Set-Aside Measures to Save the European Carbon Markets
A senior parliamentary committee of MEPs has agreed controversial measures to let the EU Commission cut the supply of carbon permits in the bloc’s Emissions Trading Scheme in a bid to prop up permit prices. But, if enacted, what effects will this have on the credibility of the EU ETS and the ultimate goal of emission reductions.
By Guy Isherwood
AT A RECENT panel discussion in Brussels hosted by the European Energy Exchange (EEX)*
a number
of high profile experts came together to discuss the state of the EU Emission Trading Scheme (EU-ETS). “We are in a pretty critical stage for the European
carbon market. Internally, we have a discussion about what to do with the huge oversupply of allowances. And externally, the EU ETS is under attack from a number of countries on the back of the inclusion of the aviation sector,” says Stig Schjølset, Head of Carbon Analysis at Thomson Reuters Point Carbon. The EU ETS has drawn criticism since its inception.
For those on the right of the political spectrum emission caps are not the answer to questionable climate change theories. Those on the left object to the ‘marketization’ of nature. In between lie those of all colours who are growing increasingly frustrated with the EU ETS and how it operates.
the EU ETS remains unrivalled in both size and ambition
“As far as climate policy is concerned, the EU
ETS remains unrivalled in both size and ambition. That is why it [the vote] is so important. Not just for carbon traders, but the wider low carbon transition,” said Matthew Gray, Research Analyst, Carbon & Emissions with Jefferies Bache ahead of the vote. The vote outcome surprised nobody. But before becoming law the bill still needs approval from the full Parliament and the Council of 27 environment ministers. And while the bill is slated to be passed before July, it is unclear whether the so-called set- aside provision will survive. Member States remain divided on whether to impose extra carbon costs on their industries amid tepid economic growth. The European Commission is also split on whether to impose a set-aside, despite Climate Commissioner Connie Hedegaard being in favour. Antonio Tajani, who heads the Commission’s
Industry department, has cautioned against intervening in the cap-and-trade scheme. “In the middle of a crisis one cannot demand
44 March 2012
impossible things from the industry,” said Tajani at a briefing to journalists before the parliamentary committee vote. He believes the pricing of allowances should be left to the market and that prices would recover by themselves as soon as the economy picks up. The question of oversupply in the EU carbon
market was demonstrated by Schjølset who set the numbers out. From a shortage of permits in 2008, since 2009 the annual oversupply has increased. As we enter into Phase III, the market will be short (on an annual basis) but the accumulated total indicates an extremely long market. “So we see that towards the end of Phase III [in 2020] we end up with an oversupply of some 1.4 billion allowances according to our numbers.” (Figure1). According to the Commission, this number is 2.4 billion tonnes. All analysts agree that there is a huge, potentially massive, oversupply of allowances if you look at Phase II and III combined. The main reason for this drastic change in the fortunes of the EU ETS is the global economic crisis which has had multiple impacts on the global carbon market. Not only do we see industrial output and associated emissions down, but governments recoiling from taking tougher climate action in the wake of domestic economic hardship.
Fixing The EU ETS Is there a need to fix the EU ETS? Is the system
working? Is it working according to its core objectives? And if not, how can it be changed? First, and according to best estimates, emissions
in the EU have been reduced by around 3% [50 to 100 megatonnes emissions per year]. The most important component of this has been fuel switching in the power sector [50 - 90% of the reduction so far] according to Raphael Calel of the London School of Economics, Grantham Institute on Climate Change and Environment. “Estimates from separate model-based studies show that between 25 to 90 megatonnes a year come from fuel switching alone,” says Calel which he describes as the ‘low hanging fruit’ of the system. Others are more sceptical. As we reported in Commodities Now in December, Swiss bank UBS
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