Saving emissions trading from irrelevance By Stephen Tindale ★ Allowances under the Emissions Trading System are trading at less than S8 per tonne of carbon dioxide. This is far too low to stimulate increased investment in energy efficiency or low carbon energy. The system must be overhauled so that it provides higher prices and greater stability. ★ As a first step, the cap on the volume of emissions should be lowered, to reflect the fact that the economic recession has led to lower emission levels than expected when the cap was set. A lower cap should be combined with a price floor and a price ceiling. ★ Without safeguards, an effective emissions trading system would lead to more manufacturing in countries with cheap energy and no carbon price. The EU should therefore introduce border tax adjustments, with revenue returned to the country of origin for spending on energy efficiency and low carbon energy. Introduction Absorbed in Europe’s economic woes, policy-makers have been paying less attention to climate change. But climate change poses a major risk to long term economic growth. The Stern Review1 showed that 1 Nicholas Stern, ‘Review the economic cost of reducing emissions would be much lower on the economics of than the cost of inaction, and so climate change’, 2006. having to deal with the consequences of major climate change. Greater energy efficiency would boost growth, by creating employment in improving the energy efficiency of existing buildings and reducing energy bills. An expansion of renewable energy will reduce Europe’s oil and gas import costs and create many thousands of jobs in the wind, solar and marine industries. Well designed climate policies could contribute to EU economic recovery by increasing investment in energy efficiency and low-carbon energy. The Emissions Trading System (ETS) is central to European climate policy. The ETS was established in 2005 to reduce greenhouse gas emissions by industry and to provide a price signal that would lead to increased investment in energy efficiency and lowcarbon energy. A further objective is to raise revenue
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for governments, once emissions allowances are auctioned off. The ETS was the world’s first international emissions trading scheme, so phase 1 (2005-07) was explicitly a learning phase. Member-states allocated too many emission allowances, and so the price of allowances fell almost to zero. The over-allocation in phase 1 led the Commission to reject many plans submitted by member-states for phase 2 (2008- 2 12). But there was still over- Simon Tilford, ‘How to make EU emissions allocation.2 So the Commission trading a success’, CER proposed that in phase 3 (2013- report, May 2008. 20), it should set a single, Europe-wide cap on the number of allowances. This was agreed in a revised ‘ETS directive’ in 2009. The revised directive also requires governments to auction phase 3 allowances to many sectors, including the power sector, 3 EU-12 countries which accounts for over half the (member-states which total emissions covered by the joined in 2004 or 2007) ETS. Allowances had previously are permitted to continue been given to companies for free giving free allowances, rather than being auctioned.3 though the free Member-states were permitted allocations must be phased to auction allowances in phase 1 out during phase 3.
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