German NAP2 Sees Utilities Cutting Most CO2 Emissions

FRANKFURT (Dow Jones)--The German government intends to force energy utility companies to carry most of the burden of further cutting carbon dioxide emissions in the second trading period of the European Union Emission Trading Scheme between 2008 and 2012. Germany's National Allocation Plan for the period 2008 to 2012, or NAP2, foresees that utilities will receive 15% fewer CO2 rights, the environment ministry said late Tuesday, when it released the draft NAP2.

Overall the government's plan envisages that affected facilities will reduce CO2 emission to 495.5 million tons a year compared with 499 million tons/year in the first CO2 trading period between 2005 and 2007. However, the plans for the second trading period include certain industrial facilities such as chemical cracker plants and steel furnaces for the first time. Excluding these plants, the CO2 emissions would be cut to around 485 million tons a year, according to the NAP2. Overall, industrial facilities CO2 rights allocations will be cut by 1.25%, the Environment Ministry said.

Additionally, the government plans to reserve 10 million CO2 emission allowances for free allocation to new facilities like power plants and factories. Another 2 million reserve allowances will be sold over the market to refinance the costs of the emission trading system, the Environment Ministry said. Previously, there had been speculation the government could decide to auction up to 10% of its total CO2 rights allocations. But Environment Minister Sigmar Gabriel recently dismissed the idea, saying such a move could trigger further increases in power prices. In the past year, CO2 rights trade has repeatedly been blamed for rapidly rising electricity prices as energy generators price CO2 into their power prices. As a result, energy-intensive industries in particular have called for a suspension of CO2 rights trade, arguing it allows power utilities to pocket windfall profits.

Under the government's draft NAP2, participating companies will be allowed to transfer up to 60 million CO2 rights a year generated from so-called joint implementation, or JI, and clean development mechanism, or CDM, projects. Under the Kyoto Protocol on climate change, JI and CDM projects are designed to help developing countries meet their emission reduction targets through joint projects. Investors, like governments or companies, can agree with partners in a host country to participate in project activities, which generate Emission Reduction Units that can be used in CO2 rights-trading systems like the E.U.\'s ETS. The NAP2 is subject to review and possible revision, the Environment Ministry added. Following its publication, the draft NAP2 enters six weeks of public hearing, giving involved parties the opportunity to lobby for more favorable allocations. The finalized NAP2 has to be submitted to the European Commission by Jun. 30.