After the European Parliament refused last year to ratify rules imposing higher carbon constraints on enterprises, a slightly modified project accepted by MEPs in July has brought climate issues back into the Brussels focus.
The text adopted by MEPs will allow the European Commission to delay the issuance of some quota allowances, creating a slight scarcity on the carbon market. Carbon prices have picked up a little as a result and currently trade at around €5 per ton.
But the Commission has bigger projects in the pipeline that will be be put forward for consultation this autumn.
Under the new plans, quotas would be regulated just like central banks regulate currency rates. Problems on the carbon market have come up because of over-optimistic macroeconomic projections, which led to an over-allocation of quotas.
The idea would be to regularly adjust the amount of carbon allowances on offer to better match demand, probably every three months. This would allow for more flexibility than the current allocation system, where quotas are determined for a four-year period and remain fixed regardless of the macroeconomic context.
Urgent reform needed
The new flexibility mechanism is expected to receive the support of some member states even though the debate is only starting. But almost everyone agrees that reform is urgently needed.
“Enterprises are not convinced that there is strong political will in Brussels on climate issues,” says Benoît Leguet from CDC Climat, a subsidiary of the French public investment bank 'Caisse des Dépôts'. “Industrialists do not integrate the carbon constraint in their long-term investments”.
“There is a feeling of incoherence in the EU’s CO2 reduction policy,” adds Jérôme Ferrier, president of the International Gas Union. “Shale gas development in the USA has freed up an important part of the coal production, and coal arrives on European markets at a very low price.”
Some European countries have restarted their coal power plants and abandoned cleaner energies that tend to be more expensive. “The return of coal demonstrates that nobody expects the price of emission quotas to rise,” Ferrier says.
While the reform of the “classic” carbon quotas is now the main priority in Brussels, some progress is also being made on the aviation side of the climate debate.
Intra-European flights are now regulated by the carbon markets, but the problem for extra-European flights has not been solved yet due to strong opposition from the United States and China. A meeting of the International Civil Aviation Organization, scheduled later this month, might help unlock the situation. Europe is ready to compromise by alleviating the carbon constraints for non-European airlines, which make up two-thirds of air traffic.
But the carbon market's misfortunes has also generated frustrations among policymakers, with some in the ruling French Socialist Party describing the situation as “ridiculous”.
“It doesn’t work, we need a European carbon tax and not a carbon market,” says a Socialist MP.