On carbon pricing, policymakers are now thinking beyond emissions trading

An electronic display shows the DAX chart, as a trader works in front of her computer screens at the trading floor of the Deutsche Boerse stock exchange, 04 November 2020. [EPA-EFE/MAXIMILIAN VON LACHNER]

Changes taking place in the UK and US could force a rethink of the EU’s flagship climate policy, the Emissions Trading Scheme.

When the ETS was set up as the EU’s flagship climate policy in 2005, the concept had plenty of detractors. Many climate activists considered the market-oriented cap-and-trade approach to be deeply flawed, saying taxes would be more effective to reduce global warming emissions.

But cap-and-trade schemes were the global consensus at the time. When the first serious trading period began in 2008, America’s two presidential candidates, Barack Obama and John McCain, said they were going to adopt it in the US.

That didn’t come to pass. Obama couldn’t get his cap-and-trade proposal through the Congress, and it was abandoned. The EU, meanwhile, soldiered on with its system, without a large global partner to link to.

The EU Emissions Trading System (ETS) has suffered all kinds of problems since, most notably a too-low price of carbon.

After having a very low price for many years, the EU has been able to raise the price of carbon to almost €30 today after a controversial market intervention by policy-makers in 2014. But the global average carbon price is currently only $2 a tonne, way too low to trigger the kind of energy transformation needed to stop climate change.

Now, with the UK set to leave the EU ETS and replace it with something else such as a carbon tax, and the incoming US administration of Joe Biden sounding unenthusiastic about cap-and-trade, EU policymakers are being prompted to think about other ways to price carbon.

UK proposes own carbon market, remains coy on link with EU ETS

The United Kingdom has put forward its own new UK-wide Emissions Trading System (ETS) to replace the European Union’s system for trading carbon emissions, which Britain will leave at the end of this year as the Brexit transition period ends.

Regulations and standards to complement EU ETS

The EU ETS itself is not in danger of disappearing. At a EURACTIV virtual event on carbon pricing this week, all speakers concurred that the EU should stick with the ETS, regardless of changes happening in other parts of the world.

“I think it’s clear that people and companies react to economic incentives, that’s why such instruments have existed for a long time,” said Hans Bergman, who is in charge of ETS policy development and auctioning at the European Commission.

“In the EU we have the ETS as the main carbon pricing tool, and for a couple of years now we have a carbon price that has gone up to something robust, in the order of €25,” he added, saying this immediately caused a 15% drop in power-related carbon emissions in 2019.

“It shows carbon pricing works,” Bergman insisted, saying the price increase sparked a quick shift from coal to gas and renewables.

Alison Martin, CEO of Zurich Insurance Group for the EMEA region, agreed. “We believe we must decouple economic activity from the production and consumption of greenhouse gases. The carbon price, we do believe, is the most effective way of doing that.”

Olav Aamlid Syversen, Head of EU affairs at Norwegian energy company Equinor (formerly Statoil), also believes the ETS is working. “We paid above €80 a tonne on average last year, a total of €150 million was paid last year into the EU ETS,” he said at the online event.

“What we believe is necessary going forward is to complement the EU ETS with regulations beyond pricing,” he added. “We have seen studies by economists at Oxford showing the marginal price increase of a dollar per tonne of CO2 has only lowered the growth rate of emissions by 0.01%. This is too slow to only act through pricing.”

“We need pricing for sure, but we need also regulation and standards.”

EU carbon market emissions (excluding aviation) fell 8.7% in 2019

Greenhouse gas emissions regulated under Europe’s carbon market fell by 8.7% last year,  according to preliminary like-for-like European Commission data examined by carbon analysts at Refinitiv.

Alternatives

Of course, emissions trading isn’t the only way to put a price on carbon. Both the UK and US are considering going with a carbon tax instead. At the same time, European Commission President Ursula von der Leyen is considering imposing a carbon border levy on imports from countries which do not have carbon pricing policies in place in order to restore a level playing field and avoid “carbon leakage” whereby EU industries relocate abroad.

Fredrik Erixon, Director of the European Centre for International Political Economy, said now is the time to think about new ways of doing carbon pricing.

“I think we have a real opportunity now with the new administration coming in America to not just try to push towards more of a global carbon price more than we’ve done so far, but also it’s an opportunity to renegotiated aspects of the Paris Agreement and trade rules that would help us decarbonise the system more in future.”

Fee rebates, or feebates, are another option at policymakers’ disposal. In a feebate system, governments charge a fee on polluters and give a rebate for energy efficient and environmentally-friendly practices. Feebates encourage people to reduce emissions by choosing hybrid vehicles over gas-guzzlers, or using renewable energy like solar or wind over coal.

“We have to find the right mix of instruments,” said Bergman.

Green German MEP Michael Bloss agreed that carbon pricing can’t be the only solution. “The problem in the current market is that it’s not truthful, it doesn’t show the real cost of CO2 emissions,” he said. “One tonne of CO2 emissions costs German society €182, and up to €600. Setting that as the price would be the best option, but it could cause disruption.”

“A truthful carbon price would be very powerful, but it might not be something that society can digest right now.”

EU climate plan could see bloc's carbon price double this decade

Carbon costs for Europe’s businesses could double this decade under European Union plans to deliver deeper emissions reductions by 2030, according to analysis of European Commission modelling.

A ‘European Carbon Bureau’?

According to Syversen, determining the correct price of carbon isn’t that simple. “How do you move toward carbon pricing that factors in all externalities when we don’t have transparency of information?” he asked. “Transparency is important, but to believe that we’ll be able to internalise all externalities, that would be a bit in the world of fantasy.”

Some argue a centralised authority could determine whether the price of carbon is correct – a sort of ‘European Carbon Bureau’ that would do on a more permanent basis what the EU did through legislation in 2014.

Erixon said that could be a solution. “We need price variety, for several purposes, we need to have some degree of political adjustment to the price. Some sectors will be more important than others. There are social sectors we want to accommodate in our development.”

Martin posited that it could be done “the way we manage inflation and interest rates, having independent bodies to give an indication, where are we heading to.”

“It’s not the solution to everything, but we would some guidance, know where we’re trying to end. We must act quicker. As an insurer we insure the physical risk of climate change, we see it in the increasing rate of natural catastrophes.”

“We need to avoid that we have an uninsurable planet”

> Watch the full EURACTIV event here:

[Edited by Frédéric Simon]

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