7 february 2017

Europe fights to save broken climate fix

Pioneering Emissions Trading System no longer works. Parliament and EU states can’t agree how best to reform it.

By Kalina Oroschakoff and Sara Stefanini, Politico, February 7, 2017

Europe once had a revolutionary idea to reduce emissions. Almost a dozen years ago, it created an incentive for companies to pollute less through the Emissions Trading System, or ETS.

The ETS turned out to be a flop. Now EU countries and Brussels are struggling to come up with a workable fix, with make-or-break decisions coming down the pike this month.

“We have to be honest in recognizing that the [Emissions Trading System] is falling short of expectations as a cornerstone of EU climate policy,” Nick Hurd, the U.K. climate change minister, told fellow ministers in December.

Making it work is crucial for the EU’s goal, set out in the Paris climate agreement, of cutting emissions by at least 40 percent by 2030. That’s why governments, the European Commission and Parliament are trying to work out how to reform the system for the period after 2020. Environment ministers are under pressure to reach agreement at a summit this month, and the Parliament holds a final vote in February on repairing the ETS.

“It does feel like this is a major opportunity, arguably the one opportunity we have to step up and deliver an ETS that actually is fit for purpose and sends the right signal to those making critical investment decisions,” Hurd said.

Great idea, poor in practice

The idea of the cap-and-trade scheme is simple: cap the emissions that more than 11,000 power plants and factories pump into the atmosphere, and make them pay to pollute. By the logic of the market, the need to buy emission allowances would force them to shift to cleaner low-carbon technologies. As the cap gets lower over time, emissions would fall too — a compromise to the conundrum of rising global temperatures that both greens and free-market purists could live with.

The problem? There’s a glut of low-priced permits on the market. In large part, that’s due to the lingering effect of the global financial crisis that pushed down industrial production, as well as an overly generous emissions cap based on expectations that economic activity would go up.

“The way the ETS is functioning today is far from ideal,” said Ivo Belet, a Belgian MEP from the European People’s Party who has long been involved in political negotiations on the ETS. “It is far from an efficient instrument” to push industry to innovate the way it uses energy and reduce emissions in the bloc, Belet said. “It is doing that but not enough.”

On the face of it, fixing the ETS seems simple: reduce the number of permits, which would push up the carbon price and then companies needing to pay for permits would pollute less.

With prices now hovering around €4 to €6 to emit a ton of carbon, too few companies feel enough pain to change their behavior. According to Thomson Reuters Commodities Research and Forecasts, carbon prices would have to be around €20 per ton to make power plants switch from coal to gas or invest in new technology — but based on reform proposals from the Commission published in July 2015, prices wouldn’t rise to that level until 2030.

Getting the details right is turning this into one of the key political fights in Brussels. There’s resistance from industry and from coal-reliant countries such as Poland and other Eastern EU members who worry that aggressive measures to cut emissions will kill their economies too.

So one challenge is ensuring factories and plants don’t pack up and move to less environmentally stringent regions — something called carbon leakage.

While many environmentalists dispute carbon leakage is happening, companies say that although they may not be closing down factories today, they are making investment decisions based on regulatory regimes.

In an effort to protect industry in poorer member countries as the EU shakes off its fossil fuel habit, one idea is to use revenues from carbon permit sales to help them upgrade energy systems and introduce cleaner technologies. There’s also the question of which sectors continue to get free pollution permits — a current provision of the ETS.

Those are major battlegrounds for lobbies and countries intent on keeping their coal mines, steel plants and other power-hungry industries afloat.

Reform proposals

Discussions among countries and in the Parliament include reducing the number of emission permits (just how many is the subject of a fierce battle) as well as temporarily removing even more permits from the system.

Analysts say such measures would be a start — but won’t be enough to fix the system in the long term. That’s a concern shared by climate campaigners who worry that political and industrial pressure is making Brussels too skittish about slashing the number of permits.

The proposed measures are purely cosmetic,” said Wendel Trio of Climate Action Network Europe. His concern is that the emissions cap will once again be set too generously — and so allow low prices to persist.

Jeff Swartz of the International Emissions Trading Association argues that what the system really needs is a total rethink of how the emissions cap is determined. But with an EU political agenda dominated by Russia and Brexit, “I don’t think there’s political appetite for a massive overhaul of how [the ETS] performs in the next six months,” he said.

Miguel Arias Cañete, the European commissioner for climate action and energy, is confident the proposals under discussion would be enough to help the EU achieve its Paris target, he told POLITICO in December.

Going at it alone

As Brussels and national capitals spar over efforts to cut back emission permits and so boost the carbon price, there’s a growing danger the ETS could become pointless.

Instead of waiting for it to be repaired, countries have started to implement national policies to phase out coal or promote more ambitious green energy targets to spur emission cuts. Others have sidestepped the ETS and simply fixed a carbon price of their own — in the U.K.’s case, a price floor of £18 per ton of CO2 helped push coal-fired plants into retirement much faster than expected. France has proposed its own price floor.

Companies are also moving ahead without waiting for Brussels.

Several of the world’s biggest oil and gas companies banded together in 2015 to call on governments to impose a single price on carbon emissions — a tactical move that would squeeze out coal and make way for cleaner gas. Many companies use shadow carbon prices to guide their investment decisions — some approaching $50 a ton.

And so, a carbon trading system that was supposed to use the market’s invisible hand has been over time replaced with hands-on governance to produce the result policymakers want

With all the exemptions, funds and state aid systems, “it is difficult to still call the EU’s carbon market a real market,” said MEP Gerben-Jan Gerbrandy, Dutch negotiator for the liberal ALDE party.

Environmental analysts at the NGO Sandbag said without a functioning ETS, a patchwork of rules would make it more costly to meet climate targets and overlapping policies would weaken the EU’s leadership position.

The EU has gained diplomatic mileage from building the world’s first and largest cap-and-trade scheme, which accounts for almost 90 percent of carbon trading volume around the world. The model continues to attract followers: Major countries moving ahead with their own carbon pricing systems include China, which plans to launch a national system in 2017, South Korea, Canada and many U.S. states.

But many global markets are running into the very same pricing problem as the ETS, and face similar political and industrial push-back in reforming their own schemes.

“With the exception of South Korea all markets are oversupplied,” said a new Thomson Reuters Commodities report. “There is serious doubt about policy-makers willingness to make their emissions trading systems more stringent by withholding/reducing the number of allowances.”

Correction: This article has been updated to correct the date of Nick Hurd’s statement.

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