10 december 2013

[4C note: For a report on an earlier, apparently inadequate attempt to fix the ailing emissions trading system, click here].

European Lawmakers Vote to Support Carbon Trading

By STANLEY REED, The New York Times, December 10, 2013

LONDON — Lawmakers at the European Parliament on Tuesday approved a rescue plan for the European Union’s system for trading carbon-emission credits. Their hope is to revive prices for carbon credits, which have been so low that the system is creating few incentives for smokestack industries to cut back on their emissions of greenhouse gases.

Although many experts see the plan as little more than a stopgap action, “today was extremely important to get the first emergency measures started,” said Marcus Ferdinand, an analyst at Thomson Reuters Point Carbon, a market research firm in Oslo. “This shows the European Union cares about its emissions trading scheme.”

The approval by the Parliament had been widely expected, and the carbon-credits market reacted only modestly. The price of a carbon allowance ticked up about 10 euro cents, to 4.90 euros, before settling back to about 4.80 euros, or $6.60.

Europe’s Emissions Trading System, begun in 2005, is the largest and most ambitious effort yet to use markets to regulate greenhouse gases. Under the program, businesses like steel mills and coal-fired power plants are required to obtain permits for their allowable emissions of carbon dioxide — authorizations they can assemble either through allocations from regulators or through auctions. Each allowance allows a company to emit one metric ton of carbon dioxide.

The plan the Parliament approved Tuesday would delay the allocation of one-third of the new permits that had been scheduled to be offered in the next three years, as a way to make them scarcer and presumably drive up their price, creating more of a cost incentive for polluters to reduce emissions or move toward clean-energy technologies.

As part of the system already in place, the ceiling on allowable emissions is to be reduced by nearly 2 percent each year, to give companies even more incentive to adopt clean-energy alternatives.

But the financial crisis and its aftermath sharply reduced European economic activity like steel making, undermining the carbon-credit price, which has plummeted from a level of about 28 euros five years ago. Moreover, huge government subsidies for renewable energy sources like wind and solar in countries like Germany and Britain have also reduced the influence of the carbon trading system.

Europe’s troubled experience with carbon trading has also discouraged efforts to establish large-scale carbon markets in other countries, including the United States, though California and a group of Northeastern states have set up smaller regional markets.

Current trading prices are not considered sufficient to give companies much incentive to invest in clean technologies or reduce their use of coal, which emits more carbon dioxide than other fossil fuels like natural gas. “Below €20 has no impact on investment decisions,” said Roland Vetter, an analyst at CF Partners, a commodities trading house in London.

And yet the price of carbon credits has come back from a near collapse in April, when it fell below €3 a ton after the European Parliament voted against a previous rescue effort in April. Many lawmakers were opposed to intervening in the market, and businesses opposed the effort to raise their costs.

But the European Commission, the European Union’s executive arm, refused to leave matters there. In July, it came back with a revised plan that won preliminary approval. That measure was formally passed on Tuesday by legislators, who were urged by European officials and environmental groups not to let the trading system collapse.

The vote Tuesday, with 385 in favor and 284 against, enables officials to move ahead with a specific proposal for how to withhold about 900 million carbon allowances over the next three years. That would amount to about one-third of the number that would otherwise be issued. The plan is not expected to be formally implemented until April or May.

Analysts said there could be a squeeze in allowances in the short term that could drive up prices next year. But over the long run they saidthe market is likely to be oversupplied with carbon allowances through 2020, when the current phase of the Emissions Trading System is set to expire.

European officials are also working on what they call structural changes, like faster reductions of the emissions ceiling, but bigger moves may encounter more opposition from smokestack industries and countries like Poland that which remain heavily reliant on coal.

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