Europe aims to revive its emissions trading system with mechanisms to ensure pollution comes at a price
Battle lines are being drawn once again around the European Union's Emissions Trading System (ETS). Since it was introduced in 2005 as the EU's main tool to reduce greenhouse gas emissions, the ETS has seen considerable turbulence, largely as a result of economic downturn and imports of international credits. The carbon price plummeted from more than €30 per tonne of CO2 in pre-crisis days to less than €3 in early 2013, and now stands at about €7. The slowdown in manufacturing during the recession years meant less production and less emissions, creating a glut of carbon allowances that made them at times almost worthless.
The ETS covers energy generation from fossil fuels and heavy industry. For many students of the scheme, the dramatic price fluctuations prove that it works. The EU is on track to meet a mandatory emissions cut of 20% by 2020 from 1990 levels. Industry is emitting less, and therefore the carbon price goes down, just as it should.
Others argue the ETS could do more. A low carbon price means industry can coast along without making deeper emissions cuts. The European Commission, which oversees the ETS, has on a number of occasions tried to open a discussion about how the carbon price can be increased and stabilised to incentivise companies to invest in emissions-cutting technology. In the short term, it is postponing the auctioning of 900m credits until 2019-20 to allow demand to pick up.
The Commission's latest ruse is a market stability reserve (MSR). This would kick in when the ETS enters its next phase in 2021. Under the plan, if the ETS surplus rises above 833m allowances, 12% – or roughly 100m credits – will automatically be removed from the market and placed in the reserve. If the surplus drops below 400m allowances, 100m will be released back into the market. The current ETS surplus stands at around 2bn allowances.
The MSR might sound like a moderate adjustment, but it has divided countries into those that believe there is room for quicker action to cut emissions, and those that are wary of the costs for their economies. Broadly speaking, there is an east-west divide. Countries including France, Germany, Italy and the UK say the MSR should be introduced in 2017, while countries such as Bulgaria, the Czech Republic and Poland want to stick to the original 2021 date. The launch date has become symbolic of the broader battle over what should be done about climate change.
Companies are also divided. Margarida Bolzer, climate and energy adviser at lobby group BusinessEurope, says the organisation is against “quick fixes” and that the MSR introduction should wait until 2021. BusinessEurope's UK federation member, the Confederation of British Industry (CBI), has a slightly more nuanced position. It says the MSR should be introduced in 2021 “at the latest”.
The Prince of Wales’s Corporate Leaders Group (CLG), however, wants a 2017 start for the MSR. The CLG, which includes major companies such as EDF, Philips and Unilever, wrote to members of the European Parliament in January saying that the MSR would “rebalance the emissions allowance market, strengthening the carbon price and giving the right signals to investors and industry to effect the necessary transition to a low-carbon economy”.
Some companies are, confusingly, lobbying on both sides. BT and Shell are members of the pro-2017 CLG, but Shell Chairman Erik Bonino and BT consumer chief executive John Petter also sit on the CBI's Energy and Climate Change Board. Bolzer says the CBI contributed to BusinessEurope's pro-2021 point of view. CLG deputy director Eliot Whittington tells Ethical Corporation: “Along with other members, Shell was actively involved in developing our letter, and we are confident it is an accurate representation of their views.”
It will soon be make-your-mind-up time. The European Parliament's environment committee is scheduled to vote on the MSR on 24 February. MEPs will then negotiate with EU member state representatives to finalise the measure. Whatever the outcome, the carbon price is likely to rise. The questions for companies are how quickly and by how much.
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