Europe opts for ‘auto-backload’ of carbon markets

  

Europe’s depressed carbon markets are to be given an automatic ‘market reserve’ facility allowing at least 100 million carbon allowances – or 12% of the market – to be withheld or released to buoy prices, according to a document set for release on 22 January.

The plan is set out in a one page legal amendment to the Emissions Trading System (ETS) directive that EurActiv has seen. This would allow an 'auto-backload' of carbon allowances to be triggered “if the total number of allowances in circulation is lower than 400 million,” the paper says.

But the automated mechanism will not begin operating until 2021 and it is far from ideas pitched by environmentalists such as a minimum carbon price, or a ‘carbon central bank’ that would have handed a regulatory board the power to set prices and so determine climate policy. 

“The Commission may raise the dikes, but it is forgetting to pump out the toxic floodwater,” said Greenpeace’s EU climate policy director Joris den Blanken, referring to the large volumes of surplus carbon allowances in the system.

“And there's no guarantee that a new tide won't come rushing in again,” he added.

Few NGO or industry analysts canvassed by EurActiv expected the new proposal to have a significant long-term effect on carbon prices, although the proposal’s simplicity was welcomed by some.  

The EU’s Emissions Trading System (ETS) is widely acknowledged to face three problems:

  • A linear cap on carbon allowances that reduces at 1.74% a year, far below what is needed to meet the EU’s objective of an 80% cut in emissions by 2050
  • The surplus of billions of allowances as a result of economic recession and over-allocation
  • It operates as a fixed supply of allowances that is structurally unable to adapt to changing demand patterns, so causing price volatility.

“This proposal is mainly trying to address the third problem and some of the surplus perhaps,” said Jesse Scott, the environment head of Eurelectric, the European electricity industry’s association in Brussels.

'A tweak to the market'

“It’s helpful as far as it goes but not wildly exciting,” she added. “It is a tweak to the functioning of the market that is not going to have a radical impact on the basic cap which drives prices.”

In an impact assessment accompanying the 2030 package, with which the new structural reform will be released tomorrow (22 January), the Commission does propose increasing the linear cap to 2.2%.

But number-crunchers at Friends of the Earth contend that, on its own, this will delay achievement of the EU’s decarbonisation goals from 2050 to 2066 (as opposed to 2070 with a 1.74% target) and call for a cap above 3%.

Brook Riley, a spokesman for the group, described the proposal as “too little, too late” and “just abysmal”. Sarah Deblock though, a spokeswoman for the International Emissions Trading Association said that a majority of her members would welcome a similar ‘flexible supply mechanism’.

Such a reserve would “improve the ETS,” she said, “although our reflection has looked at different types of triggers.”

Carbon market glut

However, Europe’s enormous carbon allowance glut, which continues to depress carbon prices and offers no disincentive to coal use, would remain unaddressed by the withholding of 100 million allowances a year.

According to research by the environmental group Sandbag, up to 3.8 billion allowances in the trading period to 2020 could be surplus to requirements. Analysis by the group indicates that manufacturing sectors accrued roughly 680 million spare allowances over the 2008-2011 trading period, with a net value of around €10.5 billion.  

Prices now are too low to run up such huge surpluses. But because EU companies can meet their emissions cutting obligations by offsetting them with carbon allowances bought at bargain basement prices, Sandbag estimates that the bloc’s emissions could even increase by 2.2% every year and still technically meet the EU’s 2020 target of a 20% cut on the greenhouse gas emissions level in 1990.

Damien Morris, Sandbag’s head of policy told EurActiv that the new proposal had been stripped down to little more than “a permanent automated backloading system.” His group still hoped for a discrete cancellation of allowances, or an option for allowances to depreciate in the reserve through an expiry date system.

Backloading

In 2013, a backloading proposal to address market over-supply was put to the European parliament, where it faced ire from conservative politicians and industry groups which argued that it would make their businesses uncompetitive in a global market largely unencumbered by climate policies.

A compromise proposal that pleased few but saved the faces of many finally limped home last Spring. Carbon prices are still languishing at below €5 a tonne today.

Surprisingly, officials from the employers confederation, BusinessEurope, which led opposition to the backloading move last year declined to comment on this draft ahead of publication.

But a letter sent by the group’s director-general Markus Beyrer to the EU president Jose Manuel Barroso on 8 January 2014, supports a continued allocation of free allowances to industry at a reference price of €30 a tonne, the value at which the bloc hoped allowances would trade.  

“In the longer-term, full compensation through free allocation based on benchmarks must allow the most efficient companies to be globally competitive without being penalized by indirect and direct carbon costs,” Beyrer’s letter said.

Timeline: 
  • 2014: India due to begin energy efficiency trading
  • October 2014: Thailand due to launch a voluntary emissions market
  • 2015: South Korea due to begin emissions trading
  • 2020: Phase IV of ETS due to begin
External links: 

European Commission

Market analysis

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

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