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Free-of-Charge Allowances in the New Emission Trading System

At the end of September, the European Commission published a draft list of sectors which could receive free of charge up to 100% of emission allowances even after 2013; in 2013, the European greenhouse gas emission trading system is to enter into a new stage in which the free-of-charge allocation of allowances based on the National Allocation Plans shall be replaced by the purchasing thereof in Europe-wide auctions. However, revised Directive 2003/87/ES approved within the climate-energy package in December of last year counts on some exemptions. One of them shall apply to industries which may, as a result of more stringent constraints, move outside of the EU to third countries in which climate protection is not that strict; such industry relocation would not only result in a loss for the EU economy but it would also negate the endeavours for emission reduction which would increase uncontrollably in such third countries.

The Directive imposes 2 criteria to select the endangered sectors: the intensity of trade with third countries and the increase of production costs. The draft list is very long; it contains 164 sectors selected by experts from Member States. This why the Commission has received criticism from environmentalists who claim that the list contains sectors substantial for national economies and labour market rather than sectors that are in true jeopardy by third-country competitors such as the production and manufacture of wallpaper, lingerie, pharmaceuticals or arms.

However, the European Commission claims that the list is wide in order to cover the situation if no agreement is reached with third countries on similar compliance to reduce emission at the December UN Climate Change Conference in Copenhagen. In addition to a new climate agreement which should replace the Kyoto Protocol that expires in 2012, the Conference should involve major polluters such the United States, China and India in the emission reduction system.

The draft is currently being discussed by the European Parliament. The Commission should approve the final version of the list by the end of this year and it should take force and effect by the end of 2014. However, the Commission has already admitted that further sectors may be included.

The actual amount of free allowances to be received by the companies, however, shall not be available before 2011; the decision will be based on performance benchmarks which are to be determined at the end of 2010. A mere 10% of the least polluters will have the chance of receiving all their allowance for free.

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