus claim to act in a climate-neutral manner. For example, the car company General Motors has bought emission rights from the electric car manufacturer Tesla to improve its weak environmental record. The problem with buying emissions certificates, however, is that the authenticity and uniqueness of the certificates cannot be guaranteed. Since duplicates and forged certificates do not protect the climate but burden it with additional emissions, a more reliable solution is needed. 

This could be remedied by the use of “distributed ledger technology”, as blockchain transactions are transparent and cannot be changed, reversed or duplicated. On the contrary, emission certificates issued as digital tokens could be “burned” – i.e. demonstrably taken out of circulation. In order to participate in CO2 trading, member states need an emissions trading registry that records the issue, ownership, transfer and cancellation of emissions allowances and transmits them to the United Nations central trading platform for verification. If the existing system were decentralised, the administration of this registry would be much more efficient and cost-effective. In addition, blockchain technology would enable barrier-free and transparent peer-to-peer emissions trading. Overall, blockchain technology could thus also revolutionise the EU emissions trading system. 


AUTHOR:

Mag. Ronald Frankl, Attorney-at-Law and Managing Partner at LANSKY, GANZGER + partner

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