Background
Like the EU, Norway has had an emissions trading scheme in operation since January 1st 2005. The aim of the Norwegian government is to make their scheme the first to link up with the EU.
Design of Norwegian Emissions Trading Scheme
In principle the Norwegian scheme is supposed to be compatible with the EU ETS, opting for the same cap-and-trade form, initially only covering emissions of CO2 and installations from the same sectors and combustion installations as the EU. The Norwegian scheme will cover energy installations not covered by its CO2 tax (including some planned gas powered plants), oil refineries, iron and steel producers and the cement, glass, lime and ceramics sectors. However, there are some significant exemptions from scheme participation with the offshore sector (responsible for 28% of Norwegian CO2 emissions), pulp and paper sector and gas power utilities producing electricity mainly for external use not included. Only a small fraction of the Norwegian process industry is included in the scheme, and only 10 per cent of Norwegian greenhouse as emissions are covered. In comparison, 38 percent of the EU’s emissions are covered by its trading scheme. Instead of permit obligations, the Federation of Norwegian Process Industries entered into a non-binding arrangement with the Ministry of the Environment whereby it agreed to reduce emissions voluntarily. The offshore sector was very keen to be included in the scheme but the government chose to not to allow them to participate. The main reason for their non-inclusion is that offshore installations are already covered by the CO2 tax and the government was very reluctant to see this revenue lost.
Norway's target under the Kyoto Protocol is to limit growth in its greenhouse gas emissions to 1 per cent above 1990 levels during the first commitment period. Norway emitted 52.1Mt of CO2e in 1990 and can thus not exceed 52.6Mt on average in the 2008-2012 period. However, under business as usual Norway is expected to emit 64-65Mt in 2010. According to the Norwegian Ministry of Environment, the Norwegian ETS will yield somewhere between 500,000 and one million tonnes in reductions annually. Accordingly, this means that Norway intends to cover less than 10 per cent of the gap between its Kyoto target and estimated emissions through emissions trading. The decision not to allow offshore to participate in the scheme leaves Norway with a very limited set of choices for how to meet its Kyoto target through reducing emissions a further 12.5Mt annually. Analysis from Point Carbon shows that had offshore been included in the scheme and allowed to purchase the estimated 15Mt of CO2e that it will be short annually, this would enable Norway to comply with its Kyoto target. Although the Norwegian cabinet will set the final cap for the installations covered, the emissions trading law sets out to allocate 19.7MtCO2 over the three years from 2005 through to the end of 2007. This allocation represents 95 per cent of projected emissions for the covered period. Thus, Norwegian companies would be expected to make up the 1 MtCO2 shortfall by a combination of purchases and emissions reductions. CO2 emissions from the period 1998-2001 were used as a baseline in determining the allocation of allowances for the covered installations. Exceptions are made for installations where these years were unrepresentative. The Norwegian scheme allows Norwegian companies to use EU allowances and CDM credits for compliance in the period. It also sets the fine for non-compliance at the same level as in the EU for 2005-2007, at €40/tonne.
From the EU's perspective, the design of the ETS opted for by Norway is insignificant in terms of size and market relevance to the EU. The scheme is not expected to make a significant contribution as Norway struggles to meet its Kyoto target. Gaining access to a large and liquid market such as the EU ETS will however be of great importance to Norwegian companies.
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