The Challenges of GHG Emission Trading for Lithuania

Abstract

The article deals with the issues related to the implementation of EU emission trading scheme in Lithuania. The main objectives of the article are to analyse the main features and requirements of EU emission trading scheme and to assess the impact of GHG emission trading on economy through the energy price increase caused by carbon restrictions on energy sector. The aim of EU Emission trading scheme is to help member states to fulfil their Kyoto commitments at lowest costs. In Lithuania GHG emissions in 2004 amounted to 20.2 mill. t and were by 2.5 time lower Lithuania’s Kyoto commitments. The total number of allowances allocated for Lithuanian emission trading sector in both emissiontrading periods was not imposed by Kyoto commitments. The main constraint for 2005-2007 is laid in Annex II criteria – not to allocate more allowances than it will be needed. The quantity of allowances member state may issue was governed by 11 common allocation criteria. While the directive does not explicitly prescribe a given number of allowances, each member state must respect the criteria, which mean that in practice their leeway is limited. The general concern of EC is that if too many allowances were issued there would be no scarcity, and no market develops. Analysis of new Lithuanian National Allocation Plan for 2008-2012 indicated that with the growth of Lithuanian economy CO2 emissions per GDP seeking to maintain the average annual GHG emission level up to 2012 should be reduced by 33%. This is important challenge for Lithuanian enterprises taking into accountanticipated closure of unit 2 at Ignalina NPPP. It is foreseen that with the reduced supply of GHG emission allowances in 2008-2012 because of restrictions imposed in new NAPs to GHG emission trading sectors and the fast economic growth in new member states will drive the price of allowance up to 50-60 EUR/t. This will have impact on increased investments in use of renewable energy sources especially of biomass in energy sector and in increase of energy efficiency. Therefore it is very important to ensure the investments of energy and industrial enterprises in modernization of energy sector. Such high prices of allowances will create the situation when previously not competitive in the energy market expensive advanced technologies become efficient having short payback period. However these trends will cause increase in energy prices to consumers. One of the possibilities to reduce the burden of GHG emission trading on economy and to mitigate GHG allowances and energy price increase is application of Flexible Kyoto mechanism which are cheaper options to acquire GHG emission credits and to cover increased GHG emissions in the country. In general forecast for the second trading periods is not favourable for Lithuanian economic development as carbon restriction on Lithuanian economy reduce competitiveness of Lithuania economy (which is low GHG emission economy comparing with old EU member states) in EU market will lead to the energy price increase. The additional taxes on energy and other goods may have negative impact on Lithuanian economy because introduction of new environmental taxes should be implemented through the green budget reform which implies the rise of environmental taxes by reduction of the income, social security and value-added or profit taxes and maintaining budget revenues constant. Positive impact of The EU emission trading for Lithuania is the promotion of use of bio fuels, CHP and other advanced energy production and consumption technologies having external benefits on society in terms of increased knowledge, skills, employment etc.