Last week, MEP’s on the European parliament’s industry (ITRE) committee rejected a proposal to firm up carbon prices by withholding – or ‘backloading’ – 900 million EU allowances from the 2020 auctioning period.
Analysts expect a narrow majority for action in key votes on the parliament’s environment committee on 19 February and, crucially, in a plenary later this Spring.
But Hans ten Berge, secretary-general of Eurelectric, warned that “if we choose the strategy of a lost decade then we are going for a collapse of the carbon market and it will be impossible to achieve the 2050 decarbonisation targets.”
Carbon prices, which are supposed to entice low-carbon investments, plunged to a record low of just €2.81 per tonne after the ITRE committee vote, down from a peak of €32 in April 2006. But ten Berge said that the price could yet fall further.
“Just ask investors what the value is of a bond that you would not be able to cash before 2025,” he said. “I think that would be called a junk bond.”
The EU has pledged a reduction of CO2 emissions to 80-95% of 1990 levels by midway through the century, the minimum necessary to avoid global warming above 2 degrees Celsius.
But the EU’s Emissions Trading System (ETS) is the primary policy driver for achieving this and, by most reckonings, it is currently broken.
“The market is clearly looking at the politicians’ positions and the moment one parliamentary committee gives advice to another committee that will advise the parliament, which is the basis for a decision by the Commission in coordination with the member states, already this advice is capable of bringing down the market price by more than 50%,” ten Berge said.
“We have to ensure that we are not moving the CO2 price slowly in the direction of zero,” he added.
Less than zero
Energy-intensive industries allied with coal-dependent states such as Poland have persuaded many MEPs that there is no case for meddling with the carbon price, even if it falls to zero itself, because Europe appears on track to meet its modest 2020 climate targets.
Austerity has improved the odds of a 20% cut in CO2 emissions by the decade’s end, while government subsidies have made a 20% share of renewables in the EU’s energy mix a realistic prospect.
But preliminary analysis that Eurelectric is preparing indicates that achieving the much more ambitious 2050 target will require superhuman efforts, if the ETS does not lay the groundwork for it this decade.
“We’re very frightened by what we see,” Jesse Scott, the head of Eurelectric’s environment and sustainable development policy, told EurActiv.
“If you lose this next decade you have to do astonishingly fast roll-outs of low-carbon technologies, which we know is going to be expensive and which may not be technically feasible.”
Carbon market debate
The backloading debate has pitted the electricity sector and businesses trying to move towards a low-carbon model, against energy-intensive industries and the fossil fuel lobby.
Critics say that the electricity sector favours a strong carbon price to help a decarbonisation process that might otherwise cost them more.
But low carbon advocates counter that energy-intensive industries claimed windfall profits from the ETS’s free allowances for years, only to cry foul once they actually had to cut their emissions.
Between 2008 and 2011, the iron and steel sector banked 201 million tonnes of surplus allowances, while the cement sector banked accrued 207 million tonnes, according to analysis by the environmental group, Sandbag.
Together, the two sectors accounted for 69% of surplus carbon allowances with a net value of €4.5 billion.
'Shocking' BusinessEurope meeting
The backloading issue turned toxic at a Climate Change Committee meeting of the European employers federation, BusinessEurope, held on the same day as the ITRE committee vote.
The day before, BusinessEurope had sent MEPs on the committee a letter, obtained by EurActiv, saying that its members were “strongly opposed to the backloading proposal” and calling for its rejection. But 16 companies – including Shell, Unilever, EDF, GDF Suez, Statoil and Alstom – have spoken out equally strongly against this position.
When an announcement of the ITRE vote sparked a round of applause from some at the BusinessEurope meeting, a blazing row broke out. “I would never have imagined seeing scenes like that,” one attendee said. “It was shocking.”
“We were really surprised and disappointed that the wording of the BusinessEurope letter went further than the established position we had been working on over the last six months,” another industry source said. “We hope that the subsequent letter will respect the agreed position.”
The UK’s Confederation of British Industry is also known to be unhappy with BusinessEurope’s position.
The stakes in Europe’s carbon market debate can be partly assessed by the reactions to the ETS crisis of other states and regions that are currently in the process of applying the EU’s carbon trading model.
Australia is in talks about linking its carbon market with the EU’s, while California and Quebec have launched similar schemes. South Korea is due to begin emissions trading in 2015, and China is currently piloting a similar mechanism.
“I’m getting phone calls regularly from all those countries asking what is happening in Europe,” Scott said. “They’re watching closely and they’re expressing alarm.”