Under the 1997 Kyoto Protocol, the EU is obligated to reduce its greenhouse gas emissions 8 percent from 1990 levels by 2008-2012. All members of the EU-15, countries which were in the EU prior to May 2004, signed the Kyoto Protocol on April 29, 1998 and subsequently ratified it on May 31, 2002. In 2003, EU members generated 4,048 million metric tons (Mmt) of energy-related carbon dioxide emissions, 16 percent of the world total. Germany emitted the most carbon dioxide (842 Mmt) of the EU countries, followed by the United Kingdom (565 Mmt), Italy (465 Mmt) and France (409 Mmt).

In October 2003, the EU Parliament and Council issued Directive 2003/87/EC, establishing an emissions trading scheme which became operational in January 2005. According to the Directive, no installation undertaking activities are permitted to emit CO2 unless the operator of the facility holds a permit from its government. Under the Directive, member state governments allocate annual emission allowances to companies, which have to meet their allowance by either reducing CO2 emissions or acquiring emission rights from other companies. If a company emits less than its quota, it can either sell the remainder or save them for future use. Members of the EU-15 were required to submit plans to the European Commission (EC) containing a list of installations and proposed allocations for each site. New members as of May 2004 were required to submit plans with their accession.

The EC has been reviewing the progress of the emission trading plan since January 2005 and plans to release a report during 2006. Specifically, the EC’s report will focus on how the plan affects the EU’s international competition, how it impacts electricity prices in the EU and the possibility of extending the plan to include additional greenhouse gases listed in Annex II. Under Article 30 (3), the EU Parliament Directive could eventually allow companies to achieve reductions through emissions-reducing projects carried out anywhere in the world, as long as those reductions can be verified under the Kyoto Protocol’s Joint Implementation and/or Clean Development Mechanism. The reductions could then be converted into allowances and traded within the EU.

Phase I, which the EU considers a “warm-up” phase, began in 2005 and will run until 2007. The second phase will run from 2008 to 2012, corresponding with the first Kyoto commitment period. The EU anticipates that the program will be run in five-year phases after 2012 as well.