How sick is the CO2 emissions trading scheme?

David Holyoake By David Holyoake
March 7, 2013  (Hot Air, A Client Earth blog)


If you are reading this blog then you will already know that slamming the failing EU Emissions Trading Scheme(ETS) can be a favorite pastime of us environmentalists.

And there are good reasons. It is supposed to be the flagship of EU climate policy, yet it has  consistently failed to alter investment patterns in favour of cleaner energy and industrial processes. The price of carbon is at record lows, due to a huge amount of surplus allowances, or ‘hot air’, in the system.

The Commission blames the economic crisis and it is true that the drop in productivity has been a major contributor to the crashing price of carbon. Yet there was over allocation before the crisis, and it is essential to realise that over allocation, while the main problem, is not the only problem with the ETS. In general it suffers from inflexible legal architecture that erred far too far in the direction of industry certainty, at the expense of strong rules to ensure the effective functioning of the market.

However, as we set out in our response to the Commission’s consultation on reforming the ETS, ClientEarth considers that the scheme could function effectively and be one of the important tools within EU climate policy. But we need to get real here – a fundamental rethink of the design of the ETS, and its place in the policy mix, is required.

I personally believe it is a case of radical surgery rather than band aid. The backloading working its way through parliament is merely a band aid – a temporary booster shot in the arm by delaying the auctioning of some allowances. A booster shot can be important – it might even save a patient’s life, but unless the disease is addressed the patient will die sooner or later.

The first step is to permanently cancel the backloaded allowances. And when we think about longer term ETS reform, we must remember that modern economies have cyclical lifespans. There will be other recessions and drops in productivity. An ETS that doesn’t provide either mechanisms or regulatory powers to ensure scarcity in the face of a changing world will never be fit for purpose and is unlikely to remain healthy for long.

Policy makers must also find the courage to admit that carbon pricing will never be enough on its own to secure decarbonisation for the sectors currently included in the ETS. ClientEarth calls for regulatory backstops such as CO2 emissions performance standards for power generation – like those recently proposed by the UK Government. This would give industry the long term certainty they need to invest accordingly.

One proposed option to ‘fix’ the ETS is to include new sectors. But we think it is important to fix it first and let the ETS prove itself before risking bringing in new sectors, particularly where other viable options to regulate greenhouse gas emissions exist. At the same time, we strongly call for the equal treatment of all emissions within sectors currently covered. At the moment, this is not the case for emissions from the burning of biomass (e.g. wood), which are assumed to be zero despite the fact that, for equal amounts of energy generated, they are as high as emissions from coal.

It is true that, unlike coal, the regeneration of biomass (e.g. trees growing back) may offset some of the emissions from combustion, but there is no assurance as to whether and when biomass will regenerate. And in any case, the zero-emission treatment is not conditional on proving that this happens, or that it happens over a period compatible with the urgency of combating climate change. Our proposal for reform, therefore, is that infuture combustion emissions should fully count under the ETS, with a possibility of ‘discounting’ them only when justified by evidence.

Last but not least, we should learn from other models as we plan the future of the ETS within the context of the broader climate policy framework. The US Regional Greenhouse Gas Initiative (RGGI) is a cap-and-trade model adopted by several states. Many of these states direct all or most of their cap-and-trade income into clean energy and refurbishment schemes. While we fight to amass enough political will to secure even the band aid solutions here in the EU, last month nine States in the US RGGI agreed to tighten their cap by 45 per cent!

Politicians welcomed it, because it meant a source of cash for measures that protect and empower consumers and therefore help win votes. Sounds like a great way to counter the fuel poverty lobby, doesn’t it? Yet we have no mandatory requirements for revenue recycling in the EU scheme at present. Let’s hope the backloading passes swiftly and that it is followed as soon as possible by proposals for the serious surgery that is needed, not merely a sugar pill.

Read our response to the ETS reform consultation