The price is right? Crunch time for EU carbon market reform

The Price is Right is a US game show which began in 1956. [Digitas Photos / Flickr]

Lawmakers in the European Parliament are voting on Wednesday (15 February) to give a new lease of life to the EU’s emissions trading scheme, which puts a price on global warming emissions. But will they get the price right? EURACTIV looks at the expectations from the reform.

Investment in renewable energy and other low-carbon technologies has progressed apace in Europe, without much help from the EU’s emissions trading system (ETS), which has been in place since 2005.

Coal, the most polluting method of generating electricity, remains central to the EU’s energy mix. And many are hoping that the coming ETS reform will push the cost of pumping a tonne of CO2 into the atmosphere well above the negligible €5 or so seen at the moment.

“The ‘at least acceptable price’ would have to be €30,” said Boris Lagadinov, chief analyst at Sandbag, a UK-based environmental NGO. This, he explained, is the price used by the European Commission to calculate which sectors should be placed on the so-called carbon leakage protection list, which registers industries at risk of relocating abroad because of the EU’s carbon constraint.

But Lagadinov doubts that tentative reform deal, agreed by the European Parliament’s environment committee (ENVI) in December, and due to face a full vote in plenary this week, will achieve even this much.

“We don’t believe that these tweaks in the design of the ETS will resolve the structural issues of the system since the market will most likely remain in surplus until the end of Phase 4,” Lagadinov said of the reform, which will take effect for the decade starting in 2021.

Parliament demands deeper cuts to industrial emissions

Lawmakers in the European Parliament’s environment committee this week backed more ambitious carbon market reforms than those tabled by the European Commission. Convincing the plenary, and above all the member states themselves, to follow suit may prove more of a challenge, however. EURACTIV France reports.

Renewables sector calls for ‘ambitious reform’

Others were not prepared to be pinned down on an ideal price, but agreed that the system in its present state provided little incentive for generators to decarbonise.

Oliver Joy, spokesperson for the wind power industry association WindEurope, says the ETS is clearly failing to deliver or even contribute meaningfully to an energy transition in Europe.

“To avoid the ETS sliding into irrelevance, policy makers should adopt high-impact measures that address the short-term challenge of oversupply which will continue to depress carbon prices well into the next decade,” Joy said.

The ENVI report by the Scottish Conservative MEP Ian Duncan proposes the cancellation of a billion surplus allowances, strengthening the “market stability reserve” designed to absorb the remaining surplus, an increase in the rate at which the overall emissions cap is lowered.

However, in a pamphlet published last week, Sandbag reckons the surplus of emissions allowances (EUAs) swishing round on the market is already 3 billion – well over the 1.8 billion tonnes of CO2 emitted in 2015 (when the cap was 2 billion) by the 11,000 or so installations subject to the ETS.

“We therefore believe that the best solution would be align the start of the Phase 4 cap to actual emissions as the only way to fundamentally fix the market,” Lagadinov said.

The solar power lobby also wants to see “ambitious reform of the system to get to a meaningful CO2 price”, said spokesperson for the trade association SolarPower Europe, Kristina Thoring.

But even that might not be enough to drive investment in renewable power, amid an energy union strategy that plans to phase out direct support for technologies deemed “mature” enough.

“A higher CO2 price will not necessarily drive investments in renewables given that its remaining volatility will not address the ‘risk premium’ issue that RES investors face today,” Thoring said.

Carbon market reform vote puts EU cement sector in the spotlight

Green lawmakers in the European Parliament have raised the stakes in the proposed overhaul of the EU carbon market, saying they would reject any deal that leaves the cement sector off the hook when the reform comes to a vote next week.

UK leads Europe with carbon price floor

However, the UK has shown that a robust carbon price can impact CO2 emissions. Across the channel, the meagre ETS price is underpinned by a domestic carbon price floor, and output from coal-fired plants hit zero for several hours in May last year.

“The UK’s €30/tonne carbon price ensures most gas plants run ahead of most of the coal plants for most of the time,” said Sandbag’s carbon and power analyst Dave Jones.

Gas plants emit roughly half the CO2 of coal-fired power stations, and the European Commission has clearly placed gas at the centre of its planned transition to a low-carbon economy. Its director for the internal energy market, Klaus-Dieter Borchardt, recently called it a “natural friend of renewables”.

“Gas is here to stay for a long, long time – longer than many believe,” Borchardt said at a conference of energy regulators in Brussels last month.

Anders Marvik, vice-president of EU Political Affairs at Norwegian energy giant Statoil, the largest supplier of gas to Europe after Russia, has said in the past he would like to see an EUA price of around €50.

“The ETS price level is still around the level I have stated before, but obviously that is not going to happen any time soon,” he told EURACTIV. “There is no such thing as an ideal price, but it has to be high enough to start the switch from coal to gas.”

While it appears doubtful that the ETS alone is about to drive a shift away from coal – which still accounts for about a quarter of the EU’s electricity supply, and far more in some countries such as Poland – fuel prices are also notoriously hard to forecast.

“The extreme gas market volatility of the last 12 months alone means the carbon price needed for coal-gas switching has varied in the range of about €0 to €40/tonne,” said Jones of Sandbag.

Double digit figure?

Speaking at the same conference as Borchardt, Green MEP Claude Turmes said the reform proposals on the table were unlikely to push the carbon price even into double digit figures.

“I have come to the conclusion that if you have an alliance between Poland and German industry, it is impossible politically to get beyond €10 in the ETS reform,” Turmes said.

Fellow Green MEP Bas Eickhout told reporters this week that it was only the activities of speculators keeping the price above zero at the moment. His expectation is that reform plans currently on the table will achieve a price of €20 to €25 by the end of the next decade.

Brian Ricketts, secretary-general of the coal industry lobby Euracoal, is more sceptical about forecasts. “I simply do not believe them,” he told EURACTIV. “If a carbon price is now desired, then the ETS is clearly not the way to set one, and manipulating it to set a price, as proposed by some including NGOs and the gas industry, will kill it.”

Whatever shape the ETS reform ultimately takes will depend on the final position adopted by the Parliament and the 28 EU member states, whose ministers are due to meet for an Environment Council at the end of February.

In a letter sent to all 751 MEPs last week, Euracoal urged them to “consider the burden that some amendments will place on your electorate: higher electricity bills, fewer jobs and reduced prosperity”.

Carbon market specialist Andrei Marcu believes the proposed reforms, with a steeper annual reduction of the overall emissions cap, would inevitably bring down emissions from heavily polluting industrial sectors.

“In the past, some paid little, if anything at all…but as the curve goes down they will start hurting,” said Marcu, a senior fellow at the Swiss-based International Centre for Trade and Sustainable Development.

But with uncertainty surrounding the new US administration, key elections coming up in Europe, and Brexit threatening to sap the energy of the political establishment, MEPs and member states should conclude final “trilogue” talks before the summer, he said. “My sense is that it would be in everyone’s interests to agree at Council and a give the mandate for negotiations now.”

EU countries stall over carbon market reform

After more than a year of negotiations, EU member states have come up short in their efforts to find common ground on a carbon market reform seen as necessary if the ambitions of the Paris Agreement on climate change are to be met. EURACTIV France reports.

The EU's Emissions Trading System is the world’s biggest scheme for trading emissions allowances. Regulated businesses measure and report their carbon emissions, handing in one allowance for each tonne they release. Companies can trade allowances as an incentive for them to reduce their emissions. Countries can also sell permits to the market.

The European Commission has proposed a series of reforms to the ETS.

Pollution credits were grossly over allocated by several countries during the 2005 initial implementation phase of the ETS, forcing down carbon prices and undermining the scheme's credibility, which prompted the EU to toughen up the system. Carbon prices have since remained stubbornly low at under €8 a tonne.

The proposed reform proposes tightening the screw on heavy polluters by restricting the amount of pollution credits available in the period 2021-2030.

Under the Commission proposal, 57% of allocations will be auctioned by member states, the same as in the current trading period (2013-2020). They are estimated to be worth €225 billion. 43% (6.3 billion allowances) will go to industry in free allocations, worth an estimated €160 billion. Those will be divided out, with the most efficient companies being prioritised. So the best performing companies will still get the benefit of free allowances.

177 sectors currently qualify for free permits. About 100 will drop off the list for 2021-2030. They are likely to be those that qualified because of their trade intensity rather than their emissions intensity.

The list will stay the same for ten years, rather than the five years of the previous trading period. This will make it more stable and give greater investor certainty. The new system will take into account production increases and decreases more effectively, and adjust the amount of free allowances accordingly. A number will be set aside for new and growing installations.

>> Read: ETS reform: EU tightens screw on 'carbon leakage' handouts for polluting industries

Subscribe to our newsletters