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OPINION

Mayday call for the EU ETS

22 July, 2009

A surplus of allowances threatens to make the EU Emissions Trading Scheme irrelevant, says Bryony Worthington – who suggests how it could be rescued

One of the advantages of emissions trading compared to taxation is the transparency of the data it creates. Over the last few months, we have been able to pore over emissions data for the 12,000 installations covered by the EU Emissions Trading Scheme (ETS) and have concluded that all is not well. Others can judge for themselves, as we’ve mapped all the installation data on a Google map and made the data available on our website.

The other major advantage of emissions trading is that it is very cost efficient. A report from the UK Prime Minister’s special representative on carbon trading found that the cost of meeting emissions reduction targets can be reduced by up to 70% in some scenarios. This is a serious incentive for using such schemes in the fight against climate change.

Unfortunately, whatever the advantages of the policy mechanism, there is still the problem of political will. And the 2008 emissions data show that the EU’s flagship policy has been seriously holed by the combined forces of industry lobbying and the unexpected recession.

There are now so many unneeded permits in circulation that the EU ETS is at risk of being rendered irrelevant, with firms unlikely to have to act to reduce their own emissions until 2015. As in Phase I of the programme, a high volume of freely allocated permits have been handed out to heavy industry, based on the assumptions that Europe’s economy would continue growing and emissions would remain coupled with that growth.

And, as a safety valve against high prices, generous access has been granted to the international market in offset credits. As companies in the scheme shuffle paper permits around, or indulge in offsetting rather than investing in their own emissions savings, there is a real danger that the ETS will have no discernible impact on the EU’s emissions. The over-supply of allowances has pushed the price so low that even the cheaper reduction options are just not worth taking.

We strongly believe that the EU ETS can be rescued, but it will need bold leadership on the part of the EU to acknowledge the problems and swift action to correct them. There are a number of measures the EU and governments can take to choke off the supply of permits and get the market back into balance. Chief among these is the setting of much more ambitious targets for Phase III (2013-20).

The proposed 1.74% reduction per annum is not adequate in light of the latest scientific warnings, which clearly indicate that there is now a premium on early and bold action if global emissions are to peak within a decade. To achieve this, rich countries need to be achieving reduction rates of at least 3-4% per annum, but actually in some sectors – such as power – this could be even higher, at around 10% per year.

Other recommendations include an EU-wide agreement to cancel any spare permits held by governments in new entrants’ reserves and the introduction of a floor price for the remaining Phase II allowance auctions. Incentives for companies to voluntarily cancel permits should also be introduced.

But these are small measures compared to the bigger goal of a tighter cap. The EU is now in a strong position to be able to commit to a more ambitious target in Copenhagen, which will subsequently trigger tighter EU ETS caps. The unilateral commitment to a 20% reduction by 2020 from 1990 levels on which Phase III caps are based was never very ambitious. Latest figures are likely to show that the EU has over-achieved its Kyoto target, of an 8% reduction below 1990 levels, and emissions are now close to 10% below already. Given that up to 50% of the effort can be offset, the commitment to achieve a further 10% is really only a requirement to cut 5% domestically. And we have given ourselves over a decade to get there – a decade which will see a massive scaling up in investment in renewables and energy efficiency.

Add to this the fact that, thanks to the banking rules in the EU ETS, when the EU sits down at the negotiating table it will be in the unusual position of already having a large volume of banked Assigned Amount Units (AAUs) – the allowances issued to governments under the Kyoto Protocol – at its disposal, carried forward on its behalf by the companies in the EU ETS. Much of this is the ‘hot air’ generated by the recession and over-allocation to heavy industry. The EU has gone on record as wanting hot air AAUs to be cancelled ahead of the next international deal, post-2012, primarily because of the large volume of spare permits held by Russia, which has arisen because of industrial decline in the 1990s. It follows, then, that the EU should heed its own advice.

The final reason tougher targets make sense is that the estimated costs which formed the basis of the political agreement reached at the end of last year have fallen dramatically. The current market value of EU permits is around €14 ($20) – far lower than at the start of Phase II last year. This low price undermines investment in solutions in the EU and abroad, and there is a very real danger that, as the recession takes hold, 2009 emissions will be lower again and even this price won’t be sustained.

Defenders of the status quo will quickly point out that the recession will end at some point and emissions are likely to bounce back when it does. But surely, to tackle climate change we must now plan on the basis that economic growth and emissions can be decoupled. This is the message we are sending to developing countries and we must show we mean it by adopting the same approach at home.

We believe, whichever way you look at it, that we need tougher caps and we would urge everyone who cares about the future of emissions trading to join us in sending this message to policy-makers. Only then can we properly reap the efficiency reward that trading brings and really get started on the task of decarbonising the global economy.

Bryony Worthington is the founder and director of NGO Sandbag. E-mail: bryony@sandbag.co.uk

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