In December 2007, the UN Climate Change Conference in Bali agreed to a road map for a protocol that would succeed the Kyoto Protocol from 2013. In the road map, industrialized countries committed themselves to massively reducing their greenhouse gas emissions by 2020 compared to 1990. Until a new protocol is reached, however, there are no binding reduction targets for the period after 2012. Only the European Union has set a long-term target of reducing its CO₂ emissions by 20 percent by 2020 compared with 1990 levels.

 

The Kyoto Protocol has three flexible mechanisms to help achieve emission reduction targets: emissions trading, Joint Implementation (JI) projects, and Clean Development Mechanisms (CDM). E.ON intends to make use of all three mechanisms. E.ON Energy Trading, which began operations on January 1, 2008, is responsible for our emissions trading operations. E.ON Climate & Renewables, which also began operations at the start of 2008, is responsible for managing our JI and CDM projects.

The EU launched the Emissions Trading Scheme (ETS) on January 1, 2005. The purpose of this marked-based mechanism is to help the EU achieve its emission reduction targets under the Kyoto Protocol and to provide companies with incentives to invest in climate-friendly technology. Companies participating in the ETS are allocated a certain quantity of emissions allowances. If a company emits more CO₂, it must buy more allowances. If a company emits less CO₂, it can sell unneeded allowances.

There is room to improve the current ETS, which distorts competition in a number of ways. That’s why we welcome the "Green Package" of climate-protection legislation announced by the European Commission in January 2008. The draft legislation aims to harmonize the ETS for the period after 2012. We think it makes sense for the same rules to apply to generating units across the EU. We also think that the auctioning of emission allowances is the right solution for the long term. However, we believe auctioning should be introduced gradually so that it doesn’t render some existing generating capacity immediately uncompetitive, creating stranded assets and diminishing security of supply.

In phase one of the ETS (2005-2007), the overabundance of allowances meant that their cost in the secondary market became negligible, creating little incentive in the short term for emitters to improve their environmental performance. In the second phase of the ETS (2008-2012), member states will allocate fewer allowances, with their prices likely to rise.

During each year of phase two of the ETS (2008-2012) period, E.ON estimates to be allocated allowances of about 55 million metric tons of CO₂. In 2007, E.ON was allocated allowances equal to 76 million metric tons of CO₂. This is a significantly lower amount than E.ON power plants involved in emissions trading emitted in 2007 (87.5 million metric tons).