Running on empty
For the European Union’s emissions trading scheme, 2013 has been an annus horribilis. The price of allowances in the carbon market remains stubbornly low, because too many free allowances were distributed. When the ETS was designed, it was thought that the price of carbon would by now be around €30 per tonne, but the current price is less than €5.50. European politicians have refused to come to the rescue. MEPs rejected a temporary fix for the price problem in May, and national governments refuse to intervene.
This month, the International Civil Aviation Organization (ICAO) refused to recognise the EU’s right to cover international aviation in the ETS. Under the ETS directive passed in 2008, airlines had to start purchasing credits for all emissions from flights landing or taking off in EU airspace in January 2012. With protests mounting from the likes of the US and China, and with the EU’s national governments tepid in defence of the law that they had earlier adopted, the European Commission made concessions by offering to exempt emissions outside EU airspace.
ICAO did agree to a global plan of sorts this month, committing itself to work towards a global deal agreed by 2016 and taking effect in 2020. But the organisation’s members refused to sanction the EU’s right to charge for aviation emissions. Russia and China even added an amendment to the ICAO text saying that the ETS cannot charge non-European airlines operating in its airspace unless the other country gives consent. The amendment received majority support. The EU signed the resolution, but noted a reservation against the amendment.
Perhaps an even worse blow for the EU’s ETS was the decision by the new government in Australia to abandon its own ETS that had been set up by the previous government.
Emissions trading had become a prominent topic in the Australian election campaign, with the Liberal leader (now prime minister) Tony Abbott criticising the very concept of an ETS as trying to form “a so-called market for the non-delivery of an invisible substance to no one”. Abbott intends to replace the ETS with a low carbon investment fund of A$2.9 billion (€2bn).
The EU has been left isolated as it nurses its own emissions trading scheme. Australia and New Zealand were the only other countries to have created national schemes.
When plans were made last year to link the Australian and EU ETS systems, the Commission trumpeted it as proof that, even though the United States chose to spurn the market mechanism approach, the world at large was still embracing carbon trading.
“Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions,” proclaimed Greg Combet, the (now former) Australian minister for climate change.
The irony of all this is that the EU was initially not enthusiastic about market mechanisms. It was the US that pressured the EU into committing itself to such an approach back in the late 1990s when the Kyoto Protocol was being negotiated. Then, it was the Americans who believed that only the power of capitalism could solve the problem of climate change.
Even when the US Congress refused to ratify the Kyoto Protocol, the EU was still given assurances that the US would join the EU in a market-oriented approach. The EU’s ETS was devised with that in mind.
The Republican John McCain made setting up a US ETS a centrepiece of his 2008 presidential campaign.
The US ETS was also supposed to include all emissions from flights taking off or landing in the US, even emissions outside American airspace.
The defeat of Barack Obama’s climate bill in 2010 dashed hopes of a US ETS and left the EU alone in the world defending a system that it had not initially wanted.
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Now the European Commission is supposed by the end of the year to come up with proposals for long-term structural reforms to the ETS that will solve its pricing problems, and with a proposal for a target for reducing emissions by 2030. Internal discussions have now settled on a reduction of 40% from 1990 levels, according to Commission sources. But carbon market analysts say that cuts of 50%-60% would be needed to drive up the price of carbon in the ETS.
One of those analysts, PointCarbon, said last month that, with a target of 40% for 2030, the ETS will remain oversupplied with allowances until 2027.
“Even though it is likely that more ambitious policies will be put in place over the coming years, we think carbon prices will essentially remain at single-digit levels, averaging €7.7/tonne in the period up to 2020,” said PointCarbon’s Stig Schjolset.
It is perhaps unsurprising that some environmental campaigners and policymakers are asking whether the EU would do better to scrap the ETS and start again with a new scheme.