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Europe Sinks Its Flagship Carbon Trading Scheme

All German Chancellor Angela Merkel had to do was pick up the phone and dial her people in Brussels. Had she done so before the European Parliament's (EP) key vote last month on April 19, her party's representatives could easily have saved the EU Emissions Trading Scheme (ETS), Europe's flagship mechanism for reducing carbon emissions. But the woman once hailed as "the climate chancellor," didn't make the call, a consequence of differences of opinion on the ETS within her ruling center-right coalition, she said. The impotent ETS is now withering on the vine, where it may remain until it is dead altogether.

Although even proponents of the ETS saw the proposed reform as  stop-gap tinkering, the EP’s failure to revive its faltering mechanism could have wide-ranging implications for renewable energy expansion in Europe, especially for countries without a feed-in-tariff pricing system.

“This was a hugely important vote and a backlash for European climate policies. If this vote will not be corrected we are entering into a re-nationalization of European climate and energy policy,” says Regine Günther of the World Wide Fund For Nature Germany, one of the country’s biggest environmental NGOs.  “Carbon emissions have to have a price to make the shift from CO2 intensive fuels to renewables attractive” 

“Because of the way the electricity market in Germany is structured, the lower the price of carbon, the more you pay for renewables, and the more carbon-intensive fuels you have in the mix, “ explains Ms. Günther. “This is why Germany is burning so much lignite coal now. It’s a fatal spiral downwards.

Launched in 2005 to much fanfare, the ETS was meant to be the centerpiece of Europe climate policies and a best-practice pioneer that other continents and countries would replicate. (Despite its travails in Europe it has been copied across the world, from California and New England to China and Australia.) The ETS covers roughly half of the factories, power plants, and airlines in all 28 EU member states, accounting for half of the EU's emissions of CO2 and 40 percent of its total greenhouse gas emissions.

The goal of the "cap and trade” system is to set limits on emissions and allot allowances in the form of permits. If companies emit more carbon than the allowances they possess, they are forced to purchase more permits to compensate. If they emit less, they can sell their extra permits. The disincentive would make fossil fuels more costly and the price of renewables more attractive, and ultimately drive down carbon emissions. The EU’s goal was to reduce 20 percent of its total emissions (from 1990 levels) by 2020.

But the ETS never lived up to its hype. The number of permits issued was too great from the onset, which pushed the price of carbon down to less than 10 euros a ton. Moreover, the eurocrisis caused a contraction of production and lower energy demand, thus further exacerbating the market’s surplus of carbon permits. Experts say that permits would have to cost at least 30 euros a ton in order to dissuade companies from using high-carbon-emitting fuels. The EP was voting to “backload” the market, an initiative that would have reduced the excess supply of permits and thus push up the price of carbon on the carbon market. Most observers called the back-loading a patch-up job of a mechanism that ultimately requires a much bigger overhaul.

But Europe’s center-right EU parliamentarians, taking their cue from a powerful business lobby, blocked the efforts in a razor thin vote. They noted that Europe is already close to meeting its 2020 emissions goals, a result not of climate protection measures but of weak economic activity. Today the price of carbon is less than three euros, a record low.

Just how much the ETS impacts renewables growth is a matter of contention.

“The ETS has to date not been able to drive investments in renewable, and it is unlikely that it could even were it healthy, namely reflecting the true price of carbon,” explains Luci Tesniere Senior Policy Advisor at the European Council on Renewable Energy in Brussels. “Renewable energy developments would not have happened at all without renewable targets. Now more than ever, binding 2030 renewable energy targets are needed to show the direction to investors in the renewable energy sector.

“Renewables will suffer in the long-run, especially if other renewable support schemes eventually fall away,” explains Dr. Christoph Riechmann of the consulting firm Frontier Economics in London. “The higher the CO2 costs, the more competitive renewables become compared to fossil fuels. The ETS was one way to make renewables more competitive.” Another way to change the equation, says Riechmann who also calls the back-loading scheme a short-term fix, is to set a clear emissions reduction goal beyond 2020, and to make this tighter than the 2020 targets.

Alexander Knebel of the Berlin-based Agency for Renewable Energies, a think tank and advocacy group, says that the impact on renewables could be greater in countries that don’t have a strong feed-in-tariff like Germany. “Given the ETS’s low price level, it has ceased to be an effective instrument for climate protection,” Knebel says. “In terms of renewables, even without the ETS Germany has a feed-in-tariff that helps level the playing field between fossil fuels and renewables. It’s a mechanism that has proven itself much more effective than quota systems, which the ETS resembles when taken alone [without support schemes like the feed-in tariff].”

But Ms. Günther of the WWF says the issue is extremely relevant in Germany,. “There’s a heated debate going on right now about the cost of renewables in Germany,” she says. “There’s a lot of pressure to cut the feed-in-tariff for renewables. A relevant carbon price would increase the price of electricity at the stock market but it would have the effect of lowering the amount consumers have to pay in terms of the incentive for clean energy.”    

According to the European Wind Energy Association (EWEA) in Brussels, the low price of carbon will adversely affect the investment climate for clean energy technology in Europe. “Because investors believe that the low cost of carbon will persist, there’s no incentive for investment in wind power,” explains Remi Gruet, a senior staff member at the EWEA. “We need a level playing field for new-build investment opportunities. In its present form, the ETS has no impact on investment decisions in the power sector.”

Germany doesn’t dictate environmental policy in the EU, but as the biggest and most economically powerful actor, it has plenty to say about climate policy. While it is unlikely that anything will happen between now and the autumn nationwide election, many observers think that Merkel could put it back on the table were the vote to change her coalition partner, which polls say is likely.  Speaking earlier this week at the Petersberg Climate Dialogue in Berlin, she as much as promised this. The Petersberg event is a warm-up to the annual U.N. Climate Conference, which will be held in Poland later this year.

Until then, Europe will continue to burn coal for next to nothing.

Lead image: Smoke stack via Shutterstock

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