Power chief: Carbon credits face a ‘junk bond’ future


Europe is staring at a ‘lost decade’ that will make decarbonisation impossible and reduce carbon credits to the value of ‘junk bonds’ unless politicians back a carbon market reform package, the head of Europe’s electricity industry association has told EURACTIV.

Last week, MEP’s on the European parliament’s industry (ITRE) committee rejected a proposal to firm up carbon prices by withholding – or ‘backloading’ – 900 million EU allowances from the 2020 auctioning period.

Analysts expect a narrow majority for action in key votes on the parliament’s environment committee on 19 February and, crucially, in a plenary later this Spring.

But Hans ten Berge, secretary-general of Eurelectric, warned that “if we choose the strategy of a lost decade then we are going for a collapse of the carbon market and it will be impossible to achieve the 2050 decarbonisation targets.”

Carbon prices, which are supposed to entice low-carbon investments, plunged to a record low of just €2.81 per tonne after the ITRE committee vote, down from a peak of €32 in April 2006. But ten Berge said that the price could yet fall further. 

“Just ask investors what the value is of a bond that you would not be able to cash before 2025,” he said. “I think that would be called a junk bond.”

The EU has pledged a reduction of CO2 emissions to 80-95% of 1990 levels by midway through the century, the minimum necessary to avoid global warming above 2 degrees Celsius.

But the EU’s Emissions Trading System (ETS) is the primary policy driver for achieving this and, by most reckonings, it is currently broken.

“The market is clearly looking at the politicians’ positions and the moment one parliamentary committee gives advice to another committee that will advise the parliament, which is the basis for a decision by the Commission in coordination with the member states, already this advice is capable of bringing down the market price by more than 50%,” ten Berge said.

“We have to ensure that we are not moving the CO2 price slowly in the direction of zero,” he added.

Less than zero

Energy-intensive industries allied with coal-dependent states such as Poland have persuaded many MEPs that there is no case for meddling with the carbon price, even if it falls to zero itself, because Europe appears on track to meet its modest 2020 climate targets.

Austerity has improved the odds of a 20% cut in CO2 emissions by the decade’s end, while government subsidies have made a 20% share of renewables in the EU’s energy mix a realistic prospect. 

But preliminary analysis that Eurelectric is preparing indicates that achieving the much more ambitious 2050 target will require superhuman efforts, if the ETS does not lay the groundwork for it this decade.   

“We’re very frightened by what we see,” Jesse Scott, the head of Eurelectric’s environment and sustainable development policy, told EURACTIV.

“If you lose this next decade you have to do astonishingly fast roll-outs of low-carbon technologies, which we know is going to be expensive and which may not be technically feasible.”

Carbon market debate

The backloading debate has pitted the electricity sector and businesses trying to move towards a low-carbon model, against energy-intensive industries and the fossil fuel lobby.

Critics say that the electricity sector favours a strong carbon price to help a decarbonisation process that might otherwise cost them more.

But low carbon advocates counter that energy-intensive industries claimed windfall profits from the ETS’s free allowances for years, only to cry foul once they actually had to cut their emissions.   

Between 2008 and 2011, the iron and steel sector banked 201 million tonnes of surplus allowances, while the cement sector banked accrued 207 million tonnes, according to analysis by the environmental group, Sandbag.

Together, the two sectors accounted for 69% of surplus carbon allowances with a net value of €4.5 billion.

'Shocking' BusinessEurope meeting

The backloading issue turned toxic at a Climate Change Committee meeting of the European employers federation, BusinessEurope, held on the same day as the ITRE committee vote.

The day before, BusinessEurope had sent MEPs on the committee a letter, obtained by EURACTIV, saying that its members were “strongly opposed to the backloading proposal” and calling for its rejection. But 16 companies – including Shell, Unilever, EDF, GDF Suez, Statoil and Alstom – have spoken out equally strongly against this position.

When an announcement of the ITRE vote sparked a round of applause from some at the BusinessEurope meeting, a blazing row broke out. “I would never have imagined seeing scenes like that,” one attendee said. “It was shocking.”

“We were really surprised and disappointed that the wording of the BusinessEurope letter went further than the established position we had been working on over the last six months,” another industry source said. “We hope that the subsequent letter will respect the agreed position.”

The UK’s Confederation of British Industry is also known to be unhappy with BusinessEurope’s position.

The stakes in Europe’s carbon market debate can be partly assessed by the reactions to the ETS crisis of other states and regions that are currently in the process of applying the EU’s carbon trading model.  

Australia is in talks about linking its carbon market with the EU’s, while California and Quebec have launched similar schemes. South Korea is due to begin emissions trading in 2015, and China is currently piloting a similar mechanism.  

“I’m getting phone calls regularly from all those countries asking what is happening in Europe,” Scott said. “They’re watching closely and they’re expressing alarm.”

In a letter to MEPs on the ITRE Committee, the employers federation, BusinessEurope, said: “BusinessEurope and its members are strongly opposed to the “backloading” proposal, and would therefore ask you to reject it (amendment 1). The reasons are:

  • Costs deriving from policy measures which drive investments away from the EU or lead to carbon leakage must be avoided especially at times of slow growth. Strengthening the competitiveness of all European business sectors, while promoting their sustainability is crucial.
  • The EU ETS is a market-based instrument and must continue to work according to market principles. For ETS to play its role, the regulator must refrain from interventions to steer the allowances’ price as that would reduce predictability for industry and the market’s faith in the EU ETS.
  • The ETS system is functioning as envisaged. Sectors covered by the ETS are on track to reduce emissions until 2020 by 21% compared to 2005 as it was politically decided in 2008 and laid down in the ETS Directive.
  • The current CO2 price is mainly due to the economic crisis. Re-launching the economy will boost industrial output and therefore increase the demand for ETS allowances without the need to change the legislative framework.

However, this position was disputed by a coalition of energy companies, which BusinessEurope claims to represent, leading to a row in the group’s Climate Change Committee meeting. An opposing letter to committee members was sent by Alpine Energie, Alstom, Areva, Danish Energy Association, Dong Energy, Doosan Energy Systems, EDF, EnBW, E.On, European Renewable Energy Research Centers Agency, First Solar, General Electric, GDF Suez, Shell, Statoil and Unilever. It said that “the ETS is the cornerstone of the EU’s climate and energy policy and the key means of delivering GHG reductions as well as creating the right incentives for forward looking low carbon investment decisions by reinforcing a clear, undistorted and long-term carbon price signal."

“The effectiveness of the EU ETS has been undermined by the impact of the economic recession. This has created a significant oversupply of allowances. The resulting low carbon price is failing to stimulate investments in low-carbon technologies. Furthermore, the low carbon price will lead to significantly lower than expected revenues from auctions for Governments. Failure to act quickly could threaten growth as investments may remain on hold. Without urgent intervention we will continue to see uncoordinated Government action in developing alternative measures to deliver own energy and climate policies. This threatens to further distort the internal market.”

“Immediate action is required to restore the credibility and relevance of the EU ETS. We recognise the need for longer term structural reforms of the EU ETS but these will take time. We hope that the Climate Change Committee endorses the back-loading proposal before January 2013 so that the EU ETS as a whole remains the cornerstone of EU climate and energy policy.”

“Therefore, we would like to urge you to support the back-loading proposal as this is an exceptional circumstance of extreme and temporary imbalances between supply and demand. This is an important first step paving the way for essential structural measures to ensure the full functioning of the ETS.”

“With the carbon price hitting a new record low every day and the EU's consumption of dirty coal skyrocketing, the risk of the EU getting locked into a high-carbon infrastructure is more likely than ever" Julia Michalak, the Europe Policy Officer of Climate Action Network, told EURACTIV. "In many Member States, including Germany, Poland and the Netherlands, new coal-fired power plants are either planned or under construction while much-needed investments in low-carbon innovation are being delayed. European MEPs have a choice, either to support a dirty fossil fuelled future, or to support back-loading and kick start the process of fixing the ETS so that it actually spurs on green investments".

She added: “The EU ETS set an example for other countries like China, Australia and South Korea, which have recently started to develop their own carbon markets. It will be sadly ironic if the EU provides the inspiration for other countries but then allows its own flagship programme to become irrelevant."

Rob Elsworth, a policy officer for the environmental group Sandbag, said: “There’s a clear correlation between companies that haven’t really been burdened by this scheme, as well as those who have extensively utilised its trading element by offsetting, and those who are clearly against any moves to strengthen the EU ETS and make it a more effective tool.”

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.

  • 19 Feb. 2013: European Parliament environment committee scheduled to vote on a crucial one line amendment authorising  carbon market action by the European Commission
  • March/April 2013: Potential plenary vote in European Parliament on European Commission proposal

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