Carbon Capital Markets

Kyoto: Italy risks EU diktat

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Courtesy of Carbon Capital Markets

The Commission does not like the Government’s plan – but without an agreement before the 3 June Brussels will impose tough conditions LONDON: After seven years of preparation and decades of debate, the Kyoto Protocol came into effect this February. But not in Italy. The original National Allocation Plan (NAP) drawn up by the government – its strategy for reducing carbon dioxide emissions to reach international treaty’s objectives – was not approved by the European Commission. It was rejected with some disappointment.

But the trouble is that the Commission didn’t like the draft submitted to it on the 24 February (a week after the Protocol came into effect) either, finding it still too generous. Negotiations to reach an agreement in time for the deadline of 3 June have a long way to go. Unless these positions start to come together in the next few days, Italy faces a serious risk. If Brussels imposed a national allocation plan, 4th sector industries (energy, steel, cement, paper and glass) would then have to follow it to the letter.
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“We are working very quickly to reach an agreement”, says Otto Linher, an EU diplomatic official involved in the negotiations with Italy. “We are making progress”, confirms Barbara Efferlich, a spokesperson for the Commission. Officials contacted at the Italian Ministry for the Environment by phone did not call back. But, if you ask outside of official sources, the situation is complex. Some point the finger at the decisions made by ENEL, the Italian utilities company. Instead of abandoning the production of carbon, ENEL has increased investment in fossil fuels over the last two years. Others however, say the reasons for the current impasse go beyond ENEL. “The problem is with the size of the numbers”, concludes a source close to the Commission. In other words, the dissent between Rome and Brussels on the CO2 emissions is much wider than two or three percentage points.
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Italy is not alone: Greece has not even submitted its national allocation plan, the Czech Republic has had to swallow a reduction of 9.5% with respect to its plans, while Poland seems to intend to lodge an appeal, despite having accepted a call to significantly cut its emissions. On the other hand, the treaty has already come into force in the other twenty-one countries argues Albert De Haan, commercial director of ECX, a newly set up futures exchange for carbon emissions, and things are going perfectly. The large European banks have already begun to trade, as have the large energy utilities.
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“The United Kingdom has moved with extraordinary speed,” he says, “and Spain, which seemed destined to remain behind, has made some courageous choices, which are already bearing fruit. The market is still in the initial phase, but there is liquidity and the exchanges are growing”. You would expect the association between finance and environmentalism to be unharmonious..
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But it is not. Even before the Bush era, Clinton's America had brought the logic of the market to the protocol during the Kyoto negotiations: in order to emit less greenhouse gases into the atmosphere you have to invest; and whoever invests receives in exchange an economic advantage..
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Europe has developed this with the Emission Trading Scheme (ETS), which enables the sale of emission allowances that allow companies to emit a tonne of carbon dioxide. They are currently on the market at around 16 Euro each. Companies in the industrial sectors involved that have moved to reduce emissions compared to 1990 levels, are sellers of emission allowances on the market. In the second phase of the Protocol, after 2008, other sectors will join. Those who invest in cutting CO2 soon earn credits to sell. ‘We are more sellers than buyers’, says a London-based trader from EDF, the French utilities company..
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“We are setting up commercial operations in all the main European countries” – says Lionel Fretz, CEO of Carbon Capital Markets, a London-based company – “because a large number of companies understand the business opportunities implicit in the ETS. But not in Italy: in the present climate no-one knows what to do and no-one is dares to take decisions.” In England, the government acted two years beforehand, “meaning that many companies have started to cut emissions by more than is required by the national allocation plan”..
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“Italy” – observes Gianni Silvestrini, scientific director of the Italian Kyoto Club – “has played a part in this game, but alone and always on the defensive, forgetting that, as well as an obligatory reduction in emissions for the good of the environment, the Protocol also offers opportunities”. According to Kyoto, Italy should reduce emissions by 6.5%, by 2012. But the first plan submitted by Italy allowed a 15% increase. According to what they say, things haven’t changed that much with the second plan. .
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“Clearly” – comments Silvestrini – “we bet on the fact that Russia would not ratify the Treaty and that therefore it would not come into effect”. Now, only a couple of weeks are left. There are just two weeks for Rome and Brussels to reach an agreement. Without one, the Commission could impose something on government that has been drawn up by other governments in its absence. Only at that point, will the Kyoto Protocol become reality.

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