Politicians in Europe’s parliament today narrowly rejected a plan to revive prices on the region’s carbon market — the world’s largest — which have collapsed in the recession. The decision condemns the carbon-trading scheme to irrelevancy, at least in its current 2013–20 incarnation, analysts said. Prices will stay far too low to spur the investment in low-carbon energy that was one of the scheme’s key goals when it was launched in 2005.
In the market, polluters from 27 member states buy and sell permits to emit carbon dioxide under an overall emissions cap. If permits get too expensive — say, upwards of €30 (US$40) per tonne — industry would find it worthwhile to generate energy without emitting carbon dioxide. But the financial recession led to a slump in industrial activity, and the region’s emissions are now far below the cap set by politicians.
This has left the market awash in unneeded allowances. Permit prices fell below €4 in January. Thomson Reuters Point Carbon, a consultancy firm in Oslo, estimates an oversupply of about 2 billion tonnes of carbon allowances from 2013 to 2020 (equivalent to one year’s emissions from all the polluters in the scheme).
On the plus side, the recession means Europe will easily meet its emissions target (a 20% reduction in greenhouse-gas levels by 2020). But the resulting low market prices mean the region has little incentive to invest in technology that would keep it on a low-carbon path through to 2050.
One casualty is carbon capture and storage technology, which was supposed to benefit specifically from sales of market permits.
So the European Commission had suggested taking 900 million tonnes of allowances out of the scheme up to 2015, effectively tightening the emissions cap and raising prices. The allowances would be re-injected into the market sometime before 2020, effectively ‘back-loading’ the permits. But in a 334-to-315 vote, members of the European Parliament narrowly rejected that idea, worrying about rising energy costs.
As a result, the market is likely to limp along at current levels — of about €3–4 per tonne of carbon dioxide — until 2020, the end of the current trading period, says Stig Schjolset, an analyst at Thomson Reuters Point Carbon. In theory, the idea is not entirely kaput: the parliament’s environment committee will look again at the scheme. But political will is lacking: “For all practical purposes, it’s politically dead”, says Schjolset.
To many, the market had looked a boondoggle for other reasons: it suffered both from direct fraud and from its connection to the Kyoto Protocol’s Clean Development Mechanism, in which firms could earn credits by setting up sometimes dubious carbon-reducing schemes in India and China while still pumping out emissions in Europe. And Europe’s emissions have fallen largely at the expense of greater goods production (and carbon emissions) in China.
In Europe, attention now turns to longer-term climate goals beyond 2020. On 27 March the European Commission put out proposals on targets for 2030, on which it is taking consultations until July. If the region does agree on ambitious measures on greenhouse-gas emissions, energy efficiency and renewable energy for 2030, this might yet see the market revive.
But for the next few years, direct low-carbon subsidies or mandates, either from Europe’s administration or from individual countries (such as Germany’s single-handed efforts to wean itself onto renewable energy) look the most probable route forward for the region.