Brussels sets ball rolling for carbon market intervention

Connie Hedegaard. Brussels, January 2012. [Shutterstock]

A review of the Emissions Trading System (ETS) has been brought forward a year, offering “a golden opportunity” for a re-examination of the current rules to prop up the depressed carbon market, said Connie Hedegaard, the EU's Climate Action commissioner.

The reappraisal would be completed within two months, she said at a press conference outside an informal council of energy and environment ministers in Horsens, Denmark.

With regards to the 2013-2020 auctioning period, "there is a tendency [of] much more allowances going into the market in the early phase, rather than the later stage,” Hedegaard said.

“We think it's time to look into whether that makes sense.”

Other options on the table could include imposing a reserve carbon price, withholding allowances (so-called 'set-asides'), and creating thresholds beyond which allowances trading would be frozen.

EURACTIV understands that officials in Hedegaard's department, DG Clima, have already begun work on the review. It would form the basis of a proposal to the EU’s Climate Change Committee for a decision before 2013.

“I was not counting votes but I think there is now momentum for a set-aside [proposal],” one participant in the ministerial discussions told EURACTIV.

“But ‘set-aside’ could mean technical adjustments within the directive,” he cautioned, “to postpone auctioning for example, or a change to the directive, or a change to the [emissions] target.”

While there was “almost unanimous support” among ministers for keeping the ETS as the backbone of EU climate policy, member states were “not very clear” about how exactly this should be done, he said.

Carbon price plunge

Earlier this month carbon prices plunged to a record low of €6.14 per tonne, way below the €30 a tonne price the architects of the cap-and-trade scheme once envisaged.

Analysts blame a massive over-supply of credits, uncertainty over the climate investment outlook after 2020, and an economic recession which has prevented a growth in emissions needing to be offset.

In March, the European Parliament called for Brussels to withhold carbon allowances to boost their market price before the third period of ETS trading begins in 2013.

The renewable energy industry believes such a move would send a price signal to investors encouraging market stability and more green investment.  

However, one paper submitted to the informal EU council by Poland, a coal-dependent opponent of further climate legislation, proposed allowing credits traded under the Kyoto Protocol into the ETS, a move likely to lower carbon prices still further.

Poland isolated

Poland is isolated but has already used its veto twice to prevent the European Council from adopting the Commission’s 2050 energy roadmap.  

It has also disrupted the EU nominations procedure for the UN’s planned $100-billion-a-year Green Climate Fund board, by demanding a permanent seat and, EURACTIV understands, submitting and then withdrawing a separate application for a seat through a non-EU bloc.

One informed source said that Warsaw’s positioning was a gambit to prise more funds from the EU’s budget, with no strings attached.  

“They don’t have a plan,” he said. “Their key priority is getting the EU to give them a lot of money from the Multi-Annual Financial Framework but it’s inevitably going to fall apart.”

“You can’t keep poking states like Germany, the UK, and the Netherlands in the eye and expect them not to retaliate.”

Business divided

The ETS issue divides the energy business sector too, with companies such as Shell – which have invested heavily in carbon capture and storage – calling for a billion allowances to be set aside from auctioning, a move strongly opposed by BusinessEurope, the umbrella group for Europe’s employers' confederations.

“The ETS is delivering,” Philippe de Buck, director of BusinessEurope, told the EU ministers in Horsens. “It is on track to reach its target of reducing emissions by 21% compared to 2005 by 2020. I hope you will consider this as an important achievement.”

But he conceded that “some have expressed concerns about the lower than expected price for ETS allowances – also within the business community.”

Market players such as the Institutional Investors Group on Climate Change, whose members – mostly large European pension funds and asset managers – claim a combined €7.5 trillion in assets, take a very different view.   

A statement by the group called for a one-off set-aside, a revision of the EU’s 2020 emissions target, and a rethinking of ETS allocations more generally. 

“The European Union’s emissions trading scheme is not producing the outcomes originally envisaged and needs fixing,” Stephanie Pfeifer, the IIGCC’s director said.

“At under €7 per tonne, the carbon price is not even high enough to support a switch from coal to gas,” she added.

EU Climate Action Commissioner Connie Hedegaard said: "Difficult and unexpected macroeconomic circumstances arising from the economic and debt crisis ... have substantially altered the supply-demand balance in the European carbon market for the early years of phase 3 [of the ETS]," which starts in 2013.

"I have therefore asked my services in DG Climate Action to bring forward the first annual report on the ETS. This report is envisaged by the ETS Directive in 2013, the first year of phase 3, but I have asked for it to be prepared already now. This offers an opportunity to include a review of the auction time profile. Based on this annual report, I will consider bringing forward a proposal to the Climate Change Committee for decision this year."

“We understand the concerns that are voiced about the effectiveness of the ETS,” a statement sent to EURACTIV by the chemical company BASF said. “Ad-hoc set-asides are not the right measure, because they would destroy the confidence in the carbon market. However, we support the dialogue to review the entire energy and climate policy framework and establish a well balanced and truely complementary system of policy instruments to reduce GHG emissions, improve energy efficiency and increase the share of renewables at lowest costs."

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.

One Commission official pointed out that tens of thousands of euros spent on security could prevent millions of euros in losses.

  • June 2012: ETS Review due to report back
  • 2013: Third phase of EU ETS trading scheduled to begin, and continue until 2020

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