MEPs throw lifeline to EU's ailing carbon market

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Lawmakers on the European Parliament’s environment committee voted by 38-25 in favour of an amendment in support of the EU’s ‘backloading’ plans for the Emissions Trading System (ETS), throwing a lifeline to the crisis-hit carbon market.

“The ETS is not dead,” WWF’s EU policy officer, Sam Van Den Plas, jubilantly told EurActiv from the European Parliament after the vote on Tuesday morning (19 January).

“The patient is in the ambulance now but will need further treatment in hospital,” Van Den Plas said.

The vote opens the way for further moves to raise flat-lining carbon prices by backloading (or withholding) 900 million allowances from auction, so creating a market scarcity.

Next week, another environment committee vote is expected to begin the ‘trialogue’ discussions between the European parliament and EU member states on the issue. A plenary vote at the parliament is slated for April, although delays are possible.

The continuing instability on the ETS has unsettled other countries and regions that have adopted the EU’s market-based model of countering carbon emissions, such as Australia, California, South Korea and China.

The EU’s chief climate negotiator, Artur Runge-Metzger said on the sidelines of a ‘Greening China’ conference last week that because of this, “one worry is that the Chinese might think that nobody in Europe takes climate change seriously any longer.”

This, he told EurActiv, "is a much more serious potential outcome" than the Chinese abandoning their own carbon market scheme "because that then evolves into the discussions at the international level."

Sinking carbon prices

Within Europe, carbon price have sunk to around €4-€5 per tonne, due to an over-allocation of carbon allowances before recession decimated demand for them. Rejection of backloading by Parliament’s industry committee in January sparked a record fall in carbon prices to just €2.81 a tonne.

Runge-Metzger said that any failure of backloading would not necessarily affect the ETS’s link-up with other global markets because “the price is going to equalise as soon as the systems link up and common [standards] will be established for systems across the board.”

But Gerben-Jan Gerbrandy, a Liberal who is vice chair of the European parliament’s environment committee, foresaw a “huge problem” if the amendment for backloading fell at the plenary vote.

“In that case we might have to consider totally different options, and reconsider the whole ETS system,” he said, “and there are many other reasons to do so: the current system is not working.”

“If the economy starts to recover and we emit more CO2 again and prices go up, energy intensive industries will say that it is hurting our recovery,” he added.

Alternative measures

BusinessEurope, an amalgam of Europe’s confederations of industry which has led the campaign against the EU’s backloading plan, argues fiercely that a robust carbon price will damage Europe’s competitiveness. Environmentalists see the group as a powerful lobby-locus of hostility to any climate targets, but BusinessEurope argues that it merely advocates a stable and predictable business framework that can prevent carbon leakage.  

“We generally reject the [Commission proposal’s] six options because we feel that they try to solve the issue by raising the carbon price whereas we see bigger issues in the current climate and energy framework,” said Bruno Pedrotti, the BusinessEurope spokesman on climate change.

A draft position paper by the group dated 18 February, which EurActiv has seen, says that the group favours a transparent stakeholder debate, a competitive and sustainable European business sector, and a forward-looking industrial policy to boost research, innovation and technological development.

The paper also indicates that BusinessEurope currently has no rival structural measures to the EU’s. “We don’t have any quick positive alternative,” Pedrotti confirmed. “There are no quick solutions to the problems we have. We never publicly endorsed the 2050 decarbonisation targets, or said that we support them, so it is very difficult to say how we would reach them.”

Business opposition

BusinessEurope was buoyed by a statement yesterday (18 February) from Energy Commissioner Günther Oettinger, questioning the legality of any changes to the current market setup.

But 30 leading energy companies, and 81 investors with a combined worth of €7.5 trillion have broken with the group, issuing statements calling for urgent action to stimulate the clean energy economy.

Assaad Razzouk, chief executive of Sindicatum, a global sustainable resources company with over $300 million invested in low-carbon projects around the world, said that opposing price-raising adjustments to carbon auctions was akin to opposing the setting of interest rates by banks.

“It is slowing down the growth of the new green economy in Europe so it translates into job destruction,” he told EurActiv. “It is perverse because it allows polluting industries to pollute forever and locks in all their technologies. If you follow their argument it will in turn lead to those industries becoming uncompetitive and ultimately cost Europe even its old economy jobs.”

A previous meeting of BusinessEurope’s climate change committee held on the same day as an industry committee vote on backloading ended acrimoniously, with an estimated third of those present loudly protesting the group’s official stance.

Pedrotti declined to comment on that meeting, or claims heard by EurActiv that his group had written letters and developed proposals without consulting relevant working groups.

BusinessEurope’s consensus-based decision on backloading reflected “the best compromise for all members we represent, that this could be more damaging for the energy intensive industries than useful for the power sector,” he said.

Asked by EurActiv for details of who gave what in the compromise, he replied: “backloading is a ‘yes or no’ issue,” so it is difficult to find a middle way.”

Positions: 

David Hone, Shell’s chief climate change adviser, said: “It’s encouraging to see the Committee has reached a positive outcome, despite coming under considerable pressure from those who oppose ETS reform. This outcome signals the intention of the European Parliament to begin the process of restoring the most cost effective approach to meeting Europe’s energy needs and reducing emissions over time. It won’t immediately restore the ETS to good health, but it is a start.”

Green climate spokesperson Bas Eickhout (MEP, Netherlands) said: "MEPs have today taken a step towards shoring up the flagging EU carbon market. We hope this positive vote will be swiftly endorsed by the EP as a whole, so the postponement of the auctioning of 900 million emissions allowances can be implemented without delay. However, the Greens caution that this 'backloading' measure is merely a temporary, quick fix. Much deeper action needed if we are to truly rescue the EU's flagship climate change policy.

"With the surplus of emissions allowances under the ETS predicted to rise to 2 billion (2), merely postponing the auctioning of 900 million permits is clearly not sufficient. Returning 900 million permits to ETS at a later date would be like throwing petrol on a fire. We urgently need more durable structural solutions, notably on permanently retiring emissions allowances to address the oversupply, and not simply postponing the auctioning of permits. In addition to retiring at least 1.4 billion allowances, there is also a need to introduce a linear emissions reduction factor of 2.5% per year. Ultimately, stepping up the EU's outdated emissions reduction target to at least 30% by 2020 is necessary to properly rescue the ETS. The EU's carbon market is at crisis point, with the carbon price pathetically low. Failure to deliver a permanent solution will mean the emissions trading scheme will continue to fail in its purpose of delivering domestic emissions reductions and stimulating investment in green technologies to this end."

EU climate policy director for Greenpeace, Joris den Blanken, said: “Despite the vote, there’s little reason to celebrate today. The EU’s carbon market was saved from complete redundancy, but there’s a long way ahead to ensure it becomes a meaningful tool for greening Europe’s economy. The backloading proposal might slow the slide in the carbon price, but permanent cancellation of allowances and strong 2030 targets are essential if it is to achieve its aims.”

Julia Michalak, CAN Europe climate policy officer, said: “A few years ago, the EPP took the lead in putting in place a harmonised and stronger EU carbon market. Today, in contrast, we have witnessed a party opposing to innovation and efficient, future-oriented industries, with no vision of future EU climate and energy policies.”

Brook Riley from Friends of the Earth Europe said: “MEPs are working with the options on table, but there is no getting round the fact that no amount of fiddling with the ETS will make the system fit for the challenge of tackling the climate crisis. The real priority must be for the EU to set a tougher greenhouse gas emissions reduction target for 2020 in line with what science and justice tells us is needed to address climate change. The EU must also agree on binding targets for 2030 for greenhouse gas emissions, energy efficiency and renewable energies.”

Damien Morris, from Sandbag’s emissions trading climate campaign, said: “Today’s vote is a promising first signal that policymakers recognise the current threats to the EU ETS and are prepared to salvage it, along with the EU’s international reputation for leadership on climate change. They must now press ahead to withhold these allowances from auction, before making the permanent repairs that the scheme desperately needs. That is the only way the policy can stay relevant and deliver the cost-effective emissions reductions it was designed for.”

The ETS is "an artificially created market" which is "bureaucratically overloaded" and "does not work," said German liberal MEP Holger Krahmer and member of the European Parliament's environment committee.

 “We think that the postponed vote to enter trilogue negotiations is an invitation to the Industry committee and we assume that the ENVI will provide the mandate to enter these negotiations at the next meeting” said Hæge Fjellheim, Senior Analyst, Thomson Reuters Point Carbon. “This would allow the Parliament, the Council and the Commission to enter negotiations on a compromise text” she added.

“Should the trilogue eventually end in a compromise text we believe the probability that backloading will be implemented is high”, Fjellheim said, adding, however, that plenary support in Parliament is “far from being a ‘done deal’”.

Eurelectric Secretary General Hans ten Berge said: “back-loading can provide a vital signal to the carbon market - and also to international observers - that the EU is committed to a long-term strategy of driving carbon reduction through a strong ETS. Nevertheless, the Parliament’s support today can only be a first step towards reinforcing the ETS in the longer term. Policymakers must now turn their attention to addressing structural measures that can provide a clear pathway for carbon emissions reduction beyond the third trading period and up to 2050. We therefore urge the Commission to waste no time in pursuing structural changes that would firmly establish the ETS as the main policy instrument for driving investment choice in CO2 reduction. An early revision of the ETS annual linear reduction factor, in line with a firm, economy-wide 2030 CO2 reduction target, is the best means of achieving this objective.”

 

Gordon Moffat, director general of the European Steel Association: “Artificially increasing the carbon price by withholding or removing allowances will undermine the competitiveness of European industries by increasing energy bills even further. A higher carbon price simply adds to the cost of reaching the target of 21 per cent emissions reduction by 2020.”

Markus Beyrer, director general of BusinessEurope said: “Following the outcome of today’s vote on Emission Trading Scheme backloading in the Environment Committee of the European Parliament BusinessEurope highlights again that the ETS is a market based instrument and must continue to work according to market principles. Today’s vote shows that there are significant differences between the views of the Parliament’s Industry and Environment Committees. Hence the importance of having a full, democratic debate on this crucial issue. Moreover, instead of meddling with the ETS, it is time to start a meaningful debate involving all stakeholders on the structural reform of energy, climate and industrial policies for 2030”.

Timeline: 
  • April 2013: Potential plenary vote in European Parliament on European Commission proposal for ETS reform
  • 2014: India due to begin energy efficiency trading
  • October 2014: Thailand due to launch a voluntary emissions market
  • 2015: South Korea sue to begin emissions trading
  • 2018: EU and Australia due to link emissions trading schemes
External links: 

European Commission

Market analysis

  • Bloomberg New Energy Finance: BNEF
  • Thomson Reuters: Point Carbon
  • International Emissions Trading Association: IETA
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