Fases do RCLE e Etapas de Configuração

When I talk about Emissions Trading Systems, businesses sometimes express concern that it sounds so complicated. In actual fact, the mechanism of emissions trading boils down to an obligation for companies to monitor their emissions, on the one hand, and have in their possession the certain number of allowances that match their emissions. So, it’s a reconciliation of a liability that is incurred through the emitting of greenhouse gases and the fulfilment of the legal obligations by surrendering allowances acquired. That isn’t so complicated. I often think that businesses, running a profitable business is a great deal more complicated as an exercise and business people will easily manage an Emissions Trading System.

Now, for the government, if you look at this first slide, these are the necessary steps that need to be taken to set up an Emissions Trading System. And, of course, the hard thing for government is to decide what the total cap should be, that is to say what the total amount of allowances that are issued should be in terms of quantity of greenhouse gas. Why is it difficult? Because the government will probably be trying to fix a level that is cost-efficient so that the sectors of the economy covered by the Emissions Trading System are doing all they should be doing towards fulfilling targets.

But, once the overall cap is set, then the government has to issue allowances corresponding to the cap. The allowances are enumerated in metric tonnes of CO2 equivalent, and so for every tonne of emissions there is an allowance. The allowances once issued have to be allocated to the companies covered by an Emissions Trading System. That allocation is either done for free on the basis perhaps of historical emissions or performance benchmarks, or the allowances are allocated through auctions.

Once they are allocated, they are put into a registry account for every entity covered by the Emissions Trading System. The registry, by the way, works very much like an online banking system works, you have an account number and you have a certain quantity of allowances in your account.

Then, after issuance of allowances, the companies get on with their business and they have to monitor their emissions and, at the end of a period, a calendar year perhaps, they have to report on those emissions and the report has to be verified by an independent verifier. And then, once verified, the company has to surrender to the government, hand over to the government the number of allowances corresponding with its emissions in the given period and in doing that it fulfils its legal obligation. If ever it can’t surrender the equivalent number of allowances, there would be penalties that have to be applied and those, of course, are usually deterrent penalties that make it much cheaper to comply than to not comply.

So, that’s how an Emissions Trading System works, in essence. Now, in Europe we have had phases of our Emissions Trading System over the 16 or 17 years that it has been in operation. The very first three years, from 2005 to 2007 included, were a first Phase, a pilot-phase where we were just getting the system up and running.

It was running but the most important thing about it was that the obligation to monitor and report emissions started in that period as well, so it was a very difficult exercise to try and estimate what the emissions of the Emissions Trading System should be, what the total cap should be and we got much better at it in Europe once we had a good data set. Then, the Phase 2 of our Emissions Trading System ran in a period corresponding to the first Kyoto Protocol commitment period.

Under the Kyoto Protocol, Europe had an obligation to reduce its emissions by 8% and the cap for that period was calibrated in order to meet that target and the same is true for the Kyoto Protocol’s second commitment period that ran from 2013 to 2020. And then in the 2020s it’s the fourth Phase of the Emissions Trading System and it corresponds with the nationally determined contributions, the pledges in other words that the European Union has made in the context of the Paris Agreement. So, those are the four phases that we’ve had, and for every phase a new cap is set, which is shown in the next slide.

Essentially, you can see that for the duration of the emissions trading from its start in 2005 to 2020, at the end of Phase 3, emissions were coming down consistently. The caps for every period were below those of the previous period and indeed, you know, what this graph shows is that very clearly the emissions covered by the sectors of emissions trading in Europe have been reducing their emissions in the time we’ve had our Emissions Trading System.

Indeed, most people don’t recognize the extent to which emissions have fallen by more than a third in that period and they continue to fall as a result of there being effectively a cost for polluting and businesses try of course to minimize that cost which is exactly the sort of mechanism emissions trading is intended to be. Thank you.