Recent price collapse shakes European belief in emissions trading.
By Geert deCock
There are still some people, who deny that climate change is happening, though recent events – record droughts, frequent hurricanes, floods – are perfectly in line with the predictions by climate scientists. In the camp of those who do recognize climate change as a serious threat, there is another divisive issue about how to effectively and efficiently reduce greenhouse gas emissions. The debate revolves in particular about the role that emissions trading should play. Emissions trading has received broad support among those political leaders in Europe and the U.S., who would like to see some action on addressing climate change. The European Union has led efforts to use emissions trading as a central policy to deliver on its climate targets. It established its Emission Trading System (ETS) in 2005 and the results so far have been underwhelming, to put it mildly. While the position of the ETS as Europe’s flagship policy was unquestionable until recently, last week’s price collapse led to an existential crisis for emissions trading in Europe.
What happened? The European Union and its Emission Trading System – the world’s largest carbon market – was supposed to be the cornerstone of the EU’s climate policy. However, carbon prices in Europe have been very volatile and they have been on a constant downward slide since early 2011. Over the last two years, prices have been sinking non-stop: From EUR 20 in early 2011, to about half at the end of 2011, to just EUR 5 per tonne of CO2 by the end of 2012. Despite this, policy-makers kept up the mantra that this system can be fixed. However, the tone of the debate changed, when carbon prices dropped to EUR 2.81 per tonne on January 24.
When the ETS was designed, it was expected that the prices of carbon credits would be around €30. Apart from a short peak, such high prices never materialized. Now, for the first time, key policy-makers in Brussels and across the EU admit the failure of the ETS to deliver emission reductions. For the first time, Connie Hedegaard, the European commissioner for climate, warned that the ETS is at risk of collapse, due to its low prices. The Italian Environment Minister Corrado Clini even went so far to describe the ETS as “irreparable” and expressed a move towards a carbon tax.