As the European Commission is working to revive the EU's ailing Emissions Trading System (ETS), big energy companies say that making the system more flexible should be the first priority. EurActiv Czech Republic reports.

An initiative of twelve European utility companies calls for a resuscitation of the emission trading system. The EU ETS does deliver on its goal to reduce CO2 emissions. However, reductions are mainly due to the economic crisis and not because of a structural shift towards low carbon technologies, the companies say.

The carbon market currently does not encourage the industry and utilities to invest into low carbon technologies as the price of its allowances is too low, the companies say. They argue that this situation is mainly caused by a fixed supply system design that could not adjust to demand dropping as a result of economic recession.

Last year, the European Commission came up with a plan to reform the ETS on a structural basis. But the proposed moves do not eliminate the risk of external economic shocks and the need for administrative intervention, according to ČEZ Group, a leading power producer in Central and Eastern Europe who has recently joined the “12 CEO’s Initiative”.

The company proposes loosening the supply side of the ETS. It advocates a predefined decreasing emission intensity path for industrial and power production in the framework of European climate policy. Accordingly, this intensity would be multiplied by real production numbers taken from public statistics.

As a result, the supply of allowances would by changed automatically according to these indicators. This would allow the supply to respond flexibly to the economic cycle, the company says. It also expects that the effect would be to push companies to improve their technologies as the emission intensity limit would decrease every year. 

Towards flexibility

The rest of the system including the overall cap or auctioning rules should remain the same, just as the practical principles followed by market participants.

“The only thing such system needs is a buffer, which the French in the present debate refer to as a ‘carbon bank’. This reserve could be used in a situation of growing GDP. When the economy slumps, the flexible mechanism will make it possible to withdraw allowances from the market,” EurActiv.cz was told by Ivo Hlaváč, director of public affairs of ČEZ.

The Commission said it could not comment on particular submissions which appeared during the stakeholder consultation process. But the EU executive is going to present its own structural proposal in mid-January.

In its plans, the Commission also seems to be favourably disposed to some kind of “flexible cap and trade”. EurActiv.cz understands that there is an agreement among various stakeholders that more flexibility in the system is needed.  

Stable for investments

In the current situation, the Czech company possesses millions of allowances which are of low value. Therefore it seeks a way to increase their price, one source from a Czech climate-focused NGO guessed. However, ČEZ says it will already have to buy new allowances this year. 

The company says the main aim of the ETS reform is to make the system transparent and stable, although the Commission sees its objective as being to bring the trajectory of its CO2 emissions in line with the 2050 low carbon roadmap's decarbonisation plans.

ČEZ wants to increase the value of its investments in modern gas fuelled plants, which emit less than coal, oil and older gas plants.

Such investments are not currently advantageous as it is cheaper to run older coal power plants when the price of allowances is low.

Is 40% enough?

According to the NGO source, a flexible mechanism could have benefits for the system. “But the benefits would depend also on how the absolute emission cap would look,” she added.

“If there was a 40% greenhouse gas emissions reduction target for 2030, combined with an actual surplus of allowances and a flexible mechanism, the whole ETS would lose its meaning,” the source said. “It would mean that until 2030 we would not have to do anything with CO2.”

“All twelve firms unanimously agree that Europe needs one binding and perhaps even very ambitious goal in reducing CO2 emissions within the EU by 2030,” Ivo Hlaváč of ČEZ said. According to the company, with a 40% reduction target the current surplus of allowances would cover only about 20% of the required additional emission savings in the EU.

Inactive utilities 

James Atkins, president of environmental commodities broker company Vertis, welcomed the energy utility's engagement with these issues. Atkins is engaged in a working group of the International Emissions Trading Association which is preparing a paper to describe different approaches for ETS reform. 

“One or two other organisations have come up with their proposals, as for example Fortum,” he told Euractiv.cz. This energy company based in Finland suggests introducing a so called optimal surplus band which would basically create a reserve where redundant allowances could be placed.

But the other utility companies have not been very active in this topic, Atkins said, although they are those most affected by the system.