We see initiatives such as the EU Emissions Trading Scheme (EU ETS) as an excellent way of promoting genuine international participation in reducing carbon dioxide (CO₂) emissions, by providing companies with the opportunity to reduce their carbon emissions at minimum cost.

The EU ETS works on a 'cap and trade' basis, with an overall cap on emissions from each country. Each participating country allocates a proportion of the overall emissions total as an allowance to industry. Companies with excess allowances can trade them with those that need more, giving all the businesses concerned the choice of how best to manage their emissions. This means that the maximum result in terms of a CO₂ reduction will be achieved for the lowest cost.

We are active players in the EU ETS. The 25 Member States of the European Union (EU) collectively issued 2.1 billion allowances (one allowance equates to one tonne of CO₂) to industry during 2005 and, while there had been some trading in 2004, the new market grew rapidly with a total of 260 million tonnes traded. Prices ranged from €6.80 to €29.45 per tonne, reflecting changing demand for other commodities such as gas and electricity.

In 2005 our UK power stations' CO₂ emissions were 28.2 million tonnes, of which 26.7 million tonnes were tradable against an initial allocation of 22 million tonnes. We purchased the difference on the EU ETS market.

We fully support the development of the EU ETS as the primary driver of low-carbon investment. Phase II of the EU ETS is set to run from 2008 to 2012. However, we make investment decisions on a much longer-term basis and need to see an international commitment to the scheme that matches this timescale.