16 april 2013

EU carbon vote dooms plan for market fix

By Joshua Chaffin in Brussels and Pilita Clark in London The Financial Times April 16, 2013

The European parliament’s rejection of a proposal to prop up sagging prices in the world’s largest carbon market was in doubt until the votes were counted early Tuesday afternoon.

But the outcome confirmed a reality that had been dawning on politicians and policymakers across Europe well before the ballot. Climate change, which once sat at the top of the bloc’s agenda, has increasingly been trumped by concerns about jobs and growth in an economy sapped by a lingering debt crisis.

That shift appears to have doomed a plan from the European Commission, the EU’s executive arm, to give the market a temporary jolt by postponing – or “backloading” – the auction of 900m carbon allowances. Each of those allowances gives a company the right to emit a tonne of carbon without penalty.

It threatens to overshadow the debate about more fundamental remedies for the market – not to mention the EU’s stated goal of leading the world in the fight against global warming.

“There is a growing awareness of the cost burden on consumers and also European industry,” says Peter Botschek, director of energy policy for Cefic, the European chemicals industry trade group.

For chemicals companies, electricity can account for more than half of their production costs. Cefic says its members are caught between their own domestic downturn and the prospect of much lower energy prices in the US as a result of the shale gas boom.

“People are starting to understand that we cannot have a climate policy drive all other policies,” Mr Botschek says.

Gunther Oettinger, the energy commissioner, reflected this thinking last week when he told reporters that cost should be given greater weight when setting EU energy policy and that the bloc should be more “pragmatic” about initiatives to reduce greenhouse gas emissions.

His comments came after months of complaints from European industry about the burden of high energy costs as well as the collapse of a government in Bulgaria, where protests were initially fuelled by public unrest over energy prices.

EU officials may dispute the idea that the carbon market places an undue burden on European industry since the price of carbon has been so low. Many companies are also sitting on piles of free carbon allowances, handed to them by national governments to ease their adaptation to the market, which came into force in 2005.

Still, they do not argue that “competitiveness” – not climate – has now come to dominate the political debate. “That’s the imperative,” one says.

The immediate impact of Tuesday’s vote on power companies showed why some large emitters have been backing the backloading plan. Shares in some of Europe’s leading utilities dipped after the vote, with Germany’s Eon closing down nearly 5 per cent while RWE fell by 2 per cent.

This reflects investor uncertainty about the value of the carbon allowances these companies hold.

Technically, the backloading proposal is not dead. It has been sent back to the parliament’s environment committee.

Following Tuesday’s vote, Connie Hedegaard, the climate commissioner, vowed to press on with efforts to fix the market. Ms Hedegaard is hoping to rally national governments to adopt their own proposal, which would then be the basis for fresh negotiations with the parliament.

Key to that effort will be Germany. It has so far remained on the sidelines in the carbon market debate, with the country’s environment and economy ministers clashing over backloading. Commission officials have been hoping that Angela Merkel, the German chancellor, will intervene on their side.

In the meantime, as they studied Tuesday’s vote, EU officials and parliamentary observers found a variety of reasons why backloading failed.

Many MEPs appear to have been swayed by arguments that raising the carbon price in an economic downturn could affect EU business competitiveness.

At the other end of the spectrum, some committed environmentalists have long opposed emissions trading and would prefer more rigid measures to control greenhouse gas emissions.

This underlines the potential danger of Tuesday’s vote, says Anthony Hobley, president of the Climate Markets & Investors Association.

“It potentially unlocks the door to start thinking the unthinkable,” he says, arguing those opposed to carbon trading could now start lobbying for less flexible measures such as a carbon tax or “command and control” pollution regulations.

Some NGOs have long preferred such measures to an emissions trading scheme, he says. If the carbon market now falls over, they could decide to push for alternatives that industry would find far less palatable.

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