Fears Grow Over Future of EU Emissions Trading

Prices for carbon credits under the European Union’s Emissions Trading Scheme (EU ETS) recently plunged to new depths and to less than a tenth of their peak valuation of €30/tonne, seen in the heady distant days of spring 2006.

The cause: a vote by the European Parliament to reject proposals on shoring-up the price by means of holding back some 900 million tonnes of allowances until later. In Europe the industrial energy demand slump has brought with it a glut of credits, and the so-called backloading proposals would have seen allowances from 2013-2015 postponed until the 2019-2020 period.

Rejecting the proposals by a narrow margin of 334-315, the European Parliament stopped sort of flatly rejecting the plans, instead referring them back to the lead ENVI Committee for reconsideration. Indeed, officially, the European Parliament still does not yet have a position on the proposals.

Responding to the vote, European Commissioner for Climate Action, Connie Hedegaard, commented: “The Commission of course regrets that the European Parliament has not approved the back-loading proposal. However, it is worth noting than when it was suggested in the second vote that the Parliament finalised its rejection right away, this was not supported. The proposal will now go back to the Parliament’s Environment Committee for further consideration. Europe needs a robust carbon market to meet our climate targets and spur innovation. The Commission remains convinced that back-loading would help restore confidence in the EU ETS in the short term until we decide on more structural measures. We will now reflect on the next steps to ensure that Europe has strong EU ETS.”

Naturally enough, the renewables industry reacted with consternation. For example, Rémi Gruet, Senior Climate Advisor of the European Wind Energy Association (EWEA), said of the vote: “This makes the ETS irrelevant in Europe’s bid to reduce the use of fossil fuels. The carbon price will continue having no impact on investment decisions in the power sector.”

Electricity industry trade group Eurelectric described the development as “a dangerous set-back for the internal energy market and for EU carbon goals.” They further warned that “only urgent action by the Commission to put forward structural proposals on ETS can now stop Member States from each legislating their own alternative policies: 27 different carbon floor prices, coal taxes, carbon taxes.”

With uncertainty over future climate and energy policy frameworks already all but stalling market-based investments in Europe, the consensus option appears to be that the rejection of backloading inevitably increases this uncertainty significantly.

More significant are perhaps the wider implications for the future of carbon trading. In a major step towards the first full inter-continental linking of emission trading systems, the European Commission and Australia have agreed that the EU ETS and the Australian emissions trading scheme should be fully linked by mid-2018. There will be an interim link from 1 July 2015, allowing Australian businesses to use EU allowances to help cover their emissions under the Australian scheme.

The crisis within the EU ETS scheme, which covers some 11,000 sites, suggests that any link would have dire repercussions for clean energy development.

Australian Federal Treasurer Wayne Swan has reportedly moved to calm these fears, apparently saying “it’s a folly to draw conclusions about the Australian carbon price in years to come from a European spot market price.” The Australian Treasury is forecasting a carbon price of A$29 (€22.2) a tonne in 2015.

However, energy and carbon advisory firm RepuTex forecasts that Australia’s carbon price will fall dramatically as a result of the tumbling EU ETS prices.

Executive Director Hugh Grossman said: “The failed vote in the EU ETS will flow through to the Australian market straight away when trading commences. We have seen price expectations in Australia drop from an average of A$14 (€11)for financial year 2016 through 2020 should the EU vote have passed, back to an average of A$2.70 (€2) now that reform has failed.”

RepuTex notes that prices may fall even lower as Australian companies look to cheap international markets to offset their domestic obligations at very low cost. “In year one we are likely to see Australian companies swoop on cheap international offsets, meaning that the local carbon price could fall as low as A$1.30 (€1) until demand for domestic units catches up to the regulated supply.

“From that point we expect the European price will drive the Australian market, however with slightly lower Australian emissions being forecast, that demand may not be as strong as the market previously expected, which will keep prices low initially.”

Nonetheless, longer term structural reforms remain possible in Europe, which may flow through to Australia later, Grossman believes: “We have never viewed the recent EU backloading proposal as anything more than a temporary fix – it was always designed to be a stepping stone to broader structural reform in the EU ETS.”

Now that the temporary solution has failed, all eyes turn to the EU Commission as it looks to lock down a new emissions reduction target through to 2030. Should agreement be reached before 2015 – as was determined in Durban – we would see European carbon prices recover, and that recovery would flow though to Australia, however we would not expect prices to rise in the near term.

In an open letter, ministers from nine European member states, have set out the actions they want to see from the European Commission this year to reform Europe’s ailing carbon trading initiative.

Backed by the environment and energy ministers from Denmark, Finland, France, Germany, the Netherlands, Portugal, Sweden, Slovenia, and the UK, the joint statement calls for a resolution to the backloading proposals by July this year at the latest and for the European Commission to produce a legislative proposal to deliver proper structural reform to the EU ETS by the end of this year.

The document says they “remain deeply concerned that the ETS as currently designed cannot provide the price signals needed to stimulate the low carbon investment needed now because the supply of allowances substantially outstrips demand, leading to a very low carbon price. This also threatens the credibility of carbon markets.”

As if to heap yet more pressure on Brussels, measurements from a U.S. National Oceanic and Atmospheric Administration (NOAA) site on the Mauna Loa volcano in Hawaii have recorded atmospheric carbon dioxide concentrations of more than 400 ppm, widely seen as a symbolic threshold.

Discussions are due between national governments and the EC on a backloading plan.

Lead image: Carbon pricing via Shutterstock

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