EU ETS
market alone is simply not sustainable. This is the fundamental debate says Eickhout. So supply-side management of the EU ETS is simply tinkering with the system in the absence of a structured Roadmap towards emission goals. The EU ETS has helped shape the transformation
seen, particularly in the power sector. “At the very least, you have to recognise that. So to have a debate around the set-aside I think is unfortunate. It’s unnecessary,” says Sikorski. The EU ETS is incredibly long on carbon. But there
will come a time [most probably in 10-15 years] when the market starts becoming structurally short of carbon, particularly if we manage to align our long-term goals with something more like intermediate targets. “When that happens, you can be sure the carbon price is going to go high. And it’s probably going to have to go high. Because what it’s there to do is actually to effect transformation at an efficient rate. And that efficient rate is the rate consistent with the caps that are being set along the way,” Sikorski adds.
Europe is lurching into a world of greater intervention ... setting the system up for continuous meddling
If prices do go considerably higher in the
future, the set-aside precedent will rally calls for intervention on the upside. “And the only way to intervene on the upside is to put more carbon allowances in, i.e. to lose the cap, to lose the environmental goals,” Sikorski insists. For him the debate is about the price and the fact that the market (and by definition the suite of policies we have) is in some way broken. “I think that’s really unfortunate,” he stresses. Europe, then, is lurching into a world of greater
intervention in the EU ETS. A dangerous debate, say market mechanism advocates, as it sets the system up for continuous meddling. After the recent price collapse there are two
factors that will prevent prices from falling further according to Schjølset. One would be a more ambitious target [higher than the 20% emissions reduction scenario] and including a set-aside option. The other would be to ‘bank’ allowances into Phase IV. “Of course, if the set-aside falls away, then a huge part of the support we see at current
*The panel discussion included a number of high profile experts and was moderated by Stig Schjølset (Head of Carbon Analysis, Thomson Reuters Point Carbon). the focus is on the immediate and forthcoming challenges of the EU Emissions Trading System. The full discussion is available as a webcast at:
http://videohouse.clients.telemak.com/eex/links.htm# 48 March 2012
price levels could also fall away,” says Schjølset. “That’s why the discussion on the set-aside is really critical, especially in the short term.” Which raises the question; are low carbon prices
a system failure? A “yes” answer would indicate that you see the primary aim of the EU ETS to ensure compliance with climate targets. And low carbon prices only reflect that a given target can be achieved at the lower price. So the system is working as it should. And with lower emissions, prices should go down. A “no” answer would take into account the range
of purposes for the EU ETS ... the transition to a low- carbon economy, renewable targets and the like. Set-aside is all about changing the allocation of
permits – the supply-and-demand balance. Price management measures are more interventionist than the option for changing the allocation. And if you want to change the allocation, you can adopt a target beyond 20%, changing the Directive itself. You could have a set-aside of allowances in Phase III. You could also try to restrict the use of credits by adopting further restrictions. If you take away, for example, a number of supply countries (such as China and India and Brazil) or certain project types, you could also restrict supply and then force larger internal reductions in Europe. Another final option is to have an early decision
on the Phase III cap. “Some might say we can’t do anything about the allocation in Phase II or III, but we can make a decision, for example in 2015, about a further reduction of the allocation in Phase IV ... which would then also be reflected in prices at some point during Phase III,” says Schjølset. Many in the market want to hear not only the
clear intention to offset the impact of the Energy Efficiency Directive, but the removal or set-aside of EUAs post-Phase III. The removal or set-aside of EUAs post Phase
III means tightening the cap, which is legally challenging. Perhaps due to the continued ambiguity about how the set-aside mechanism may develop, few have voiced concern about the obvious problem with setting aside and re-releasing in Phase III, according to Matthew Gray [although this could be tacked-on to the Phase III sovereign auctioning system]. “Setting aside EUAs only to re- release them towards the end of Phase III does little to solve the problem. It would make the situation worse, as oversupply would simply be pushed down the curve.” Ultimately, this could all be part of a Brussels
strategy, Gray suggests: “Buy time to work through the legal complications of tightening the cap and hope that, by this time, other major trading partners take climate change as seriously as they do. •
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