Saving the ETS
The emissions trading scheme is the single most important instrument for the EU for reducing greenhouse gas emissions in industry. Lately a couple of interesting things coincided concerning the scheme.
- First, a preliminary 2011 overview of submitted annual emission reports shows that emissions of ETS industry have been reduced by some 2.5% compared to 2010. Good news, you could think, and for the globe it is. But looking at this at a more structural way, the things that caused the emissions reduction were a decreasing industrial production – due to the crisis – and mild weather, but hardly any extra technical emission reduction measures. And taking measures is really what the EU ETS is heading for, in order to start a continuous innovation cycle that will last for decades.
- The price of emission credits (EUAs) sunk to an all-time low level, for a short period even to below 6 €/tonne CO2. Although EUAs have returned to the 8€ level, EUA prices were once 30 €/t! The market price is a sign that companies do not value greenhouse gases at a high level. Of course investment decisions are not taken on the basis of present prices. But if we put it simply, a price of 8€/t will leave a large potential of measures beyond the horizon.
- In the annual survey that market analyst Point Carbon published lately, respondents confirmed that emitters ‘view the cost of carbon as less decisive in investment decisions’ than last year. Fewer respondents report that the ETS has incurred emission reductions.
All in all, the EU ETS is under pressure. Not only because some member states or some airlines don’t like it anymore, but the ETS is also touched in the heart. After seven years of ‘rehearsal’, the ETS hardly invokes application of innovative measures or hardly influences EU companies to take emission reduction measures. Some companies started with measures, but most are still in the wait-and-see mode, especially in times of crisis. Meanwhile, a broad consensus exists about continuous emission reductions, to even 80% reduction by 2050. With the present standstill in industry, we will not make that kind of figures.
The problem is basically, that the ETS cap leaves much room for freely available credits that are not needed for compliance shortly. That causes a lot of ‘banking’, it creates a ‘long’ market and low prices. How to deal with this? That’s not an easy question to answer. There’s been talk about price floors or even vigorously replacing the ETS with a carbon tax. An emissions reduction target of 30% (instead of the present 20%) was on the radar, but is now far from being realised. Most concrete is a proposal that has been discussed in the EU in the last months: to set aside a number of EUAs, thus creating a ‘shorter’ market and forcing the CO2 price into the upward direction again. Parliament and European Commission seem to be in favour, most member states feel like the measure but some member states (with Poland up front) are strongly opposed. The option is neither rejected nor approved and still under discussion. The set-aside was rejected as part of the Energy Efficiency Directive (mid-June), but it is expected to return in the action plan (announced by the Commission for mid-July).
The advantage of such a set-aside is that the instrument is still market-based - unlike a price floor or carbon taxes – and if the instrument does not work enough, the EU can decide to hold even more credits from entering the ETS market. Moreover, it leaves the basics of ETS as they are. This ‘tuning knob’ could be an elegant solution for an urgent problem.
There are some alternatives, like a provision on a price-dependent auctioning reserve (following the example of California). But if the EU applies the set-aside option, let us not forget that a tuning knob should be able to turn both ways. If industrial production will recover, if prices go up again and the market becomes ‘short’, the EU should be prepared to prevent sky-high prices by turning the knob the other way. I haven’t heard anything like it until now, so let that be an extra element in the discussions.