Parliament takes first step to fix carbon market

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The European Parliament backed a plan on Wednesday (3 July) to support carbon prices by withdrawing part of the emission permits traded on the EU's carbon market. Prices jumped up after the vote but remained low as national parliaments still have to ratify the proposal.

The European Commission had to sweeten its proposal to support carbon prices after the first one was rejected in April, as politicians reflected industrial concerns on energy prices. Carbon prices currently hover around €3 a tonne, too low to support investment in green technologies.

Higher carbon prices typically drive companies to use less coal or fuel and more natural gas. Energy-intensive industries argue that it makes them less competitive, especially as shale gas offers cheap energy to their American competitors.

The compromise adopted yesterday in Strasbourg should not make carbon permits skyrocket as the oversupply is huge, and industrial activity remains weak. Some 900 million permits out of a 2 billion surplus will be taken out of the EU Emissions Trading System to try to create scarcity.

But this mechanism will be allowed to happen only once and the decision still has to be approved by national parliaments. Some amendments planning to set aside carbon permits in a fund within the European Investment Bank were surprisingly rejected.

Germany has failed to take a formal position as the economy ministry opposes it due to concerns it will hurt competitiveness, while the environment ministry supports the plan. 

Carbon prices jumped by more than 12% on the news, without erasing previous losses. A permit cost €4.8 on Wednesday, still 40% less than four months ago, and 70%  less than three years ago.

The vote brought a flood of reactions from politicians, industry representatives and environmental groups, closing lengthy discussions on the issue. Critics from energy consuming industries were particularly harsh.

“It is a fact that backloading is not necessary for reaching the ETS targets," said Gordon Moffat, the director general of  steel organisation Eurofer. "Today’s decision represents unnecessary interference in a market-based system. It once more undermines confidence in the policy framework, which is so urgently needed for investment.”

The position was shared by chemical industries represented by Cefic. “The proposals for backloading will not help. They signal a willingness to intervene in the market and push up prices, risking weakening competitiveness and distracting investment from innovation," said Cefic's Director-General Hubert Mandery.

Other industrial sectors though exhaled at the news. "Today's vote will give a small boost to the carbon price but most importantly it will build confidence in the ETS," said Rémi Gruet, the European Wind Energy Association's senior regulatory affairs advisor. "It is crucial that the EU Member States now agree backloading as soon as possible. Then the European Commission should propose a 2030 Climate and Energy Package, with headline renewable and GHG reduction targets, without delay."

The Renewable Energy Association's policy chief Paul Thompson backed this up.“We welcome the European Parliament’s vote, which will help restore some incentive for low carbon generation in the EU," he said. "Although the UK has already introduced its own ‘Carbon Price Floor’ designed to top up the carbon price, it is clearly preferable for carbon prices to be stable across the EU. Today’s vote goes some way to achieving this, and will reduce the risk of UK energy intensive industries being put at a competitive disadvantage. However, we remain of the view that wider scale reform of the EU ETS is needed to fix the longer term problems with the market.”

Ingrid Reumert, the head of Public Affairs, VELUX Group welcomed the vote "because we see it as an important measure to restore the credibility of the EU ETS and stimulate green transformation towards 2020. We hope this also will be a step towards a more structural reform of the EU ETS.”

Shell's climate change adviser David Hone said: “This outcome is encouraging and goes some way towards helping to preserve the scheme as a flagship policy at the heart of the EU’s climate and energy framework. Backloading sends a political signal about the importance of the EU ETS but does not address the structural problems. We urge the Commission to come forward, as soon as possible, with proposals for structural reforms.”

The International Emissions Trading Association’s CEO, Dirk Forrister argued that  “it is now important for the negotiations between the co-legislators to move forward rapidly, to avoid further delays and uncertainty for market operators. Today’s vote was a critical first step.  At the same time, it is vital to advance discussions on long-term considerations and structural reform of the EU ETS.”

Electricity producers, for their part, welcomed the compromise. Electricity price are closely linked to carbon prices, and most large European utilities are trying to use less polluting coal and more gas or nuclear power to bring down their emissions.

“This is a reassuring signal for industry and international observers – many of whom have recently adopted their own emissions trading schemes – that the EU remains committed to decarbonising Europe’s economy in the most cost-efficient way," said EURELECTRIC Secretary General Hans ten Berge. "The European power sector has consistently spoken out in favour of a strong ETS as the key driver of emissions reduction in Europe. We continue to believe that a strong ETS, bolstered by an economy-wide 2030 emissions reduction target of at least 40%, is the best way forward to achieve a decarbonised economy by 2050."

“Yes!” EU Climate Commissioner Connie Hedegaard said on her Twitter account. “Despite heavy-handed lobbying, and after very substantial debate, the European Parliament supports the backloading proposal.” A statement later issued by her office said: “With today's vote, the European Parliament has sent a clear message: Europe needs an effective ETS and a genuinely European climate policy. I of course welcome this positive vote which also shows that the European Parliament shares the Commission's view: we must have a well-functioning European carbon market to boost innovative low-carbon technologies in Europe. The next step is now for the Council to take a decision. The sooner, the better, so that we can move on to the structural reform of the ETS as soon as possible.”

Green NGOs such as Carbon Market Watch responded cautiously to the parliament's decision. “While allowances are being held at this end, the UNFCCC has just issued 450.000 international offset credits to Adani’s business as usual mega coal power plant located in Gujarat, India with EDF Trading Ltd listed as the buyer” said Eva Filzmoser, Carbon Market Watch's Director. “Backloading only makes sense if we also address the vast amount of substandard offset credits that keep undermining the EU’s climate goals.”

Greenpeace's EU climate policy director Joris den Blanken went further. “This plan will not restore the credibility of the carbon market," he said. "As soon as the suspended allowances are allowed to re-enter the system, the carbon market will be back to square one, with a low carbon price that won’t stop a single coal plant from being built. The only way out of this mess is for the European Commission to table a proposal to permanently remove carbon permits from the system. The time for tinkering is over. Only decisive action can save the EU carbon market.”

“This is a positive outcome after months of uncertainty," Sandbag’s Rob Elsworth agreed. "All eyes are now on Member States to reach a position as soon as possible. Once a backloading decision is agreed, this must act as a stepping stone to deeper structural reforms of the EU ETS that restore the balance of  supply and demand in the carbon market and prevent the ETS from compromising the environmental effectiveness of other  climate policies."

“The European Parliament has done the minimum to rescue the ETS from redundancy,” said Sam Van den plas of WWF European Policy Office. “Member states should back further measures to eliminate these toxic tonnes permanently from the EU’s carbon market.”

According to Julia Michalak of CAN Europe: “Today the European Parliament used its second chance to get back-loading right.”  “By approving back-loading and rejecting several dangerous loopholes that had been proposed as part of a compromise, they’ve paved the way for the necessary deep reform of the EU ETS.  Member States must start to negotiate the final outcome as soon as possible - we have lost enough time already.”

Lies Craeynest, Oxfam’s EU climate change expert, said:“Today’s vote keeps the EU Emissions Trading Scheme afloat for now but the rescue plan will need to be further strengthened if Europe’s flagship climate policy tool is to be fit for purpose. Higher auctioning revenues, as a result of ambitious ETS structural reforms, would raise much needed money for climate action at home as well as to help meet international commitments to deliver climate finance to developing countries, and so increase the chances of a successful international climate deal.” 

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.

  • 2014: First backloading could take place


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