EU ETS
As markets go the EU ETS is indeed working. But the question is one of intended consequences. “You’re looking at a market where there’s maybe 20 million tonnes a day plus being traded. A narrow bid offer spread. You can do all the risk management you want. Just as a pure market ... this thing works really well,” says Trevor Sikorski, Head of Environmental Market Research with Barclays Capital, adding: “We’d like to have other energy markets that worked this well in Europe.” Sikorski cites three reasons
How to Get The “Right” Price Signal? Change the Allocation • Adopt Target Beyond 20%
• Set-Aside of Phase III Allowances • New “Use Restrictions” on Credits • Early Decison on Tighter Phase IV Cap
Price Management
• Price Floor/Ceiling (AUS, NZ, CA) • Minimum Auction Price (CA) • “Strategic Reserve” (CA)
• Carbon Bank (& Price Target) For Peter Reitz, European Energy Exchange CEO,
market based mechanisms work best. In the context of the EU ETS “the market mechanism works and it delivers the lowest possible cost for achieving the agreed targets. And it does so transparently, responding to market-wide economic conditions.” Whilst being a defender (as we are) of markets,
Reitz does concede that market-based mechanism won’t deliver additional targets of investments into technology for 2050 emission goals. “If we want to do that then a market-based mechanism is not the right tool for it. We need other tools in addition,” he explains. “So, let’s not overburden the EU ETS with other stuff that it cannot deliver.”
“We’d like to have other
energy markets that worked this well in Europe”
The EU ETS certainly does deliver in absolute limits
the emission targets. It does so at the lowest cost for society. “I consider the EU ETS a success story. It is important that we expand its reach,” says Reitz. This includes adding additional sectors into the scheme and building linkages to other countries and regions. “Let’s not underestimate what this scheme has done outside of Europe,” says Reitz. “We have already seen it triggering similar developments in other parts of the world. A lot of that wouldn’t have happened if the EU had not shown the courage and vision to start it as a European programme.”
46 March 2012
for the current low prices. The economic recession [a 15% reduction in industrial production between 2008 and 2009 leading to an 11% reduction in emissions]; investments in offsets; and investments in renewable energy. Combined, they have
left system incredibly long. “In 2011 alone, the CDM and JI put 400 million
tonnes of carbon into the market. That’s an amazing amount of carbon to come in. And we’re looking at similar levels of carbon offsets being generated again this year,” says Sikorski. The set-aside could produce an offset which completely undoes the impact of the Linking Directive. In that case, asks Sikorski, “Why did we agree to the Linking Directive? Because we wanted cost containment ... so we don’t have carbon leakage.” As for investments in renewables, its been
“transformative” says Sikorski. “In 2010 and 2011 alone, investment in renewable energy in the EU was around 50 GW. And that’s just two technologies [wind and solar]. To put it another way, that’s 40 nuclear plants. This investment has been driven by two things: a series of feed-in tariffs and the incentives created by the ETS. As a result, power systems have been transformed
in Europe. “That transformation has been a lot faster than it probably would have been if you had just left it to the carbon pricing,” says Sikorski. However, investments in renewable energy –
direct investment – mean you are simultaneously undermining the carbon price by putting more permits into the rest of Europe. Therefore, having some kind of mechanism where permits are retired in the market would make these instruments more complementary and less substitutes, Calel notes. Leaving the climate change challenge to the
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