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Feb 16th 2013 |From the print edition
ON FEBRUARY 19th Europe s emissions-trading system (ETS) faces a potentially
fatal vote. It could not only determine whether the world s biggest
carbon-trading market survives but delay the emergence of a worldwide market,
damage Europe s environmental policies across the board and affect the
prospects for a future treaty to limit greenhouse-gas emissions. Quite a lot
for a decision which as is the way of things European sounds numbingly
technical.
The vote is due to take place in the environment committee of the European
Parliament. If the committee approves the proposal before it (and the
parliament in full session as well as a majority of national governments agree
with the decision), this would give the European Commission, the European Union
s executive arm, the power to rearrange the ETS s schedule of auctions. Its
plan is to delay the sale of about 900m tonnes of carbon allowances from around
2013-16 to 2019-20.
The vote matters, its sponsors argue, because the ETS could collapse if the
commission s proposal is rejected. The ETS is the only EU-wide environmental
instrument. It trades allowances to produce carbon equal to about half the EU s
total carbon emissions. When the system was set up, its designers thought these
allowances would now cost roughly 20 per tonne of carbon. The current price is
around 5 ($6.7), and in January it fell by 40% in a few minutes after a
negative, but legally meaningless, parliamentary vote (see chart).
The low prices reflect a chronic oversupply of carbon allowances, which the
commission puts at 1.5 billion-2 billion tonnes, roughly a year s emissions.
When the ETS was designed in the mid-2000s, growth was strong and demand for
carbon allowances was expected to be high. Their number was therefore fixed (at
16 billion tonnes for 2013-20). But demand has crashed. Other temporary factors
are also driving prices down: more frequent auctions mean that allowances which
once sat unused for months now come onto the market immediately; a special
reserve for new entrants has boosted supply; and hedging by power stations has
dried up.
Yet none of this justifies interfering in the market, opponents of the
commission s plan say. The ETS remains liquid; the emissions cap stays in
place. A low carbon price simply means the aims of the ETS are being met
cheaply. What s the problem?
The commission highlights two. First, if the proposal is thrown out, the ETS
could collapse completely: ie, the carbon price could fall to zero. Second, and
more likely, even a further, temporary slide in the price could do permanent
damage.
When carbon prices are low, coal is cheap relative to cleaner forms of energy,
such as gas. As a result power suppliers build more coal-fired plants and
Europe emits more carbon. This is already happening. In the long run carbon
prices are likely to rise again: industrial demand will pick up (one day); and
the cap (the supply of carbon allowances) is due to be lowered by 1.7% each
year. But by the time this has an effect not before 2026, says Guy Turner of
Bloomberg New Energy Finance, a firm of market analysts the coal plants will be
running and expensive to turn off. Their owners will be lumbered with stranded
costs . Power generators, which are the main buyers of ETS allowances, say a
higher carbon price would help them avoid this problem by spurring investment
in new technologies.
A lot of people beyond Europe are anxiously awaiting next week s vote.
Australia s carbon price, which it established in 2012, is currently fixed. If
the ETS remains weak, Australia s carbon price will not soar in 2015 when it
will be allowed to float and the country s carbon market will be linked to the
larger European one. But if the ETS collapses, it will encourage further
opposition to the already-controversial Australian scheme, worries Tom Brookes
of the European Climate Foundation, an environmentalist group.
A collapse could also affect California, which set up a carbon market in 2012,
as well as China and South Korea, which are putting together theirs. And it
would undermine the chances that all these markets might one day form a global
carbon-trading system.
Back in Europe, other environmental policies could suffer. A low carbon price
would slow down Germany s ambitious plan to boost renewable energy and a high
one would speed it up. Perhaps reflecting this, the German government is split
on the vote. A collapse of the EU s flagship policy would also throw into
disarray European plans for future environmental reforms and its hopes of
leading other countries by example.
Even if the proposal goes the commission s way, that would not change the ETS
fundamentally. The oversupply of allowances would continue unless the auctions
were cancelled, not just rescheduled. But that is a battle for another day.