Electricity consumers are expected to bear much of the cost of the reduction of the UK’s CO2 emissions in Phase 2 (2008-2012) of the EU Emissions Trading Scheme (EU ETS). The UK Environment Secretary, David Miliband, announced on 29 June 2006 the cap on the annual carbon dioxide allowances that will be set under the UK's National Allocation Plan (NAP) for Phase 2. This cap will be set at 238 million allowances per year, which represents an annual reduction of 29.3 million tonnes of CO2 against projected business as usual emissions. The UK Government anticipates that its NAP for Phase 2 will result in an increase in electricity prices of approximately 1% for industrial users and 0.5% for domestic users.

The other key features of the UK's CO2 emissions cap under its NAP are as follows:

  • 7% of the UK's allowances will be auctioned and these will be drawn from the allowances allocated to the power sector
  • UK installations covered by the EU ETS will be entitled to use credits from the Kyoto Protocol's clean development (CDM) and joint implementation mechanisms (JI) to meet up to 8% of their emissions allocation.

The cap of 238 million allowances is regarded as ambitious. Since the consultation on the draft NAP in March, where the Government proposed to set a cap between 234 and 252 million allowances, projections for the UK's annual emissions of CO2 in 2010 have risen by 3 million tonnes for the UK as a whole, and by 1.1 million tonnes for the installations covered by the EU ETS. However, a tight cap over CO2 emissions will be necessary if the Government wants to comply with its greenhouse gas emissions reduction target under the Kyoto Protocol as well as meeting its goal to reduce UK emissions of CO2 by 20% below 1990 levels by 2010.

The Environment Secretary also announced that the Department for Environment, Fisheries and Rural Affairs (DEFRA) and the Department of Trade and Industry (DTI) have decided to form a joint environmental transformation fund to encourage investment in renewable energies and low carbon technologies.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 10/07/2006.