Carbon market reform: Much ado about nothing?

MEPs want to exempt coal plantsfrom future inancing under the EU's carbon market. [Shutterstock]

The European Parliament and several member states, including France, have excluded new coal plants from future financing under the EU’s reformed carbon market. EURACTIV France reports.

It was meant to be the last round. Starting on Thursday 12 October, the most recent negotiation to reform the EU carbon market continued into the early morning in a tense atmosphere in Brussels.

At 3 am on Friday, the Estonian presidency finally called time on the antagonistic “trilogue” talks between the European Commission, Council and Parliament.

At the heart of the disagreement is the so-called Modernisation Fund, a financial facility designed to help the most CO2 intensive countries de-carbonise their industrial facilities after 2020.

The European Parliament insisted that only plants emitting less than 450g of CO2 per kilowatt-hours be co-financed by the fund. A limit that excludes de facto any coal-fired power station, and which the Council opposes.

France, the Netherlands, Luxembourg and Sweden, as well as the Czech Republic and Germany, back the idea of prohibiting the carbon market from financing new coal-fired power plants.

But Poland has seized on this point, blocking an overall agreement on the text. Earlier this month, the EU offered Poland more freedom to subsidise its transition to clean energy under the Emissions Trading System (ETS).

Environmentalists are alarmed by a decision that risks funding coal-powered plants for several more years.

Poland wins bigger coal transition funds in reformed ETS

The European Union has offered Poland more room to subsidise the coal transition in ongoing talks on reforming the Emissions Trading System (ETS), the EU’s flagship instrument to fight global warming, a move that sent alarm bells ringing among environmentalists.

However, the Estonian presidency did not expect MEPs to adopt this position since the Council, representing the 28 EU member states, usually has the last word over Parliament.

Indeed, on the future of the EU carbon market, both the Parliament and Council have ridden rough-shod over the Commission’s initial ambition by relaxing the constraints on CO2 emitting industries.

By doing so, they have increased the possibilities of granting free – rather than fee-based – carbon quotas to polluting industries, to help them stand up to international competition.

They also limited the number of allowances that would be withdrawn from the market.

The Estonian presidency intends to put the subject back on the agenda very soon, before  the next UN climate summit (COP23), which starts on 7 November.

Estonian minister: ‘Nobody is objecting’ to CO2 limit on power plant subsidies

The European Commission’s proposal for a CO2 limit on power plant subsidies is supported by the Council of Ministers, insists Ando Leppiman. But now the issue is more how it can be managed, he told EURACTIV.sk.

“This would be a strong signal from the EU before the climate conference,” Council sources said.

But in order to reach such an agreement, the Estonian presidency is likely to resort to qualified majority voting on the part of the text related on the Modernisation Fund, something which would weaken the bloc’s position.

Another possibility would be to offer additional compensation for the countries most addicted to coal, but outside the Modernisation Fund.

A lot of noise for nothing?

These arm wrestling matches and sleepless nights are, however, only useful up to a point.

Indeed, the proposals under discussion will not reduce CO2 emissions in the industries concerned over the next 13 years, because other policies on renewables and energy efficiency are expected to do that more effectively.

This is the view expressed by a study carried out by the think tank I4CE on the proposals under discussion for carbon market reform.

As in the previous phase of the ETS, energy efficiency measures and renewable energies should enable the industries concerned to reduce their CO2 emissions, but the carbon price is too low to have a real impact.

During Phase III of the ETS (2013-2020), the sudden arrival of renewable energy on the market has disrupted initial CO2 emissions forecasts, which have proved to be too high, just like the number of carbon allowances.

And in the absence of coordination between the different policies, the mistake will likely be repeated in Phase IV (2021-2030).

Coherence burried in complexity

The Commission’s proposal for “energy governance” does not seem to grab the attention of EU member states, although only a strong co-ordination between these policies will make it possible to see more clearly in the long term.

The interconnexion between the three pieces of legislation has also created a level of complexity which obscures the overall coherence of the EU’s climate and energy policy. As a result, only companies equipped with an army of consultants are able to make sense of it.

“The weight of lobbies has two consequences: the reform has become incomprehensible to the point that only a few lobbyists understand the whole mechanism, and the price of carbon has no chance of climbing significantly,” said a source close to the negotiations.

According to the Stern-Stiglitz report on the price of carbon, the tonne of CO2 should be between €40 and €80 in 2020, then €50-100 in 2050 in order to limit global temperature rise to 2°C.

However, according to projections, the reforms under discussion at EU level will only manage to increase the price of CO2 from €6 per tonne today to €20 in a few years time. In other words, the ongoing ETS talks do not keep to the Paris Agreement signed in 2015.

Almost all nations across the globe (except for Nicaragua, Syria and the US which recently pulled out) have pledged to reduce their emissions to reach the 2°C target, but the necessary emission cuts (-40% by 2030 and -80/95% by 2050) are disregarded by current carbon market negotiations.

Given the inadequacy of the ETS, some are arguing in favour of a simpler carbon tax, or a floating price for carbon, as suggested by French President Emmanuel Macron in his speech at the Sorbonne University last month.

Carbon tax could wipe out polluters' profits in pursuit of Paris targets

More than $1.5 trillion in company profits worldwide could be erased by taxes required to meet the Paris climate agreement, according to analysis by global investment manager Schroders. EURACTIV’s partner The Guardian reports.

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