European CO2 emission trading system and its implementation in the Netherlands

• Conclusions
• Recommendations
• Response of the ministers

We have examined how the Netherlands has implemented the system that the European Union (EU) has been using since 2005 to reduce the emission of the greenhouse gas carbon dioxide (CO2). The system is based on the principle that enterprises that generate large quantities of CO2 (like power stations and industry) must have 'emission allowances'. These allowance are tradable, meaning that companies that succeed in reducing their CO2 emissions can sell off surplus allowances to other companies.

Theoretically, the European Emissions Trading Scheme for CO2 (the EU ETS) is an effective instrument, since actual CO2 emissions can never exceed the total emission allowances allocated to a given company. In general the effectiveness of the ETS can be inhibited by a number of factors: (a) an unduly large number of emission allowances in relation to the actual quantity of the CO2 emissions being discharged will result in low market prices that give little incentive to curtail emissions, and (b) there is also an ever-present temptation for participating companies to misrepresent their emission figures as lower than they really are. The more companies that do this, the less successful such a scheme will be.

In this audit we looked at how the Dutch government's policy choices regarding the implementation of the EU ETS have helped fulfil the agreements set down in the Kyoto Protocol. Under the Kyoto Protocol the Netherlands is obliged to reduce its annual emission of greenhouse gases by an average of 6% over 1990 levels during the 2008 - 2012 period.

Conclusions

The main conclusion of this audit is that by and large the Netherlands has properly implemented the EU ETS, though in setting and allocating the total number of CO2 emission allowances, it placed rather too much emphasis on the interests and competitiveness of industry and electricity producers, at the expense of the Dutch Kyoto goal. Moreover, the implementation of the trading system was not always transparent. As a result of this, the Netherlands did less to contribute to the potential effectiveness and efficiency of the EU ETS than it could have. It is fair to say that the Netherlands is probably not the only member state in this position.

This main conclusion stems from the following subsidiary conclusions:

• The total amount of emission allowances the government initially planned to set aside for the second trading period imposed few restrictions on CO2 growth, thereby giving rise to a not insignificant risk that the Netherlands would fail to meet its Kyoto goal. This risk has diminished considerably when the Dutch government adopted the decision of the European Commission that the Netherlands should lower its proposed total amount of allowances by 5%.
• The allocation of CO2 allowances was dominated by the financial interests and the competitiveness of the participating companies. The process was also insufficiently transparent; the allowances were allocated partly on the basis of confidential information that is not available to the public (including the Court of Audit) and is thus impossible to verify.
• Owing to the introduction of the EU ETS (in 2005), existing Dutch sustainable energy policy has become less effective in reducing CO2 emissions. The policy should have been subjected to a cost-benefit analysis after the introduction of the ETS. This has yet to occur.
• At this point there is no reason to conclude that the data provided by Dutch companies about their CO2 emissions are not sufficiently reliable. There is, however, room for improvement in the monitoring, supervision and verification system.

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Recommendations

In the negotiations in Brussels on the modification of the trading system, the government should press for more harmonisation in setting the total allowance amounts among the member states. Furthermore, the government should press for a simpler and more transparent allocation of emission allowances (possibly by auctioning more); a single, centrally run European reserve for newcomers; and EU benchmarks or CO2 norms per unit product.

With regard to the sustainable energy policy, the government should conduct a cost-benefit analysis of every policy instrument, and on that basis reconsider the advisability of that instrument.

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Response of the ministers

The Minister of Housing, Spatial Planning and the Environment and the Minister of Economic Affairs expressed appreciation for the timing of the audit and are pleased with our main conclusion. They emphasise that the EU ETS is a new instrument created under tight time constraints, necessitating a great deal of pioneering. The ministers share many of our conclusions, but do not accept all our recommendations.

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