Firms in these industries will be allocated permits from governments in the countries in which they are based. These permits can be sold to other firms, or the firms can buy extra permits if they need them. The EU Commission believes that emissions permits will cost about 15 euro per ton CO2 in the emissions trading market. Firms that do not meet their targets will have to pay a fine of 40 euros per ton CO2 and 100 euros after 2008. The permit system will cover sectors that are responsible for about 46% of the EU’s total emissions. Market analysts believe that trading in the permit market can reach up to 8 billion euros by 2007.
It is expected that Great Britain, which has its own permit system, and Germany, which has voluntary agreements between industry and the government about reducing emissions, will not take part in the EU’s permit system from the outset. The permit market will initially be limited to firms within the EU, but from 2008 the intention is that these firms will be able to purchase quotas from other countries that have ratified the Kyoto Protocol. The Commission has proposed a way of integrating the EU’s emissions trading system into the international market under the Kyoto Protocol.
The temptation to freeride
Since the end of the 1980s, international negotiations have been taking place to limit emissions. But it is difficult to come to agreement about concrete steps that make a difference.