EU Emissions Trading Scheme Reform & the EU 2030 Climate Targets

EUETS reform

The EU Emissions Trading Scheme is failing. There is a massive surplus of over 2 billion excess allowances in the system meaning that the current price on emissions is way below the level needed to stimulate investment in low-carbon technology or make renewable energy truly competitive.

The two main reasons for this huge number of excess allowances are –

  • Too many allowances have been given out for free in an attempt to protect industry from carbon leakage (more on this below)

  • The allocation mechanism did not allow for the economic recession, which reduced demand.

The EU commission is currently overseeing reforms which aim to help restore the ETS to a useful mechanism to drive decarbonisation.

Climate Action Network Europe have this position paper on EUETS reform with coalition of groups including Sandbag, WWF, Carbon market Watch and Greenpeace – http://caneurope.org/resources/cat_view/318-position-papers-and-research/228-eu-ets?orderby=dmdatecounter&ascdesc=DESC

CAN Position Paper: Key points

1. Start the Market Stability Reserve in 2016 (not 2021 as the European Commission is proposing)

2. Prevent back-loaded and unused allowances from re-entering the market

3. Make adjustments stronger when the supply is large: More allowances should be removed faster

4. Limit the surplus in the MSR from being used as future rights to pollute

The same coalition are contesting €39bn in free carbon emission allowances that are still being handed out to industry – http://www.wwf.eu/?235090/NGOs-contest-39bn-in-free-carbon-emission-allowances-for-industry

Pushing for a strong implementation of the reforms currently on the table and challenging free allowances is crucial to restoring the usefulness of the ETS but at Citizens’ Climate Lobby UK we’re not convinced the current set of reform proposals will succeed in the long term. We agree with CAN Europe that

The MSR is an important first step. However, the MSR does not raise ambition in the ETS. Significant further reforms of the ETS are necessary under the 2030 framework.

More on this below.

The EU 2030 Climate target

On October 24th the European Council announced that the twenty-eight EU Member States had agreed to “…a binding EU target of an at least 40% domestic reduction in greenhouse gas emissions by 2030 compared to 1990.”

This target is just within the range of what’s needed for a cost-effective path toward reducing EU emissions by 80% by 2050.

The ‘at least’ in ‘at least 40%’ leaves open the possibility that the ambition of the target can be increased.

The UK’s position

UK government has stated that “if other countries come forward with ambitious commitments, the UK would argue for the EU to go further and move towards a 50% reduction, for example through use of international carbon markets” – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/360596/hmg_paris_2015.pdf (p.55)

This builds on earlier analysis showing that in the context of a global climate agreement that achieves the 2°C target, the EU’s GHG reduction target should be 50% on 1990 levels and that meeting a 50% EU target is affordable –

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253209/UK_Analysis_of_EU_2030_GHG_Targets_FINAL_TO_WEBSITE.pdf

How is the ETS going to address the issue of Carbon Leakage?

In our view this is a key issue that the current reform proposals are failing to address.

There two main ways carbon leakage can occur –

  1. People buy imported goods because they are cheaper – because the manufacturers have not had to pay a carbon tax or buy carbon allowances.

  1. Business and Industry moves out of the EU to take advantage of lower operating costs.

At the moment the price of carbon is so low that carbon leakage isn’t much of an issue in the ETS, but leakage will be a problem if the reforms work and the price of carbon increases.

Concern to prevent carbon leakage is the main reason governments hand out free permits to industry. This is sometimes known as ‘grandfathering’ – protecting industries which are particularly exposed to carbon leakage.

This is a major structural flaw in the ETS. Handing out free permits depresses the price of carbon and undermines the usefulness of the ETS as a driver of decarbonisation.

In our view none of the reforms currently being proposed offer a credible solution for this issue.

Border Adjustments

In the US and in other countries around the world, Citizens’ Climate Lobby are pushing for an alternative mechanism for pricing carbon called Fee and Dividend. CCL’s fee and dividend proposal deals with the issue of carbon leakage by putting *border adjustments* in place.

Border adjustments are a key feature that makes pricing carbon viable in the global marketplace. By levying an import charge on goods originating in a country without its own carbon price, nations can achieve a level playing field in their domestic market.

There has been some initial work exploring border adjustments and the EUETS –

http://www.cepii.fr/PDF_PUB/wp/2013/wp2013-34.pdf

http://www.cccep.ac.uk/Publications/Working-papers/Papers/90-99/Trade-climate-change-game-theory-carbon-adjustments.pdf

But discussion of border adjustments is conspicuously absent in the debate about EUETS reform.

Why?

Whilst the World Trade Organisation has given border adjustments its blessing for environmental and climate measures, they are by no means straightforward to implement.

Entering into force in 2012, the EU Aviation Directive was designed to target emissions from all flights beginning or ending in Europe, regardless of their country of origin. The proposed mechanism for achieving this was border adjustments on aviation fuel. But the directive was blocked by a powerful coalition of non-EU countries and airlines.

The failure of border adjustments on aviation fuel under the EU Aviation Directive has been seen as a test case for border adjustments more widely. At CCLUK we don’t subscribe to this view. Our view is that the Aviation Directive BCA proposal was too one-sided and narrow in scope, and that as China and the US develop their own carbon markets the global context for border adjustments is likely to become more favourable.

**

More on Fee and Dividend here – https://hughchapmanblog.wordpress.com/2014/12/04/pushing-for-carbon-fee-and-dividend-citizens-climate-lobby-2/

Without border adjustments industry will always use the issue of carbon leakage to lobby to suppress the carbon price. I wrote a more detailed blog about it here – https://hughchapmanblog.wordpress.com/2014/12/08/why-the-proposed-reform-of-the-eu-emissions-trading-system-is-fundamentally-flawed/

Industry lobbying in the EU policy-making process is an issue. See http://www.independent.co.uk/news/world/europe/corporate-lobbyists-celebrate-as-eu-budget-clampdown-collapses-9916470.html It’s vital that we make sure lobbying doesn’t go unopposed and that the voices of ordinary citizens are heard loud and clear.

Contact CCLUK at CCLobbyUK@gmail.com

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About hughchapmansblog

Poet and performance maker based in Cambridge and London

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