I can see you.
Good afternoon again, Mr. Chairman. It's a pleasure to be with you again, and I'm more than happy to share with you some of our experiences with the European emissions trading system.
We circulated some slides and documents, so I hope they are available to the members of your committee.
A lot has already been said. I would like to summarize my introduction in five points.
First, the carbon market, which in Europe we call the EU ETS, the emissions trading system, has been up and running since January 1, 2005, for 25 European member states. That means that it is, in our view, the largest cap-and-trade system in the world. It has mandatory caps on emissions--on absolute emissions--from the 10,000 largest emitters in the EU. It covers half the emissions of the EU. And the exchanges that happened in 2006 were about 20 billion euros.
Now, what are the key design elements of the EU ETS? It is a simple cap-and-trade system for direct emissions. It was very important to keep simplicity in the system, because we studied other experiences, and they showed us that simplicity mattered a lot if we were to have a clear and easy message that would be understood by all economic operators.
It has broad sectoral coverage. That means that all big installations--power, steel, pulp and paper--are covered in the EU. But it does not cover emissions from transport.
It has robust monitoring and independent verification, with sanctions to ensure compliance and use of the market. It is an integral part of the international system for tackling climate change. We had almost free allocation. And most of all, the system is driven by the private sector and is providing incentives for emissions reductions.
My second point is about the experience so far. What have been the stages through which we have gone? We are currently in the middle of the start-up period, 2005 to 2007. We're almost coming to the end of that start-up period. We have registries established. Allocations were done almost for free. We had fairly good market development. I think we are exchanging today almost 100 million tonnes a month. Emissions reductions, however, have been set at too low a base--I will come to that in a minute--but it was, in our view, necessary to have a smooth and easy start-up for the system.
Today we are preparing for the Kyoto period, starting on January 1, 2008. The first commitment period of the Kyoto Protocol is being prepared for by having allocation plans for companies, and our member states are taking care of those. Today, 14 of the 27 national allocation plans have been approved by the European Commission.
There is a very important slide in the package that we sent to you, Mr. Chairman, showing the development of the quantities and the prices, and I think it's very important that we spend a few minutes on that. On the quantities, you can see that we had steady growth in the allowances exchanged on the market. On the prices, there is a curve showing quite steady development from a level just below 10 euros up to a peak of 30 euros, and then there is a quite sudden drop, from 30 euros to half that level, in about April of last year. Then we see the dark line that shows declining prices. Today the spot prices are about one euro per tonne of carbon dioxide.
What happened? In May 2006, for the first time, we had verification of the emissions of all companies, and the verification was done at the company level. In fact, what turned out in April was that the database with which we worked was not ideal. What is now of importance is that today, in preparing for the first commitment period of the Kyoto Protocol, we can work in a reliable, verified database, and that is what you see in the price curve, where today the forward prices for the first commitment period are around 15 euros and I think market operators are expecting around 20 euros for the period of 2008 to 2012. In a nutshell, the prices have been volatile for the pre-period, but we are very confident that with a better database, consisting of verified data, we will no longer see this volatility in the market.
A third point I would like to make is the European emissions trading scheme is primarily focused on Europe by definition but is an open scheme. It is linked to the Kyoto instruments of joint implementation and CDM, and our companies and member states are currently planning expenditures of up to three billion euros for the first commitment period. That means this is the heart of a solid cooperation with developing countries, and it really represents a transfer of technology.
We also have the possibility to link up the European trading scheme with similar systems in the world, whether they are covered by the Kyoto Protocol or whether they are schemes outside the Kyoto Protocol. The procedures are different, but the principle of linking with other schemes is well established.
What are the lessons learned from our scheme? As I said, having simplicity in the scheme is very important and having the global perspective, a global carbon market in perspective, is key to anything we are doing in Europe, and we would hope to link up our system to as many players as possible.
It is very important that we can maximize compatibility with other systems in order to have this process of linking up, but it is very important that we have mandatory caps set for all participating companies. Only these mandatory caps allow us to have a simple system.
The European system does not have what are sometimes called “safety valves”, or price management, and the European system is strongly based on the private sector to verify its own emissions and have third parties involved. The lessons to be learned are that we have simplicity through focus on mandatory absolute caps and no price management.
To sum up, we are now reviewing our emissions trading scheme. We are going to extend it to include international aviation. We are going to have more sectors covered, and we are going to have more harmonized procedures, because it is fair to say that among the 27 member states we currently have in the European Union, we need somewhat more harmonization in order to maintain sound competition within the internal market among all players.
Thank you, Mr. Chairman.