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30/07/2016

MEPs reject proposed reform of emissions trading scheme

Climate & Environment

MEPs reject proposed reform of emissions trading scheme

european_parliament_strasbourg.jpg

The EU's flagship scheme for cutting carbon emissions suffered one of the most serious setbacks in its chequered history on Tuesday (16 April), when MEPs voted against a proposal to shore up the price of carbon in the Emissions Trading System (ETS).

The proposed reform – known as "backloading" – aimed to reverse the plummeting price of carbon that has resulted from a surplus of permits in the ETS market. If successful, the reform would have resulted in the postponement of a series of auctions of carbon permits.

But MEPs in Strasbourg voted 334 against the reform, with 315 in favour, leading green campaigners to condemn the defeat as a "monumental failure" to mend the carbon trading market, which is Europe's flagship climate policy and the biggest in the world. "They have lost all credibility on climate leadership," said Doug Parr, Greenpeace UK's chief scientist.

Rob Elsworth, a campaigner at emissions trading NGO SandBag, said: "The outcome of the vote is unfortunate. It sends the wrong message to companies, to the public and the international community. It's now incumbent on those MEPs who said they support the long-term success of the EU ETS to act to prevent the EU's climate policy from drifting dangerously off course. In the meantime, member state climate policies are now likely to become more fragmented and this will have a negative impact on the common market."

The vote was lost partly owing to a rebellion by the UK's Tory MEPs, who defied David Cameron to reject the plan to postpone the auction of a substantial number of carbon permits.

A spokesman for Conservative MEPs said: "The EU ETS was established as a market-based mechanism and must continue to operate according to market principles. We are therefore concerned about the impact of commission intervention to adapt the auction timetable in order to manipulate the carbon price. We fear it will only serve to discourage green investments, affect transparency, encourage further carbon leakage, and undermine much-needed market predictability as the EU economy strives to find a way out of the economic crisis."

Today's vote crushes hopes raised in February that reforms would go ahead, after a key committee of the European parliament judged in favour of the proposal.

The short-term fix that the reforms would have introduced was known as "backloading", whereby some of the allocations of permits by member states to their industries would be held back from auction for several years. At present, auctions of permits take place on a regular basis, in which companies bid for any they need above the free allocation that some receive.

But as the market is already swamped, if the auctions were to take place as usual the price could fall even further. Under "backloading", some of those auctions would have been postponed until later in the current phase of the scheme, which runs to 2020.

Positions

EurActiv compiled the following reactions after the vote:

EU Climate Commissioner Connie Hedegaard sent EurActiv the following statement: ''The Commission of course regrets that the European Parliament has not approved the back-loading proposal. However, it is worth noting than when it was suggested in the second vote that the Parliament finalise its rejection right away, this was not supported. The proposal will now go back to the Parliament's Environment Committee for further consideration. Europe needs a robust carbon market to meet our climate targets and spur innovation."

"The Commission remains convinced that back-loading would help restore confidence in the EU ETS in the short term until we decide on more structural measures. We will now reflect on the next steps to ensure that Europe has strong EU ETS. In doing so the Council's position on the proposal will be an important factor and I take note of the Irish Presidency's reaction today to urgently pursue and conclude discussions among member states. The market, the investors and our international partners are all awaiting.''

Phil Hogan, Irish environment minister and current president of the Council of Environment Ministers, explained the Irish position in a separate statement, saying:  “The ETS is Europe’s flagship response to greenhouse gas mitigation”, said Minister Hogan, “and the extent to which its effectiveness is now undermined by the economic downturn is a regrettable setback to Europe’s progressive transition to a competitive, low-carbon economy.  Early and cost-effective transition is key to Europe’s leadership on climate change and European competitiveness in the emerging global green economy.”

He went on: “The immediate need to address the carbon price issue in the ETS remains a clear priority.  While I can understand concerns around intervening in a market-based instrument, the reality is that the EU is faced with an exceptional policy situation which demands an exceptional policy response.  The ETS clarification proposal is designed to underpin a focused, short-term intervention that will assist in restoring the ETS to a more effective level of operation while the structural reform measures necessary to strengthen the operation of the ETS in the longer term are being considered... The Council will continue its work to agree its position on the ETS clarification proposal, and has scheduled two further meetings of the Environment Working Party in the coming days for this purpose.”

Stig Schjølset, head of EU Carbon Analysis at Thomson Reuters Point Carbon, sounded a downbeat note. “We believe that backloading is now politically dead and it is very unlikely that any political intervention in the scheme will be agreed during the third phase [2013-2020]," he said. “We do not envisage prices rising much above the current €3 mark and they may well drop lower at least until the end of the third phase. The focus will now shift towards structural, more long-term oriented measures but certainly this vote makes the EU ETS irrelevant as an emissions reduction tool for many years to come”.

“By failing to support the ETS, the European Parliament is contradicting its own goals of providing Europe with a secure, clean and affordable climate and energy framework towards 2020”, commented Josche Muth, secretary-general of the European Renewable Energy Council.

“The rejection of the  Commission’s proposal to postpone the auction of 900 million allowances effectively renders the ETS impotent as a tool for shifting investments into less polluting generation technologies”, he added. “The onus now falls on the European Council to show leadership on climate and energy by providing ambitious and binding 2030 targets for renewables, efficiency and emissions reductions”, said Josche Muth. “The correct political vision could unlock investments and give new impetus for emissions reductions today and in the longer term”.

However, the World Coal Association (WCA) welcomed the vote, calling it “a triumph of common sense and balanced policy.”

Milton Catelin, Chief Executive of the WCA, praised the decision, stating: “The European Parliament has finally made a decision on environmental policy that recognises that there’s a balance to be made between environmental imperatives and economic growth. At a time when across Europe governments are having to make difficult decisions to stimulate economic growth and tackle debt, it would have been madness to agree to back-loading and ignore the cost burden of EU climate policies on consumers and European industry. The Polish government alone has estimated that back-loading would have cost it €1 billion over the period 2013-2020. Other Eastern European EU members would have been looking at a similar cost. The cost is simply too high at a time when Europe cannot afford it.”

Holger Krahmer, environment spokesman of the German FDP group in the European Parliament, aso welcomed the vote. In translated comments, he said: "Emissions trading is a market artificially created by politicians. The attempt to save the system by selective interventions is hopeless. Incidentally, in Brussels the lack of an international agreement on climate change is ignored. The continuation of European island solutions continues not to influence the climate, and only increases energy prices due to the already high risk of migration of industry from Europe."

His sentiments were rejected by Socialists and Democrat MEPs. S&D president Hannes Swoboda said: "It is a big mistake because backloading is in no way in conflict with a reinforced industrial policy. We have to combine a reasonable environmental policy with a modern, sustainable industrial policy."

The author of the parliamentary report on the issue, the S&D MEP Matthias Groote, described the vote as "the beginning of the re-nationalisation of European climate politics. This kind of politics plays into the hands of the climate sceptics. The rejection of the backloading proposal weakens the European Emissions Trading System and puts the EU's climate goals at risk."

The S&D environment spokesperson, Linda McAvan MEP, said: "The ETS has some shortcomings, but it has already helped the EU bring down its emissions and it is taken as an example by other regions of the world. There is a surplus of 900 million allowances that has brought the price down from €30 – as originally calculated by energy producers – to €2.80. This imbalance is distorting the market and hindering Europe's transition to a low-carbon economy.”

She continued: "Conservatives in the European Parliament today showed their total lack of vision for Europe's smart growth and environmental responsibility. It was the European Parliament who asked the Commission to present a transitional measure to support the ETS while we introduce structural measures. With this rejection the conservatives now leave the Commission in a very difficult situation both in the eyes of European industry and energy producers, and in the eyes of our international partners."

Bryony Worthington, founder of the environmental group Sandbag, said: “The carbon market in Europe has suffered a real blow today. It remains to be seen if the Commission can come forward with a more ambitious rescue plan that could be more successful in gathering the support of MEPs. Whatever happens, it seems certain that in the short the EU will miss out on much needed investment in increased industrial efficiency and the low carbon economy at precisely the time when other countries such as China and the US are starting to catch up.”

Dutch Green MEP Bas Eickhout blamed "an irresponsible and unholy alliance of MEPs” which he said had “voted to allow the rot in the EU's emissions trading scheme to continue. The 'backloading' proposal was only a stop-gap measure, which would have bought time to allow a more fundamental solution to the problems in the ETS to be adopted. Rejecting the proposal will undoubtedly further undermine the already weak carbon market and push the entire scheme to the precipice. To this end, we call on the Commission to try and forge a new compromise stop-gap with MEPs as soon as possible

In a sign of the bitterness the debate over the carbon market reform has generated, he added: "The two-faced arguments of the centre-right MEPs about how the EU carbon market should be left to sort itself out are cynical in the extreme. It is precisely because of centre-right politicians in Europe that the emissions trading scheme was established as a flawed market, with various loopholes, which have led to the situation we are in today. By opposing necessary steps to fix these problems they have caused, they are effectively signalling their desire to destroy the EU's flagship climate change policy. The time for tinkering is now clearly over. The Commission now has no choice but to come forward with fundamental proposals to truly repair the ETS.”

Hans ten Berge, secretary-general of Europe’s electricity association, Eurelectric, had some ideas for what these could be. "Eurelectric regrets the narrow ‘no’ vote today by the European Parliament against the proposed ETS back-loading. This vote is a dangerous set-back for the internal energy market and for EU carbon goals. Immediate Carbon market reactions to the vote show how low the credibility of the ETS has fallen. Only urgent action by the Commission to put forward structural proposals on ETS can now stop Member States from each legislating their own alternative policies: 27 different carbon floor prices, coal taxes, carbon taxes.”

He added: “We remain convinced of the need to firmly establish the ETS as the main policy instrument for driving investment choice in CO2 reduction. An early revision of the ETS annual linear reduction factor in the region of 2.3%, in line with a firm, economy-wide 2030 CO2 reduction target, is the best means of achieving this objective."

Commenting on a linked vote to support the EU’s proposal to ‘stop the clock’ on including aviation within the EU’s Emissions Trading System, Finnish Green MEP Satu Hassi said: "Freezing the inclusion of non-intra EU flights in the EU's emissions trading scheme is a retrograde move, which will let the aviation sector off the hook for its growing emissions and do precious little to improve chances of international action. The only way the Commission's plans could have been justified would be if they had included some leverage to make progress on measures to tackle the issue at international level but the proposals voted today will fail to do so.”

"The proposals would mean flights accounting for a large proportion of the emissions from international aviation will be excluded from the scheme at this fledgling stage. This is in spite of the growing emissions from the sector, which are undermining climate change fighting efforts of other sectors, and the lack of any alternative for tackling aviation emissions The ostensible excuse for the proposal is to give the international aviation organisation [ICAO] time to come up with global agreement on how to deal with the climate impact of emissions from aviation but, based on latest news from the discussions, the prospects for this are not likely. EU member states are also partly to blame for the lack of international progress, as they refuse to allow revenues from a global scheme to be channelled towards climate aid to developing countries, despite financing commitments made in the context of climate negotiations. The failure by the EU to reverse its position on this means today's measures bring nothing to the table."

For the European Wind Energy Association, Rémi Gruet, the group's senior climate advisor, said: "The European Parliament today voted against repairing the collapsing carbon market. MEPs have voted against the polluter pays principle and putting a market-oriented price on carbon emissions. This makes the ETS irrelevant in Europe's bid to reduce the use of fossil fuels. The carbon price will continue having no impact on investment decisions in the power sector."

The International Emissions Trading Association's president & CEO, Dirk Forrister commented that “the Parliament’s vote to reject the backloading proposal today failed to provide the needed political signal for improving the EU ETS. We urge European policy makers to promptly and openly commit to the future role of the EU ETS, including its central position in European climate policy.”

From the steel industry, EUROFER's director general Gordon Moffat said: “It is clear now that the Commission should not intervene in a functioning market. The market mechanism of the ETS is the only part of European climate policies that actually works. The fundamental flaw of the system is that high carbon prices result in the deindustrialization of Europe in the long term. There are no technologies allowing industry to meet the target of 80 to 95 per cent in the Commission Roadmap for 2050.”

But Kåre Riis Nielsen, the European director of Novozymes, an advanced biofuels company said: "We regret the outcome of the European Parliament's vote today on the backloading proposal.  Although it does not officially reject the backloading principle, it sends the wrong signal at a critical time about EU's ambitions and will to build a competitive low-carbon economy. The current carbon price cannot stimulate low-carbon investments or innovation, hence the need for urgent action. Today's vote delays the whole process again and even threatens the survival of the EU ETS." He added: "Backloading is a quick political fix, to an imminent policy challenge. To be politically acceptable, it will require going hand in hand with details on long term structural reforms of the EU ETS and targets for GHG emissions reduction beyond 2020."

Background

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.

Timeline

  • Spring 2013: Backloading proposal goes back to environment committee, with working party meetings scheduled
  • 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
  • 2018: EU and Australia due to link emissions trading schemes
  • 2020: Phase III of EU ETS due to begin

Further Reading

European Commission

Market analysis

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