UKCS Contribution to Delivering UK Environmental Targets

Emissions’ Trading Scheme

In Europe, emissions’ trading represents a response by industry and government to the challenge of global climate change and one of the many concrete actions necessary to ensure that the EU meets its Kyoto commitments. The advantage of emissions’ trading is that it offers the potential to deliver the greatest reductions in emissions in the most economical fashion.

The EU Emissions’ Trading Scheme (ETS) came into effect on 1 January 2005 for the 25 Member States and is mandatory for all installations with thermal input greater than 20 MW. The scheme is initially in two phases: 2005-7, for CO₂ emissions only, and 2008-12, the Kyoto period, possibly for all six greenhouse gases. Subsequent phases will be of 5 years’ duration each. The main sectors covered by the EU Directive, which was approved by the European Parliament in July 2003, are power generation, which is responsible for over 60% of qualifying UK emissions, oil and gas (up and downstream), steel, chemicals and cement. This will be the largest emissions’ trading scheme in the world and will cover about 45% of all EU emissions of CO₂.

The upstream oil and gas industry emits approximately 25 million tonnes of CO₂ per annum, although flaring will not be in phase one, but may be considered for inclusion in phase two. UKOOA’s projections show that, in the short to medium term, offshore emissions will rise slightly, with more energy being consumed in recovering remaining reserves as fields mature, before commencing a sustained decline as installations are decommissioned. Moves to extend the life of producing fields and delay decommissioning will also have a bearing.

The EU ETS is what is known as a cap and trade system. Emissions allowances are awarded free to qualifying installations for each calendar year, based upon historic emissions, although this may be changed in phase two. The awarded allowances will decline over time in line with national targets for reducing emissions. Installation owners face the choice of investment in abatement measures to reduce emissions, creating the option to sell excess allowances (if any) in the EU wide emissions market, or to purchase additional allowances in the market to meet any shortfalls arising. Penalties for failure to comply are severe: €40/tonne of CO₂ in phase one, rising to €100/tonne in phase two. The cost of buying allowances in the market is significantly below these penalties (about €20/tonne - June 05), thus encouraging trading and the resultant sourcing of the most effective solutions for reducing emissions, wherever these may be.

Each Member State is responsible for developing its own National Allocation Plan (NAP) which determines the allocation of allowances for qualifying installations. These national plans are subject to approval by the EU Commission to ensure both compatibility with other plans across the EU and consistency with Kyoto commitments, as well as to minimise distortions in the single market. The UK’s NAP for phase one has, as widely reported, been the subject of some disagreement between the government and the Commission; this remains to be resolved. Meanwhile, preparations are already beginning for NAPs for phase two which are due to be submitted to the Commission at the end of June 2006 and to be agreed by the end of 2006.

The Department for the Environment, Fisheries and Rural Affairs (DEFRA) is the lead government department, with support from DTI. UKOOA has worked closely with these departments to ensure that the impact of the UK National Allocation Plan on the upstream industry is fair and reasonable. The same approach will be adopted by UKOOA for phase two. It is essential that the right balance is struck between the obligation on the UK to meet its Kyoto commitments (the supply of natural gas from the UK continental shelf has done more than anything else to put the country on course to meet those commitments) and, at the same time, ensuring both the competitiveness of the overall economy and maximum recovery of the remaining reserves from the UKCS. All sectors of the economy and society, therefore, need to make their contribution to the achievement of national objectives relating to climate change.