EU reveals carbon-market reform package

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The European Commission will try to shore up its battered carbon market today (14 November) with a structural report signalling a future squeeze on carbon credits to augment a planned  ‘backloading’ or postponing of 900 million allowance auctions until 2019 and 2020.

The Climate Commissioner, Connie Hedegaard, said that although the EU’s Emissions Trading System (ETS) was delivering emissions reductions, a glut of allowances was holding back investments in energy efficiency and green technologies.

“We must not flood a market that is already oversupplied,” she said. “Market operators must have clarity before year-end on this.”

“At the same time, the Commission presents options for possible structural measures that can provide a sustainable solution to the surplus in the longer term,” she added.

The Commission's report estimates an oversupply of up to 2 billion allowances that is unlikely to decline before 2020, and proposes several potential remedies:

  • Increasing the EU emission reduction target to 30% in 2020;
  • Permanently cancelling a number of allowances in Phase III (as of 2013);
  • Increasing the 1.74% annual decline in the cap on allowances that can be allocated to member states up to and beyond 2020;
  • Extending the scope of the Emissions Trading System, or ETS, to other sectors;
  • Limiting the use of international credits in the ETS;
  • Introducing discretionary price management mechanisms, such as a carbon price floor or reserve price.

Any of these options would require a new legislative proposal, accompanied by an impact assessment, a lengthy process.

But the report indicates that the ETS will be “critical” in driving low carbon investments and that it will need to play “an increased role” in the transition to a low carbon economy by 2050.

Marcus Ferdinand, a senior market analyst at Reuters Thomson Point Carbon, said the Commission’s options appeared to have been listed according to the European Commission's preferences.

“The cleanest options for sure would be to go for a 30% target, or to change the 1.74% factor of the cap,” he told EurActiv, citing these options’ power to transform the overall market structure towards helping long-term emissions reductions.

Commission officials believe that the 1.74% factor as it stands would impel the ETS to reduce Europe’s non-aviation related emissions to more than 70% of the 2005 level by 2050, an arrow in the quiver for future arguments over 2030 targets.

Quick fix

But A “quick-fix” permanent cancellation was the only realisable short-term option that Ferdinand could see.

His analysis was backed by Rhian Kelly, the environmental director of the Confederation of British Industry (CBI). 

“We would be delighted if an option was put forward to deliver a 2030 package – including greenhouse gas targets – and a consequential reform to the ETS directive for Phase 4 of the directive,” Kelly told EurActiv.

This option will now go out to stakeholders, along with the rest of the carbon market proposals to be “discussed and explored without delay,” the paper says.

The proposal would also replace the current 27 national ETS registries with a single Union-wide registry and implements harmonised rules for free allocations.  

900 million reasons to be cheerful?

The structural report follows a ‘backload’ or delay in the auctioning of 900 million carbon allowances in Phase III of the ETS, which begins next year, and was announced late on 12 November to avoid press leaks.

The information is considered market sensitive and indeed, carbon prices rose slightly to over €9 in anticipation of the move. This is an improvement on recent price lows of around €6 a tonne, although still well below the €30 a tonne expected just four years ago.

“Many market participants traded on the rumour and sold on the news,” Ferdinand said. But even a cancellation of the backloaded allowances would only raise carbon allowances to around €15 a tonne by 2020, he said.

Rather than cancel them, the EU plans to auction the backloaded allowances in the last two years of the 2013-2020 trading period, to create an interim scarcity that boosts prices.

However, the temporary nature of the allowances’ removal from the market could be quickly factored into future prices by market traders. 

The CBI does not support the EU’s backloading proposals, but Kelly said she was agnostic about their future use.

“If there seems to be a kink in the [market] curve around 2020, then it may be that short-term intervention is needed and you might want to have backloading and cancellations,” she said.

The 900 million figure was the middle option of the EU’s three suggested figures – 400 million, 900 million and 1.2 billion allowances.

Obstacles to reform

Any effort to strengthen the EU’s low-carbon goals is likely to prove an anathema to some EU states, such as Poland.

Warsaw’s positioning is supported by the centre-right European Peoples Party (EPP) group in the European Parliament, whose MEPs have delayed passage of legislation needed to allow the Commission to implement market reforms, to the dismay of their Greens and Socialist colleagues.

On 5 November, EPP Chairman Joseph Daul sent a letter to Commission President José Manuel Barroso and Climate Commissioner Connie Hedegaard urging the Commission to postpone submission of any backloading regulation until after spring 2013.

The backloading issue also divides European businesses protecting low-carbon investments, from energy-intensive industries which say that they fear carbon leakage.   

“We don’t believe in any interference with a well-functioning market mechanism,” said Susanne Kuschel, a spokeswoman for the German company BASF.

“It doesn’t matter how many allowances you take out, whether you backload them or set them aside permanently, markets go up and they go down and if you artificially intervene in them, you destroy their confidence,” she said.

This position is strongly supported by BusinessEurope, the employers’ confederation, which claims to speak on behalf of all of Europe’s employers.

But a letter sent to MEPs by 16 major companies – including Shell, Unilever, EDF, GDF Suez, Statoil and GE – calls for “urgent intervention” in the carbon markets, as well as longer term structural measures.

“We hope that the Climate Change Committee endorses the back-loading proposal before January 2013 so that the EU ETS as a whole remains the cornerstone of EU climate and energy policy,” their letter says.

Rhian Kelly told EurActiv that she was surprised by how much commonality there was between the CBI’s positioning and that of BusinessEurope. “I don’t think we’re as diametrically opposed as people would suggest,” she said.

However, asked if the CBI was satisfied that its climate position was being adequately represented by BusinessEurope in Brussels, Kelly paused for several seconds. “No comment,” she finally said.

Positions: 

"We support this step. But back-loading only 900 million allowances is not enough to re-establish an effective carbon market in Europe", said Rémi Gruet, Senior Adviser for Climate and Environment at the European Wind Energy Association (EWEA). “The Commission itself estimates the oversupply of allowances to reach 2 billion by the end of 2013. We need a high and stable carbon price, which together with renewable energy targets, will drive investment decisions in the power sector towards wind energy and other renewables, rather than locking in fossil fuels for the next 40 years."

"I urge the Members of the European Parliament and the EU Council to swiftly agree on the Commission's proposal to backload allowances, and to enable a discussion on a long-term structural solution to the ETS", Gruet added.

However, there was strong opposition to the move from Gordon Moffat, the director of Eurofer, the European steel industy’s association. “Artificially increasing the carbon price by withholding or removing allowances from the emissions trading system will undermine the competitiveness of European industries and increase the energy bill for consumers even more,” he said. “This is counter-productive in times when the EU is struggling to get out of the worst economic crisis since the Second World War.”

On the other side of the industry debate, Henrik Poulsen, the CEO of DONG Energy said: “We welcome the Commission’s initiative and support the backloading proposal. Removing allowances, temporarily or even permanently, could be a short term measure that would drive up the price of CO2  and boost the EU ETS. The EU ETS is proving not to be the driving force for green investments in the energy system, as it was originally intended to be, and political action is therefore needed if the energy sector is to maintain its confidence in the EU ETS. However, we would have liked to see the number allowances to be considerably higher than 900 million.”

“The important thing is that the backloading proposal has been followed up by proposals for a more structural reform of the EU ETS," Poulsen continued. "We are delighted to note that the Commission has acted on the  industry’s call for measures to be taken designed to strengthen the EU ETS at a more fundamental level. We therefore look forward to analysing the six proposals for structural measures that the Commission is suggesting could be instrumental in ensuring that EU ETS remains a key driver of Europe’s transition to green energy and low CO2 emissions. From our perspective, the EU ETS is one of the most transparent and efficient tools in that transition,” says Henrik Poulsen, CEO, DONG Energy."

Rhian Kelly, CBI Director for Business Environment policy focused on the potential of an increased emissions target: “Investors are ready for the low-carbon race, but right now they can’t see the finishing line,” she said. Europe urgently needs a 2030 carbon target to give investors the confidence to get going. Emissions trading is key to unlocking business investment in low-carbon technology to help get the economy growing. But at the moment the carbon market is not delivering for Europe because of its short-term focus. Without a long-term plan, the short-term changes being debated now are just tinkering with the market and won’t do anything for investor confidence.”

Environmental NGO’s gave the EU’s move a qualified welcome. “Polluting industries have gained, for free, a glut of carbon permits worth billions,” said Joris den Blanken, Greenpeace EU climate policy director. “Postponing the auctioning of emission allowances is a welcome but temporary respite for the carbon market. Stability needs to be restored by permanently removing allowances.”

Sam Van den plas, WWF climate policy officer agreed. “Backloading is a first step, but must urgently be followed by fundamental changes to the carbon market,” he said. “Europe should do more than rearranging the deck chairs on the Titanic, and show it wants to be a leader in green technologies. EU leaders must push ahead with steeper emission cuts than the 20% that has already been achieved, and move to 30% domestic emission reductions by 2020."

The International Emissions Trading Association’s President, Dirk Forrister welcomed the new proposals and called on Brussels to keep up the momentum.The EU needs to restore confidence in the ETS which is still functioning despite challenging economic circumstances,” he said. “We believe that a persistently oversupplied market puts at stake the credibility of the EU ETS. We welcome the release of the Commission’s proposal, which improves clarity for market operators after many months of discussions. We now call on the Commission, Parliament and Member States to act promptly on this backloading proposal and to simultaneously start a discussion on structural reforms of the EU ETS.”

The environmental group Sandbag sent EurActiv a statement which read: “The Commission’s first official report on the EU Emissions Trading Scheme promises to finally start a real discussion on repairing the broken policy. For too long the debate has stalled around stopgap measures which, by themselves, can provide no environmental benefits or investor security. We are particularly pleased to see moving to a 30% 2020 climate target at the top of the Commission’s list of options to repair the ETS. This is especially appropriate after new figures from the European Environment Agency suggest that Europe has beaten its current 20% target 9 years ahead of schedule.”

For the Green Party, Bas Eickhout MEP said: “The Commission remains behind the game in terms of doing what is required to repair the misfiring emissions trading scheme. The oversupply of emissions allowances and resulting unrealistically low carbon price mean the emissions trading scheme is failing in its purpose of delivering domestic emissions reductions and stimulating investment in green technologies to this end. Radical action is needed to address this.”

"Despite its promise to respond to the demand from the European Parliament and Council to deliver structural reforms to address the problems with the ETS during the third phase, the Commission is prevaricating: merely setting out options instead of making concrete proposals. We urgently need concrete proposals on permanently retiring emissions allowances to address the oversupply, as well as introducing a linear emissions reduction factor of 2.5%. Ultimately, stepping up the EU's outdated emissions reduction target to at least 30% by 2020 would be necessary to properly rescue the ETS.”

But some environmental NGOs went further, calling for the ETS itself to be scrapped. “The ETS is not fit for purpose,” said Joanna Cabello from Carbon Trade Watch. “It has generated windfall profits for polluting corporations, postponed the needed transition away from fossil fuels and its unintended consequences are locking the EU into another generation of energy production based on fossil fuels. These structural flaws remain unaddressed by the Commission.”

“Instead of taking their responsibility, politicians have voluntarily put their main instrument to fight climate change in the hands of the financial markets. As we know market mechanisms have their own dynamic. Profit making and not fighting climate change has become the overriding objective of the players involved in carbon trading. It is an illusion to believe that proposals like the one presented now by the Commission would be able to substantially improve the EU ETS.”

Jutta Kill from Fern echoed Cabello’s sentiments. “This is exposing the inner contradiction in the EU vision about the ETS,” she said. “Can a trading mechanism, where the cap is based on projections of industrial emissions years into the future ever provide a reliable price signal? Experience shows that it cannot”.

Timeline: 
  • 15 Nov.: Climate Change Committee meeting
  • 13 Dec.: Climate Change Committee meeting
  • 17 Dec.: European Parliament environment committee to outline draft report
  • 1 Jan. 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020
  • 19 Feb. 2013: European Parliament environment committee scheduled to vote on a crucial one line amendment authorising  carbon market action by the European Commission
  • March 2013: Potential plenary vote in European Parliament on European Commission proposal
External links: 

European Commission

Market analysis

  • Thomson Reuters: Point Carbon
  • International Emissions Trading Association: IETA
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