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 control over the management of 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. In 2006, 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, with the new market growing rapidly as a total of 1 billion tonnes were traded - two-and-a-half times more than in 2005. Prices ranged from €32.85 to €6.40 per tonne, reflecting a collapse in the price midway through the year as 2005 emissions data showed the first phase of the scheme to be fundamentally oversupplied. The price of allowances in the second trading period, from 2008 to 2012, remained buoyant however, as allocation plans for the period were developed.

In 2005, our UK power stations' CO₂ emissions were 27.5 million tonnes, of which 26.9 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, but we make investment decisions on a much longer-term basis and need to see an international commitment to the scheme that matches this timescale.

In 2006, we helped fund an independent study by the Institute of Public Policy Research into the future of the EU ETS after 2012 to help stimulate thinking in this area of policy. We've also supported work by the International Energy Agency into the effects of uncertainty in climate change policy on low-carbon investment risks to help improve public policy development.