Thursday, 4 March 2004

Ceisteanna (6)

Eamon Gilmore

Ceist:

5 Mr. Gilmore asked the Minister for the Environment, Heritage and Local Government the way in which the €675 million worth of CO2 emission allowances, which he proposed to allocate free of charge to certain industries, will be financed; and if he will make a statement on the matter. [7293/04]

Amharc ar fhreagra

Oral answers (7 contributions) (Ceist ar Minister for the Environment, Heritage and Local Government)

In preparation for international emissions trading under the Kyoto Protocol, the European Union is establishing a scheme for greenhouse gas emission allowance trading to commence in January 2005. The Government has agreed to make available to the emissions trading sector, comprising about 100 installations in the powergen, large industry and large institutional sectors, an average of 22.5 million allowances per annum over the three year pilot, "learning by doing", phase of this scheme to the end of 2007.

The EU emissions trading scheme creates a new commodity, an "allowance" equivalent to one tonne of CO2, valid only for the purpose of meeting the requirements of Directive 2003-87-EC establishing the scheme. Operators in the 15,000 installations across the enlarged European Union must surrender annually one allowance for each tonne of CO2 emitted in the previous year, and to meet this obligation, may trade in these allowances. Their value will be determined by the market in them, and this will act as a powerful incentive, through the internalisation of environmental costs, for companies to identify and implement emissions reductions measures at or below the prevailing market price. All companies will wish to avoid exposure to the need to purchase allowances at a price higher than in-house reduction costs and avail of the opportunity to sell spare allowances thus generated on the market.

The Government is bound by the terms of the Directive 2003-87-EC to make available at least 95% of allowances free of charge. The total value of the allocation for the three years 2005-7 equates to €675 million, based on a price estimate of €10 per tonne of CO2 predicted by the consultants advising Government. That is the price generally expected to emerge in the European Union. While the EU emissions trading scheme creates a market for a new asset, there are no financing costs for Government in this process but there are stringent penalties in place to ensure companies do not exceed their limits. The penalty in the pilot phase is €40 per tonne of CO2 emitted which is not offset by an allowance surrendered and cancelled, rising to €100 per tonne from 2008.

A total of 0.75% of the allowances will be auctioned to defray the administrative costs in the EPA and there are other provisions in the draft national allocation plan published by the EPA for auctioning that may benefit the Exchequer. These are the auctioning of any allowances not issued from the new entrant's reserve, and any not issued to installations which close.

Why did the Minister allocate considerably in excess of the minimum he was required to allocate? Will he confirm that his recommendation to Government was closer to the minimum than the figure eventually allocated? Why were allocations made to sectors in excess of current emissions? The largest sector, power generation, is getting 14.5 million allowances compared with current emissions of about 14 million allowances. The cement and lime sector is getting almost four million allowances compared with current emissions of about 3.5 million. The heading other combustion is getting about three million allowances compared with current emissions of 2.6 million. If the object of the exercise is to reduce emissions, why has the Government allocated to the largest polluters allowances in excess of the amounts they are already emitting?

Ultimately who will pay for this? Will the Minister confirm he has in his Department a report from Byrne Ó Cléirigh which estimates that average electricity bills for the householder could go up by almost 30% when the regime, including carbon tax, is in place? Has the Government made a decision to give what is, in effect, a subsidy to pollute to large polluting enterprises and sectors of industry while the householder and motorist will end up paying for this largesse through increased electricity and petrol prices?

I thank the Deputy for his questions. I would have expected him to ask such questions, many of which are the same as the ones I asked myself. This area was one of the most difficult for me to understand. I spent months trying to understand the creation of a market and how it would work. I had to be sure that it could deliver. If the figure emerges, for example, at €10 per tonne, companies will have two choices. They can do nothing and their allocation should roughly equate to what their CO2 emissions will be, which would mean they would have no gain. We do not want this, rather we want a real environmental approach to this issue. Built into this system is strong encouragement for companies to reduce. After 2012 circumstances will be far more severe for all countries, including Ireland.

If the average is about €10 per tonne, we expect many companies will see a value in making substantial investment in emissions reduction and may then see the benefit. The system contains a carrot and a stick. This represents learning by doing, the general view in the European Union. Potentially, much money is at stake. We all must be extremely careful about how we look at this matter, both from an Irish and European point of view. After 2008 there will be serious issues.

The Deputy also asked about the balance. The figures for actual output in Ireland are hotly disputed and depend on the consultants to whom one speaks. While some would put the figure much higher, I do not. I accept the figures on which we have based this assessment. However, others dispute them. While reputable companies have been employed to demonstrate that the figures may be higher, we are operating from the lower figure.

What has happened in the economy over the past ten years and more importantly over the past five or six years has had an impact on our energy needs. We negotiated a figure in 1998 which was 13% higher than our 1990 emissions level. However, we have now gone substantially beyond this. At one stage we were 31% higher but are now at about 28.5% or 29% higher. We have an enormous task to get back to the 13% level by 2012. At this stage the indications are that while we will achieve it, it will be at a price. This is not a pain free exercise and depends on everybody buying into and understanding the system.

There needs to be balance between competitiveness in the economy and environmental costs — a delicate balance. There is a very fine line. I believe we are at that line which could move a point or two one way or the other. We are not absolute in this, nor is any country in Europe. During the Council of Ministers meeting this week when the issue came up, we asked the Commission to give its views. Clearly, it had concerns about the allocations countries were considering making. While the Deputy is right in saying I had a lower figure in mind, I rightly had to listen to the arguments, as one would. I tried to balance all of the issues.

The Tánaiste would not be pleased due to competition concerns.

I am not saying that. We are at a very early stage of this process. The Deputy is absolutely on the mark with his questions. Ministers in all European countries are grappling with this issue. Clearly, those who champion competitiveness are not necessarily concerned with the environmental issues on the other side. What is happening in America gives me great heart about the ratification of the Kyoto Protocol, which I believe will happen. Even though the United States has not bought into the protocol, the change taking place——

Will the price of electricity increase?

While we do not want to see the price of electricity increase, time will tell. Clearly, there will be some marginal movement. There will be costs to the power generation sector in general in becoming more efficient. Ireland's big disadvantage is that generation is heavily fossil fuel based. That is the reason my colleague, the Minister for Communications, Marine and Natural Resources, Deputy Dermot Ahern, and I have been singing the mantra of trying to upscale substantially the level of wind energy generated. More than 25% or 30% of Denmark's energy comes from wind, which shows it works and can be efficient. I would like to see Ireland do the same.