Nations seen going separate ways on carbon as EU efforts falter
Europe has failed to raise carbon prices enough to spur green energy use but now the emissions trading system (ETS) could face its final blow in a European Parliament vote on 19 February.
The lack of European Union-wide progress means more nations are expected to follow the example of Britain and take action on their own.
EU efforts in the immediate term are focused on the vote in the EU legislative's environment committee which will provide the next signal of whether a plan to bolster the ETS can proceed.
According to some analysts, the vote is too close to call.
Even if agreed, analysts predict it will be years before European carbon prices rise to the level of at least €40 that they say is needed to spur investment in low-carbon energy.
That's good news for intensive energy users and coal-burners, but bad for governments committed to 2020 environmental targets for which they need to bolster green energy use.
A positive vote next week would give an indication of whether the EU has the political will for deeper reform needed over the longer term.
It would then require further debate among member states and a plenary session of the European Parliament.
With or without action, analysts say the market's weakness means national initiatives will proliferate, running counter to the pursuit of a single EU energy market.
"Fragmentation is something we have already seen. The latest example of fragmentation is the UK," said David Hone, climate change adviser for Royal Dutch Shell, regarding Britain's decision to establish a carbon price floor from April.
"We will see more and more of this. It will be a progressive process. It's a process that has started."
The European Commission last year proposed a plan to temporarily remove some of the huge surplus of carbon permits that has weighed on prices.
It hoped for agreement before the start of the 2013-2020 third trading phase of the carbon market but German indecision and Polish opposition have helped delay a decision while adding to market uncertainty.
Indecision and opposition
Coal-dependent Poland has been openly hostile to market intervention and Germany so far has avoided taking a stance.
While Germany needs a higher carbon price to spur its shift to renewable energy, Chancellor Angela Merkel faces an election and industry pressure to avoid action that might raise energy prices.
The chief executive of Germany's largest utility E.ON , which has supported the idea of removing some carbon permits from the market, says a minimum CO2 price or a tax might be necessary, though a reformed EU ETS would be preferable.
Britain has chosen to introduce a carbon price floor from April to give more certainty to clean energy investment.
It works by topping up the EU carbon price when it falls below the floor. Starting at around £16 (€19) a tonne, it will rise to £30 (€35) by 2020.
This compares with the current EU carbon price of around €4 a tonne and an average €10 seen by 2020.
The price floor will cost British utilities almost £800 million (€932 billion) in 2013-14, according to analysts at Thomson Reuters Point Carbon. These costs will probably be passed on to domestic and industrial customers.
Britain's carbon price floor makes it too expensive to burn coal, meaning still cheaper coal for the rest of Europe. While British emissions should fall, for Europe as a whole, there would be no improvement, further showing the need for pan-European and global carbon pricing if emissions are to be cut.
In the absence of a reliable EU-wide framework, utilities say they are forced to look to emerging markets outside Europe.
Within the EU, they have closed cleaner gas capacity because coal is cheap to import and the negligible carbon price provides no incentive to use the lowest carbon option.
"For the first time, the energy sector is closing power plants, not for reasons of obsolescence, but for economic reasons. This has never happened before," said Jean-Francois Cirelli, president of gas industry body Eurogas and vice-chairman and president of GDF Suez.
"If there is no intervention, the system is clearly dead. We will have to switch to another system, taxing CO2, but will it be at EU level?", he said.
An EU-wide carbon tax proposed in the 1990s failed to materialise because of lobbying from industry and the difficulty of getting the EU as a whole to agree.
Several EU nations, however, have introduced energy taxes at least partly based on carbon content, including Denmark, Finland, Germany, Ireland, Sweden and Norway. France failed to pass a bill for a carbon tax in 2009.
Last year, Italy proposed replacing the ETS with a carbon tax and its environment minister described the ETS as irreparable.
The scheme is nevertheless expected to stay as it would be very hard to dismantle and even Poland, the arch-opponent of higher carbon prices, has not called for it to be scrapped.
With a turnover that reached around €90 billion in 2010, the EU's Emissions Trading System is the world's largest carbon market. Around 80% of it is traded in futures markets and 20% in spot markets.
The ETS aims to encourage companies to invest in low-polluting technologies by allocating or selling them allowances to cover their annual emissions. The most efficient companies can then sell unused allowances or bank them.
The scheme has proved influential. Australia’s is due to begin carbon trading in 2015, Thailand and Vietnam have both unveiled plans to launch ETS’s, China is due to launch pilot schemes across several provinces this year, and India will ring the bell for trading on an energy efficiency market in 2014. Mexico and Taiwan are also planning to introduce carbon markets.
- 19 February: European Parliament environment committee vote on the ETS