The world’s largest carbon-trading market may awaken from its coma: politicians in Europe’s parliament today agreed a plan to revive market prices which have collapsed in the recession.
It’s a change-of-heart from a parliament which had rejected the same idea in April. But although it would lift the market out of total irrelevancy, the plan still won’t raise carbon prices high enough to spur investment in low-carbon energy, which was one of the European trading scheme’s key goals when it was launched in 2005. So some politicians say much deeper reforms are needed. What’s more, the plan still needs to be approved by the ministers of Europe’s member states — a decision that won’t be taken until after Germany’s elections in September.
In Europe’s carbon-trading scheme, polluters from 27 member states buy and sell permits to emit carbon dioxide under an overall emissions cap. The idea is that if permits get too expensive — say, upwards of €30 (US$40) per tonne — industry will 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.
As a result, the market is awash in unneeded allowances, and market prices have fallen to around €3 per tonne. This price collapse is bad news for all low-carbon technologies, but particularly carbon capture and storage (CCS), which was supposed to benefit specifically from sales of market permits.
So the European Commission suggested a rescue plan: taking 900 million tonnes of allowances out of the scheme up to 2015, tightening the emissions cap and raising prices. The allowances would be re-injected into the market sometime before 2020, effectively ‘back-loading’ the permits.
The parliament narrowly rejected this in April (causing a further price collapse), but today passed the measure. “This is the most bullish thing to happen to the carbon market for quite some time,” says Stig Schjolset, an analyst at Thomson Reuters Point Carbon. Still, to keep this in perspective, he thinks the price impact will be limited, raising carbon prices only by €2–3 per tonne. Overall, the generous emissions cap remains in place up to 2020.
And the ministers of Europe’s member states have yet to approve the scheme. That will probably hinge on the position of nations such as Germany, where chancellor Angela Merkel has said nothing will be decided until after national elections in September. In Germany, industry has been worried about the effect of carbon prices on energy costs, although on the other hand, the country has also set ambitious policies supporting a shift to renewable energy.
The deeper battle, to reform the carbon-trading scheme entirely, remains in the background. The emissions cap might be lowered, for example, by cancelling the delayed permit sales altogether.
“We need to urgently work on a more long-term structural reform … and gain back momentum in the fight against climate change,” Chris Davies, a British member of the European parliament, said in a statement e-mailed to reporters. Not that this will be easy, given the controversy over “what should have been a modest regulatory adjustment”, Davies points out. “I welcome the decision but it is very clear that the appetite for measures to tackle global warming is now very small indeed,” he added.
UK climate secretary Ed Davey told reporters in a statement: “There should be a parallel focus on the urgent need for structural reform of the European Emissions Trading Scheme, in order to promote growth in low carbon industry in the longer term. We are calling on the European Commission to bring forward legislative proposals by the end of this year, along with 11 other EU Member States.”