EU carbon prices briefly slid 40% to a record low after politicians opposed plans to support the market, raising concerns prices could hit zero and sending a warning to European governments to pull together in lowering carbon emissions.
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.
Prices in the EU's Emissions Trading System (ETS) on Thursday (24 January) dropped to €2.81 a metric tonne after a vote in the European Parliament's energy and industry committee opposing a scheme known as "backloading" - or supporting prices by extracting allowances from the market and reinjecting them later.
In volatile trade, they later climbed back above €4.
The European Commission warned this week that the price could drop dramatically and the scheme could become irrelevant unless parties agreed on a rescue plan.
"This should be the final wake-up call both to governments and the European Parliament," EU Climate Commissioner Connie Hedegaard said.
"The alternative is a re-nationalisation of climate tools, meaning a future patchwork of up to 27 different systems and taxes instead of one market creating a level playing field internally in Europe."
The €110-billion scheme is core to Europe's efforts to prompt utilities and industry to go green but carbon prices are far too low to provide that incentive. Analysts say carbon prices need to be at least €20 to make utilities switch to lower carbon energy generation.
Scheme to stay
Launched in 2005, the scheme is now in its third trading phase and is legislated to run until at least 2020, which means it cannot be dismantled even if prices crash to zero.
Thursday's vote is part of a long EU process. Although not binding, it is the latest sign of the difficulty the EU is having in reaching agreement on how to intervene in the carbon market.
A vote in the environment committee, expected next month, as well as another in a committee of representatives of member states, are far more decisive.
Many doubt the Commission's proposal will be passed, meaning more ambitious reform plans might not happen for years, leaving the market limping along and Europe's ambitions to lead the world fight against rising carbon emissions severely dented.
So far, coal-intensive Poland is opposed, Britain wants a more ambitious plan and Germany, the EU's most influential member, is undecided.
Eurosceptics and those who oppose regulation, such as energy-intensive industries, might celebrate, but others want a coherent EU-wide policy and ultimately a global carbon price.
"Many in the business community have been clear on this issue for over a decade - it's all about putting a price on carbon," said David Hone, climate change advisor for Royal Dutch Shell.
"Policymakers need to focus on the single clear goal of a carbon price in the energy system, rather than multiple energy mix targets. This is what business really needs."
Since the European carbon market launched in 2005, it has been beset by problems, including tax fraud, and an over-allocation of permits that generated huge windfall profits for polluters.
Prices crashed to near zero in 2007 from a €32-euro peak in April 2006 because of the over-allocation of permits. But traders today dismiss that collapse, blaming it on early errors in the experimental phase of the market.
It spurred Commission reforms and less generous allocation of allowances, helping prices to reach almost €30 in 2008 - a level many market participants do not expect again this decade.
Sandrine Dixson-Declève, Director of the Prince of Wales's EU Corporate Leaders Group on Climate Change sent EurActiv and emailed statement, saying: "In a single vote the European Parliament's ITRE Committee has caused the carbon price to plummet. This has slashed billions from the revenues that would have flowed into member state treasuries - billions which could have helped businesses transition to the low carbon economy."
Sanjeev Kumar of the environmental consultancy E3G though put a positive spin on the ITRE vote, which indicated that abstainers and carbon market reformers hold a majority on the committee. ‘This was actually a very positive vote," he told EurActiv. "We congratulate those MEPs who voted against rejection and abstained. Their support means backloading is alive and kicking and much more likely to be supported in the more important plenary vote.’
Energy-intensive industry representatives professed themselves satisfied with the carbon market's functioning. Gordon Moffat, the director of the European steel confederation EUROFER told EurActiv that "the ETS is supposed to be a cost-effective, market-based instrument to reduce emissions from industry by 21 per cent by 2020. The objective is to reduce CO2 emissions, not to create a high carbon price."
"The price of allowances is the result of supply and demand, as in every functioning market. From today’s perspective, the carbon targets will be met in any case. The EU itself has published calculations which say that for large energy users like the steel industry each Euro increase in carbon prices will result in an additional 190 million Euros in energy costs. Competitors outside Europe do not have to bear such cost," he said.
The International Emissions Trading Association (IETA) focussed on the ETS's end goal. “IETA looks forward to a positive vote for the Commission’s proposal as amended by the European Parliament’s Environment Committee”, said IETA’s President, Dirk Forrister. “This will provide a vital signal that the European Parliament supports the structural reform of the Emissions Trading Scheme to secure its role as one of the most successful climate policies in the world, that promotes both environmental reductions and economic growth.”
In the European Parliament, reactions were sharply contrasted. The European Conservatives and Reformists (ECR) political group hailed the rejection of the backloading proposal, saying it "will strengthen the position of all those countries, like Poland, opposed to climate policy tightening in times of crisis."
"The tightening of climate policy in times of crisis is an irresponsible action against industry," said Konrad Szymanski MEP, who sits on the industry committee and tabled an amendment for the rejection of backloading.
"Member states negotiated a difficult trade-off in 2008. Changing the rules during the game is an irresponsible market change in favour of manual control by bureaucrats in Brussels. This would be at a great cost and another big expense for the industry in times of crisis."
The Greens/EFA political group took the opposite view, speaking of a "black Thursday" for the EU's climate policy, and deploring the "myopic" vision of a majority of MEPs who rejected the backloading proposal.
"I see that MEPs, right and left, are increasingly struggling to resist the pressure and blackmail of major industrial lobbies," said Yannick Jadot MEP, a French member of the industry committee. "It is ultimately ArcelorMittal's strategy of the lowest social and environmental [denominator] which won this morning."
"Beyond the climate challenge, the reduction of CO2 emissions should be a powerful lever for the transformation of the European economy, the development of low-carbon innovations and international solidarity," Jadot said.
- February: Vote in the Parliament's Environment Committee
- March: Vote expected in Parliament's plenary