Huge Windfalls for Chemical Firms under Emissions Trading Scheme

Emissions data for 2002 have confirmed that the UK emissions trading scheme has been undermined by huge quantities of 'hot air' from three chemical companies. The figures challenge the Government's continuing claims for the scheme's environmental benefits.

The UK's pioneering greenhouse gas emissions trading scheme was launched a year ago. Following an auction, 34 organisations took on emission caps in return for total incentive payments of £215 million
Nearly half of the claimed emission savings came from three chemical companies which are regulated by the Environment Agency. These firms will receive total payments of £93 million, and ENDS suggested at the time that they appeared likely to make a handsome profit from the sale of surplus 'hot air' allowances.

Environment Secretary Margaret Beckett wrote to ENDS to deny the charges. She insisted that the scheme 'has not paid for emissions reductions which were required by regulation anyway', and claimed that the companies' baselines had been adjusted to ensure that any emissions savings are truly 'additional'.

Mrs Beckett's defence of the scheme is looking even shakier in the light of emissions data for 2002. It appears that two firms, Ineos Fluor and DuPont, exceeded their targets by a total of some 2.5mtCO2e (million tonnes of CO2 equivalent). This surplus far exceeds the current total demand from the 6,000 companies under climate change agreements (CCAs) in 2002.

Large quantities of 'hot air' are likely to have been banked, and more will become available in future years - undermining the Government's claim that the trading scheme will cut emissions by about 4mtCO2e by 2007. It is likely to push the price of allowances to a low level in coming years, and to blunt the drive to reduce energy use under the CCAs.

The saga calls into question the wisdom of bringing large point sources of non-CO2 greenhouse gases into the trading scheme, particularly when they are already regulated under pollution control legislation:

Ineos Fluor: The key release from Ineos' Runcorn site is HFC-23, which has a global warming potential 11,700 times that of CO2. A £6 million incinerator was commissioned in 1999 in response to pollution control requirements, and cut the site's HFC-23 emissions by 95%.
Under the Environment Department's rules for the trading scheme, Ineos' baseline for HFC-23 emissions is 148 tonnes. This baseline was greatly inflated by the use of a generic emission limit covering all volatile organic compounds, and it far exceeds the site's actual emissions. According to figures submitted to the Agency's Pollution Inventory, the site's HFC-23 emissions were just 28.4 tonnes in 2002.

Ineos told ENDS that its overall greenhouse gas emissions in 2002 have been verified as 0.65mtCO2e. This means that it beat its target by 1.05mtCO2e - a surplus worth £5 million, assuming an average market price of £5/tCO2e.

Ineos will receive incentive payments of £43 million over five years to compensate for the risk of taking on a binding cap. But the risk appears non-existent - the company is already far ahead of its target for 2006 under the trading scheme, let alone the less demanding interim targets.

Business development manager Louise Calviou told ENDS that Ineos' emissions 'were substantially lower than they would have been otherwise' because of its participation in the trading scheme.

The company says that 'ongoing process investment and improvement' avoided emissions of 0.88mtCO2e in 2002 - although the claim is hard to square with the low levels of HFC-23 releases in the two preceding years. Ineos says it has improved operational management and scheduling and commissioned a new vent capture system for use when the incinerator is off-line. It says it is planning investment in a 'major new emission abatement system' in 2003.

DuPont: The key release from DuPont's Wilton works is nitrous oxide, which has a global warming potential 310 times that of CO2. An abatement unit was installed in 1998 to comply with pollution control requirements.

According to the Agency, DuPont released 3,615 tonnes of N2O in 2002. Using DEFRA's rules, the site's baseline for N2O is 8,263 tonnes. This means that the company's emissions in 2002 were way below its baseline, and it is also far ahead of its eventual target under the trading scheme.

DuPont appears to have beaten its interim target for 2002 by more than 1.3mtCO2e. This is worth £7 million at a market price of £5/tCO2e, on top of incentive payments from the Government of £26.7 million.

Once again, the Agency's emission limit for the process was used in the calculation of the baseline. Just before the auction the Agency increased the limit on DuPont's annual releases of N2O from 7,500 tonnes to 15,000 tonnes. This move greatly increased the 'hot air' allowances and the payments awarded to the company - and appears particularly difficult to justify in light of the low emissions in 2002.

Rhodia: Like Ineos, Rhodia's Avonmouth works entered the trading scheme on the basis of its emissions of HFC-23. However, in this case the Agency had set no emission limit and did not require abatement plant to be fitted. Instead, it relied on a programme of process optimisation.
Because of this, DEFRA said that Rhodia's actual emissions in 2000 should form the baseline for the trading scheme. The Agency advised that all regulatory requirements had been met by that year.

In 2002, Rhodia released 119 tonnes of HFC-23, compared to a baseline of 139 tonnes. The company bettered its target by a relatively modest 0.16mtCO2e.

However, emissions from the site are set to fall dramatically because Rhodia is planning to fit an incinerator, perhaps by the end of the year. Chris Mulliss, Rhodia's regulatory affairs manager, says that 'the incentive monies have allowed us to look at options for further abatement of our emissions.' ENDS understands that the planned incinerator will cost about £1 million - a small fraction of Rhodia's £22.9 million incentive payment.

It remains far from clear why the Agency did not require Rhodia to fit abatement under pollution control legislation, not least because of the relatively low capital cost involved. Incineration of HFC-23 releases had been determined as the 'best available techniques not entailing excessive cost' at Ineos' site - and it is at least arguable that the same regulatory standard should have been applied to Rhodia.

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