2 june 2011

World Bank warns of 'failing' international carbon market

Report shows collapse in market with just $1.5bn of credits traded internationally last year

The UN carbon market is deeply dependent on the European emissions trading system, because European heavy industries are the biggest buyers of UN carbon credits.

Fiona Harvey in Barcelona, Wednesday 1 June 2011

The international market in carbon credits has suffered an almost total collapse, with only $1.5bn (£916m) of credits traded last year - the lowest since the market opened in 2005, according to a report from the World Bank.

A fledgling market in greenhouse gas emissions in the US also declined, and only the European Union's internal market in carbon remained healthy, worth $120bn. However, leaked documents seen by the Guardian appear to show that even the EU's emissions trading system is in danger.

The international market in carbon credits was brought about under the Kyoto protocol, as a way of injecting much-needed investment into low-carbon technology in the developing world. Under the system, known as the clean development mechanism, projects such as windfarms or solar panels in developing countries are awarded carbon credits for every tonne of carbon avoided. These credits are bought by rich countries to count towards their emissions reduction targets.

From its start in 2005, when the Kyoto protocol finally came into force, to 2009 the system generated a total of $25bn for developing countries. But last year's $1.5bn was less even than the amount paid for credits in the first year of operation.

"This bodes very badly for the countries we are trying to help," said Andrew Steer, envoy for climate change at the World Bank. "The [carbon] market is failing us. It has done very good things in the past but it is not delivering what we feel is necessary."

If the poor performance continued, it would mean increasing greenhouse gas emissions, he predicted. "We are heading for a 3C or 4C world [temperature rise]."

Part of the problem is uncertainty over the future of the Kyoto protocol. The current provisions of the 1997 treaty, which took years to come into force because of wrangling among governments, are due to expire in 2012 and there is no agreement yet on a continuation.

The US refuses to take part in the treaty, and Russia, Japan and Canada said at the recent G8 meeting they would not continue under Kyoto.

The UN is now trying to ensure that the trade in credits continues even if the protocol is not renewed. Christiana Figueres, the UN's climate chief, said there was broad agreement among countries that carbon trading should continue, but said investors also needed to look beyond the carbon markets to ways of financing emissions reductions independently of the protocol – for instance through "green bonds" issued by governments or the World Bank.

Henry Derwent, chief executive of the International Emissions Trading Association, said the relative health of the EU's emissions trading system showed that carbon trading was still going strong. He pointed out that the total value of the carbon market was $142bn in 2010, of which 97% came from the EU. "That is 1.5% smaller than [the previous year] during a period of turmoil. That is no big deal," he said. "The carbon market is working – it is still quite a big thing."

The UN carbon market is deeply dependent on the European system, because European heavy industries are the biggest buyers of UN carbon credits, which they can use to top up their own carbon quotas.

But the future of the EU's emissions trading system (ETS) is also in doubt, according to leaked documents. If the EU meets its target of improving energy efficiency by 20% by 2020, then the price of carbon permits under its trading system is likely to fall dramatically. This will in turn make it less financially attractive for companies to invest in low-carbon technologies.

Under the EU system, energy-intensive companies are awarded a quota of carbon permits, each representing a tonne of CO2, and cleaner companies can sell their spares to big emitters. The current price of about €17 a tonne is regarded as too low to stimulate the investment in low-carbon technology envisaged under the system, however, and any further falls would remove even more of the incentive to clean up.

The UN carbon market is deeply dependent on the European system, because European heavy industries are the biggest buyers of UN carbon credits, which they can use to top up their own carbon quotas.

The European commission said: "Energy efficiency is key to reduce emissions. All energy efficiency measures are welcome. This said, we have to make sure that the energy measures are compatible with the ETS. This is why the commission proposed in the 2050 roadmap to recalibrate the ETS cap and set aside a number - to be determined - of [carbon] allowances for the next phase of the ETS from 2013 to 2020."

Ruth Davis, chief policy adviser at Greenpeace UK, said: "A small group of dirty companies have spent years trying to undermine the European emissions trading scheme - in the process netting billions of euros of free polllution permits. Now these same companies are arguing that Europe should 'rescue' the ETS by abandoning its energy-saving plans. With global climate pollution going through the roof, and the Arctic ice cap melting, only a lunatic would argue that now is the time to waste more energy. The only 'rescue package' the scheme needs is a new 30% emissions reduction target for the EU – a target supported by a a growing movement of Europe's biggest businesses and employers, including Unilever, Google, Ikea and Vodaphone."


EC’s Delbeke argues for setting aside CO2 permits

MLEX, 31 May 11 by Peter Koh [via email from Mark Johnston, WWF]

CO2 allowances will have to be ‘set aside’ from the third phase of the EU’s Emissions Trading System (ETS) to ensure that other policies which lower CO2 emissions, such as energy efficiency, do not undermine the carbon price and other efforts to reduce emissions, Jos Delbeke, the head of the European Commission’s climate directorate argued today.

Speaking at a a panel discussion in the European Parliament, Delbeke said “If we go for other instruments, we need to make sure they work together and that they do not undermine each other.”

“That is why at DG Climate we put forward the idea of a ‘set-aside.’"

"If we do not set aside allowances, then CO2 reductions, greater energy efficiency and clean-technology investments will be undermined by a low carbon price. This is a question that is being debated in the commission,” he added.

Were the commission to go ahead and set aside allowances, those industries that will from 2013 receive some allowances for free – based on benchmark industry-emission levels – would not be negatively affected, Delbeke said.

“Any discussion on the set-aside would not interfere with benchmarks. The set-aside idea is linked to the auctioned portion of allowances. If anything, setting aside allowances would increase the value of those that are given away for free, so benefiting those industries covered by benchmarks.”

‘Setting aside’ allowances would effectively reduce the number available for EU businesses to buy at auctions, a move that would encourage a higher price.

But the commission is reluctant to propose that the set-aside allowances be cancelled, to avoid opening up the EU’s emissions legislation to wider debate. “If we cancel any allowances, we would have to change the ETS directive. But setting aside is not cancelling, it is ‘parking’ and we do not think that would require a change to the directive. Opening up the directive would create a lot of uncertainty and that’s not what we want. That’s why the set-aside idea has to be clarified before 2013 [when the third phase of the ETS begins]”.

‘Setting aside’ allowances rather than cancelling them could also create uncertainty, as it implies the possibility that they might eventually be reintroduced.

Environmental think tank E3G suggested that any set-aside allowances could be sold to fund clean-technology development, in a way similar to that of the NER300 fund. While Delbeke said such a move could be ‘interesting,’ it would likely require an amendment to the EU’s ETS legislation.

The commission’s energy directorate is expected to publish a new directive on energy efficiency on 22 June, to push EU governments to do more to reduce energy consumption. The aim is to reduce Europe’s dependence and expenditure on energy imports and to lower CO2 emissions.

But estimates from the commission’s climate directorate suggest that if the EU’s energy-efficiency policies are effective, the bloc would overshoot the 20 percent CO2 cut it has targeted for 2020 by five percentage points. While this would help put the EU on course for what the commission estimates is the most cost-efficient route to meet its mid-century goal of becoming a low-carbon economy, it would also result in a large surplus of CO2 permits in the EU ETS.

Climate officials are worried that this would lead to a CO2 price that is too low to trigger the large investments in renewable energy, carbon capture and storage, and other technologies needed to keep the EU competitive and enable it to meet its long-term CO2 target.

The UK is particularly concerned, and so has set a ‘floor price’ to provide a minimum degree of certainty for investment decisions.

The power sector, represented by industry group Eurelectric, argued that it is the emissions cap set by the ETS that triggers investments – rather than the CO2 price itself – and wants to see the EU adopt a CO2 target for 2030.



Thomas Wyns CAN-Europe, 01 June 2011

This week the International Energy Agency (IEA) disclosed that energy-related CO2 emissions in 2010 were the highest in history.

The drop noticed in 2009 seems to have been just a blip caused by the economic downturn. According to the IEA, immediate and adequate action is now required to keep global temperature rises below the political goal of +2˚C. The IEA’s figures are confirmed by preliminary data from the US government which show that carbon dioxide levels are at the highest levels on record with 394.7 parts per million (ppm): an increase of nearly 1.6ppm compared to last year.

With the next stage of UN climate negotiations starting in Bonn on 4 June, a starker warning could not have come to the policy makers meeting there. In this regard, CAN-Europe strongly deplores the very weak response of Climate Commissioner Hedegaard to the warning from the IEA. The commissioner limited herself to a brief statement, giving the EU a pat on the back and inviting other nations to follow suit.

These comments sound almost cynical when the same day Reuters disclosed that the EU Emissions Trading System (ETS) might become completely superfluous if a number of weak energy savings measures were to be implemented under the forthcoming Energy Efficiency Directive. If moderate energy savings could make the carbon price under the EU ETS collapse, we can only conclude that this system is in for a major review. There are not many reasons to be proud and certainly no reasons to put other nations on the spot. Christina Figueres, UNFCCC's Secretary General affirmed in a recent hearing in the European Parliament: "the EU needs to wipe before its own door first."

According to CAN-Europe, the answer is clear: avoiding dangerous climate change requires more mitigation of greenhouse gas emissions, also in Europe. CAN-Europe asks EU policy makers to implement a −40% emissions reduction target by 2020 with at least 30% achieved in the EU. This also means that the EU ETS cap needs to be corrected, setting aside at least 1.4 Gtonnes of allowances in the period 2013-2020, and that ambitious and binding economy wide energy savings measures are proposed and implemented.

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