LONDON – 01 December 2005

Emissions Trading

EU Emissions Trading Scheme - EU ETS - Phase II National Allocation Plan - Electricity Generation Sector Benchmarking - Carbon Dioxide Emissions

DEFRA announced on 24 November 2005 some significant decisions on the expansion of the EU Emissions Trading Scheme (EU ETS) for Phase II (2008-2012) and the allocation methodology to be used in preparing the UKs Phase II National Allocation Plan (NAP), based on the results of its July 2005 consultation.

Each EU member state is required to produce a NAP, which allocates the available EU ETS allowances (EUAs) to the installations subject to the EU ETS located within that EU member state. The operator of each such installation must surrender EUAs at the end of each compliance period equal to the installations actual emissions. EUAs can be traded, enabling operators to choose between abating emissions or buying EUAs to comply. Operators can also sell excess EUAs.

The decisions taken include:

 Expansion: The schemes scope will be expanded to cover the rock wool and gypsum sectors and additional activities at installations in the glass and offshore sectors. The inclusion of additional activities at petrochemicals plants and integrated steelworks is also being considered.

 Free Allowances for New Entrants: New entrants to the scheme will benefit from free EU ETS allowances in Phase II, although the precise level of allocation to new entrants has not yet been decided.

 Allocation Methodology: Allowances will first be allocated to sectors in the form of a  sector cap , and then allocated within each sector to individual installations. The allocation to individual installations will generally be in accordance with the average annual historic emissions of the installation for 2000-2003, dropping the lowest year s emissions. Allocation of allowances by benchmarking rather than historic emissions data will apply for some of the installations benchmarked under the UKs Phase I (2005-2007) NAP.

 Electricity Generation Sector Benchmarking: Allocation of allowances by benchmarking rather than historic emissions data is being considered for the electricity generation and brewing sectors. The proposed benchmark for the electricity generation sector will be calculated based on a standard load factor and an emissions factor, and will divide the industry into sub-sectors reflecting the different CO2 emissions of different plant.

For more information on the decisions that have been taken in relation to Phase II of the EU ETS

Please visit:

http://www.defra.gov.uk/environment/climatechange/trading/eu/phase2/index.htm.

In a separate development, the UK Government has just won its case in the EU Court of First Instance challenging the European Commission s refusal to consider an amendment to the UKs Phase I NAP. The proposed amendment is for an increase of around 20 million EUAs in the total number allocated under the UKs Phase I NAP. The Court of First Instance judgment can be accessed via the press release, by visiting:

http://www.curia.eu.int/en/actu/communiques/cp05/aff/cp050100en.pdf.

For further information and guidance on matters surrounding emissions trading and climate change issues in general,

Please contact Amanda Seaton on +44 (0) 20 7367 3454 or at

 amanda.seaton@cms-cmck.com

or Donovan Ingram on +44 (0) 20 7367 2844 or at

donovan.ingram@cms-cmck.com.

For further information please contact:

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