Will We See the 10-Year Anniversary of Emissions trading in Europe?

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.

In an effort to raise prices, the European Commission has made a “back-loading proposal,” which proposes to delay auctioning of hundreds of millions of carbon allowances in an effort to boost the sagging prices in the period 2013-2020. However, this is unlikely to substantially increase prices without a broader reform of the ETS, which would address the structural surplus of carbon allowances (e.g. permanently cancelling carbon allowances, more rapid decrease in the cap, no use of international offsets).

At the heart of this debate remains the unresolved conflict over the aims of the ETS. Some Member States like the United Kingdom and environmental NGOs believe that the ETS should help to deliver a transition from fossil fuels to a low-carbon economy and a greater reliance on renewables. This camp believes that politicians should actively intervene in the carbon markets to make sure that the price is right to boost low-carbon investments. This view obviously raises the question of why we needed emissions trading in the first place, if the market cannot be trusted to deliver sufficiently high prices.

Others believe that the only mission of the ETS is to put a price on carbon and leave it to the players on the carbon market to decide what that price should be. For them, markets rather than policy-makers should decide on the right levels. The business lobby and energy-intensive industries in particular promote this view with the support of Member States like the Netherlands and Poland. Here is the response from Polish Environment minister Marcin Korolec to a question about whether higher carbon prices would be desirable, which was published by Cleantech Poland:

“I can’t say if [a higher carbon price is] going to be good or bad for the market. It’s a simple function of the adopted legislation, the market nature of the ETS and the current economic situation. When in 2008/2009 Poland proposed a safety mechanism preventing the price of allowances from going below or above certain limits, the representatives of the Commission and the then Presidency of the Council would tell us that we didn’t understand market mechanisms. So we went with the market approach and I don’t see a reason for which we would manipulate the price today. If the market puts the price where it is now, so be it.”

Europe has only just avoided disastrous financial difficulties, including the possible breakup of the Eurozone. In addition, economic growth remains low, while energy prices remain high. And the fossil fuel industry has launched a campaign to paint renewables and energy savings as “unaffordable,” compared to supposedly “cheap and abundant” fossil fuels such as shale gas. Hence, it should come as no surprise that European Union Member States are divided about how to reform the ETS or throw in the towel on emissions trading.

Food & Water Watch and Food & Water Europe are firmly opposed to the idea that one can pay for a right to pollute. This is why we call on the European Union to abolish the ETS as soon as possible and to stop promoting this financialisation of our common resources in other countries.

Check out our latest issue brief on trading in carbon emissions and other forms of pollution by clicking here: http://fwwat.ch/WszDRX