November 17th, 2016

Part II: Reform of the Emissions Trading System — Nothing but patches on a broken system

By Frida Kieninger

foodandwatereuropeoncarbonemissionsIn part one of this blog, I referred to the obvious inefficiency of the European Emissions Trading System (ETS). While the ETS is praised to be the key element of the European climate policy, it fails to deliver and is less efficient than other factors such as energy prices and the overall tendency towards more sustainability.

The danger of an inefficient system — so big that it covers around 45 percent of the EU`s greenhouse gas emissions — is its potential to cancel out existing and future policies at the EU and national level that would really contribute to emission reductions. Ironically, this results in the ETS doing potentially more harm than good in the fight against global warming.

Just like many other mega projects of the EU, the ETS seems immune to proper reforms. Next year, we will face the uncomfortable situation of celebrating the 10th anniversary of the ETS, and we will unsuccessfully search for evidence that it changed anything for the better.

ETS reform — can we fix a broken system?

For the third time now, EU decision makers are trying to convince us that they will build a truly effective ETS now that the system is entering its fourth phase. The current proposed reforms are not promising at all. The most effective way of tackling climate change and working towards staying below 1,5 degree Celsius warming will be scrapping the ETS altogether. Already in 2013, Food & Water Europe supported a corresponding call, together with several other organisations. We need a clean slate for a set of truly ambitious climate policies that are not dictated by the big polluters but are determined by genuine, clear climate goals.

If the ETS, which is supposed to credibly reduce emissions, is basically accepting the right of people to pollute and then paying them not to, something is deeply wrong.

Carbon leakage — a myth useful for industry?

A lot of attention in the current discussions is given to so-called carbon leakage. This is the hypothetical situation of companies being forced to move to countries with lower environmental standards because of the high cost of climate policies in the EU. A study commissioned by the EU Commission itself found no evidence for this phenomenon in the past phases of the ETS. A report looking at the possibility for carbon leakage in phase III also found no clear evidence for it and only hinted at its potential impact in certain cases in the future.

Even though its existence can’t be proven, carbon leakage takes centre stage in the current reform of the ETS. Based on controversial criteria, 60 percent of the sectors accounting for 95 percent of the EU industrial emissions are on a “carbon leakage list”. The sectors on the list, allegedly facing the risk of carbon leakage, receive up to 100 percent of their emission allowances for free.

Also the EU-Parliament rapporteur for the file seems to be a great fan of free allowances: He does not criticise the concept of carbon leakage at all. Neither the rapporteur nor the Commission take into account other possible solutions for the rather mystical carbon leakage — even though the EU-Parliament adopted several resolutions proposing alternative solutions not involving free allowances.

Not carbon leakage, but green job leakage will be the result of the flood of surplus allowances.

The market is oversupplied? Lets pump more pollution permits in anyways!

What (unlike carbon leakage) is evidence-based is the soaring oversupply that the ETS has fought with for ages. A huge surplus in the last years, and a projected 2.6-4.4 billion excess allowances by 2020, show the large scale of the issue at stake.

This increasing surplus led to a very low carbon price that made emission allowances even cheaper, preventing industry from investing in emissions reduction measures. The decision to delay the auctioning of some 900 million surplus allowances in 2013 was a small, desperate move to control the flood of allowances on the market. Nevertheless, from 2021 to 2030, the Commission plans to place another 6.3 billion free pollution permits worth €160 billion on the market. The planned introduction of a “Market Stability Reserve” (MSR), a temporary reservoir storing surplus permits, should accompany the allocation of free allowances.

Still, the MSR is just another toothless instrument. The system has to cancel excess allowances, not collect them and feed them into the market later!

EU-Parliament rapporteur: Creating loopholes and granting funds to dubious projects

Instead of criticising the Commission for its proposal to hand out 43 percent of all allocations for free (and only auctioning 57 percent of them), rapporteur Ian Duncan goes even further, demanding a possible 2 percent increase of free allowances. He moreover adds loopholes for offshore oil and gas platforms to get free allowances and wants to exempt smaller facilities from the ETS.

The revenue from the few permits auctioned should be invested in climate action. This means that a maximum possible amount of money gained through ETS auctioning should be used for real emissions reduction projects. Instead, the Commission includes carbon capture and storage (CCS) in the list of supported measures. The crux of the matter: CCS is a mere caging up of emissions and not a sustainable solution.

There is also Paris, somewhere…

And there is also Paris! There is the global agreement to tackle climate change, and there are emission targets that the EU set itself. The only strange thing is that obviously the ETS is not designed to lead to the agreed reductions. The Commission proposes a 2.2 percent annual linear reduction factor for greenhouse gases, which would lead us to our 2030 goal of at least a 40 percent reduction, but not to our long-term goal:  a reduction of 80 to 95 percent by 2050. So why not set a 2.6 percent reduction factor now, getting us where we need to be?

Given the bad news about free allowances, extremely low carbon prices, loopholes and unambitious plans, the ETS is clearly a regulation by the regulated. We do not accept this kind of system, and instead call for effective regulatory measures in place of false market-based “solutions”.

Scrapping the ETS would be the best decision for our climate.

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