Brussels rolls out carbon market fix

Le charbon revient au coeur du mix énergétique européen [Shutterstock]

The European Commission has announced a twin-track approach to fixing Europe’s depressed carbon market with a short-term ‘backloading’ of carbon allowances, to be followed by proposals for long-term structural change before the end of the year.

As EURACTIV revealed yesterday, the Commission’s proposal suggests reducing the number of credits in the swollen Emissions Trading System (ETS) by delaying the release of 400 million, 900 million or 1.2 billion of them from the start of the next market issue in 2013.

“The EU ETS has a growing surplus of allowances built up over the last few years,” Climate Action Commissioner Connie Hedegaard said in a statement. “It is not wise to deliberately continue to flood a market that is already oversupplied.”

EU states such as Poland argue that with Europe on track to meet its pledge of a 20% cut in carbon dioxide emissions by 2020 (measured against 1990 levels), the carbon market is not broken and does not need fixing.

But EU officials maintain that the market was also intended to make low-carbon investments more attractive, which it cannot do when the price of carbon is half what it was a year ago.

Investments have stalled in nascent but promising technologies such as carbon capture and storage, which are central to the EU’s plans for decarbonisation by 2050.

By 2030, the Commission believes that carbon capture could account for 15% of its required emissions reductions. Thus, for a long-term solution, Brussels argues that structural reform of the ETS is needed.

Short-term option

“A short-term option is what we have proposed today,” Hedegaard’s spokesman Isaac Valero-Ladrón told a Brussels press conference in response to a question from EURACTIV.

But after the summer break – and before the end of the year – the Commission would present a carbon market report outlining proposals for structural change.

“These might include a permanent set-aside of auctions or other different options to strengthen the carbon market,” he said. “This is in the making.”

Despite this hint of stronger action to firm up the market, carbon prices lost another 5% of their value in the hours after the EU’s announcement, falling from €7.20 to €6.77 a tonne. In 2008, the price was €20 a tonne.

“I think we are in for a rough summer,” a senior market observer told EURACTIV.

Industry divided

The issue of bolstering the EU’s carbon market has split the industrial world. Companies with low-carbon investments have broken ranks with BusinessEurope, which lobbies hard against any ‘interference’ in the market.

A coalition of energy companies including Shell, General Electric, GDF Suez, Dong Energy and Alstom was quick to welcome the EU’s initiative – and call for it to go further. 

The EU’s backloading “should at a minimum reflect the European Parliament environmental committee’s position calling for the withdrawal of 1.4 billion ETS allowances,” they said in a joint statement.

However, Europe's energy-intensive industry lobbies have long staked out a position that increasing costs for Europe’s steel, cement and metal factories will hurt competitiveness and cause ‘carbon leakage’ by pushing them to relocate abroad.

“We call upon member states, the European Parliament and the Commission to stick to their promises and stop additional unilateral policy while other countries haven’t committed to anything,” Gordon Moffat, director-general of the steel-manufacturers association Eurofer, said in a statement.

“This policy is risking Europe’s industrial base and economic prosperity,” he said, adding that no existing technology would allow steel manufacturers to meet the EU’s target for a 20% emissions cut by 2020.

Surplus value

Environmentalists counter that 69% of all surplus carbon allowances were found in Europe’s steel and cement sectors last year.

In 2010, the two sectors accrued surplus allowances worth an estimated €3.4 billion, equivalent to the entire annual financial support that Europe currently provides to renewables, according to Sandbag, an environmental group.

In 2011, two steelmakers alone – Arcelor Mittal and Tata Steel – received 62.4 million more free carbon permits than they used, the most of any European company.

But Peter Botschek, director of the European Chemical Industry Council, insisted that the current carbon price showed a market system functioning well, according to signals of demand and supply.

“We are alarmed that the European Commission wants to get a blank cheque enabling them to interfere with the allowances auctioning,” he said.

“If you want to reform, remove structural problems,” he added. “Don’t try to manipulate the market.”

Dirk Forrister, who heads the International Emissions Trading Association, took a balanced view of the EU’s announcement. “The EU needs to restore confidence in the ETS which is still functioning despite challenging economic circumstances,” he said. “We believe that a persistently oversupplied market becomes a source of concern over time.”

“Market participants have been anxious while awaiting the release of these documents, and we welcome the start of an exchange of views on what should be the future of this key pillar of the EU’s Energy and Climate policy,” he went on. “We now call on the Commission, Parliament and Member States to act promptly on today’s proposals, to clarify the timelines for adoption and to simultaneously start a discussion on structural reforms of the EU ETS.”

But the European Association of Metals, Eurometaux, was less positive in their assessment. “The EC proposal cannot be used as a proper basis for decision-making as it lacks a realistic assessment of the impact on industry at installation level, with real electricity prices, real industry pass-through abilities, and real international level playing field impacts,” a statement issued by the group said.

The press release continued: “Europe’s ETS policy should not only be directed at a part of industry for which high carbon costs are beneficial. Such a policy is clearly to the detriment of the larger part of the energy intensive manufacturing industry, for which higher carbon costs and market uncertainty lead to even less investment in low carbon technology in Europe, ultimately worsening the EU crisis.”

Green party MEP Bas Eickhout, however, criticised the European Commission for timidity in the face of a climate crisis. “Despite the urgent need to repair the misfiring emissions trading scheme, the Commission is tiptoeing towards action,” he said. “The emissions trading scheme is in need of serious surgery to address the current problems with the carbon market and ensure it can fulfil its purpose of delivering emissions reductions in the EU.”

“The European Parliament and Council have called for measures to address the oversupply of emissions allowances and the unrealistically low carbon price on the initiative of the Greens, and the Commission promised to deliver this year,” he said. “Regrettably, the Commission is riven by internal wrangling and has only set out limited proposals on the legal base today, merely preparing the ground for future steps and making it more difficult to shore up the ETS before the end of the year.”

“We are alarmed that the European Commission wants to get a blank cheque enabling them to interfere with the allowances auctioning,” said Peter Botschek for the European Chemical Industry Council (Cefic). “Backloading will be ineffective in the long term because withheld allowances must be ‘reloaded’ towards the end of the trading period. We don’t see how the Commission can anticipate ‘oversupply’ of emission allowances when considering yet unknown demand for allowances from economic growth in the upcoming third period of the emissions trading taking place from 2013-2020. It’s a tall order calculate for that period.” 

Botschek added: “The current carbon price reflects demand and shows that that the ETS carbon market is actually functioning. The price is reflective of a number of factors, including EU and national energy efficiency policies and renewable energy subsidies that affect in demand for emission allowances. If you want to reform, remove structural problems.  Don’t try to manipulate the market as it stands.”

That position was challenged by the energy alliance of Alstom, Danish Energy Association, Dong Energy, Doosan Power Systems, EnBw, GDF Suez, General Electric, European Renewable Energy Research Centres Agency, Shell, Statoil and 3M.  “We welcome the Commission’s proposals, made today, to strengthen the EU ETS,” the group, which has been calling for a setaside since last year, said in a joint statement.

“We now urge support from the European institutions to agree a ‘back-loading’ of allowances which are to be auctioned ahead of the third trading period of the EU ETS. This re-profiling of the auctioning calendar should, at a minimum, reflect the European Parliament Environment Committee’s position calling for the withdrawal of 1.4 billion ETS Allowances. Furthermore, we look forward to the Commission proposals on structural, predictable and market based measures to strengthen the ETS and will contribute, in a positive way, to this process,” they concluded.

“The ETS is in crisis and must be fixed urgently,” said Julia Michalak, EU Climate Policy officer for Climate Action Network Europe, an NGO. “The EU should use the extra time to determine the right number of carbon permits that should be withdrawn from the market and permanently cancelled in the future. If Member States don’t get the guidance and certainty they need from Brussels, they may start implementing market measures of their own, undermining the coherence of the EU’s carbon market."

Another environmental group, Greenpeace, sounded a similar note. EU climate policy director Joris den Blanken said: “The euro crisis is showing Europe the cost of doing too little too late,” he said. “The EU should not repeat the same mistakes with the carbon market. We need swift and decisive action or the scheme will deteriorate fast and will not deliver any real reduction in carbon emissions for at least a decade. The number of allowances needs to come right down or companies might as well be trading Monopoly money.”

Market analysts Thomson Reuters Point Carbon were focused on the effect of the announcement on the carbon price. “If there ends up being an agreement on back-loading and cancelling in the order of 800 million allowances, which we think is in the upper range of what is politically feasible, we assume that carbon prices could increase by as much as €6/t on average over the 2013-20 period compared to current price levels” said Marcus Ferdinand, a senior market analyst with the group.

“The actual price impact is difficult to predict as there are still several political options on the table on how to realise the proposed market intervention”, he added. “The crucial decision is not only on the number of allowances that will be temporarily removed from the market, but more importantly on the timing and the volume of the EUAs that will be permanently cancelled in order to reduce the current oversupply. “In order to permanently cancel the back-loaded volume, a separate political decision is needed that will take some time and is not expected to be concluded before the end of 2014.”

For the World Wildlife Fund, the EU climate policy officer Sam Van den Plas issued a statement, saying: “The lack of ideas coming out of the Commission for real emission reductions is a big disappointment. Further reforms are needed to make the European carbon market work for the climate in a positive way. We all know that the EU Emission Trading Scheme is in a state of crisis and only structural measures can save it from collapse.”

According to the European Wind Energy Association (EWEA), the EU’s move was needed to prevent carbon prices from falling any further. "The European Commission has finally taken the first step towards boosting the carbon price in the short term. As a second step a permanent solution to the current and future oversupply of carbon allowances needs to be found to ensure a high and stable future price: the amount of allowances put on the market up until 2020 needs to be reduced by 2.6 billion", said Rémi Gruet, EWEA’s senior regulatory affairs advisor.

"Today's EU industry is changing and encompasses many new sectors that benefit from ambitious carbon pricing,” he went on. “The wind industry is one of the most dynamic and globally competitive, in 2010 contributing 32.4 billion Euros to the EU's GDP, 8.8bn Euros in exports, and supporting 238,000 EU jobs. Increasing the carbon price will help both the climate and economic recovery."

“It is unfortunate that the backloading of Phase 3 auctions has faced further delays, but we hope that the proposed clarification of the language in the ETS Directive can be executed swiftly so this can properly get underway,” commented Damien Morris, senior policy advisor at Sandbag.

“With a clearer legal mandate, we hope the Commission will move to withhold a quantity of allowances commensurate with the crisis facing the scheme: our research finds that 2.2 billion allowances need to be removed to restore the scarcity envisaged before the recession,"  he said.

But “industry requires certainty,” Gordon Moffat, Eurofer’s director general, said. “A cancellation of allowances is a de facto increase of the CO2 target for 2020 beyond the 21% as set by the directive. We call upon member states, the European Parliament and the Commission to stick to their promises and stop additional unilateral policy while other countries haven’t committed to anything.”

“This policy is risking Europe’s industrial base and economic prosperity. There is no technology available for steelmaking that would allow the industry to reach even the existing target. We need rather a sectoral approach based on economically viable technologies. The ‘one-size fits all’ policy must end”, he demanded.

With a turnover of some €90 billion in 2010, the EU's Emissions Trading System (ETS) 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.

After a series of VAT "carousel" and "phishing" frauds in 2009, the European Commission proposed tighter security measures. But a number of member states declined to implement them because they said they could not afford to.

  • Before end of 2012: EU to bring forward long-term proposals for a structural fix of the ETS
  • 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020


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