Carbon Market Watch

For fair and effective climate protection.

The EU ETS back-loading hurdle (Newsletter #3)

30 May 2013

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EU-FlagThe quest to prop up depressed CO2 prices in the European Union’s Emissions Trading Scheme (EU ETS) is continuing. After the narrow rejection of the back-loading proposal in April, the European Parliament is expected to have a second vote in July. Meanwhile, the scheme continues to be oversupplied by an estimated 2 billion allowances. Allowance prices are at a record low and raised concerns over the effectiveness of the scheme in reducing emissions and de-carbonising European industry. 

The EU-ETS is ailing, and so far EU politicians have not come to its rescue. Already over-allocated in some sector, the EU-ETS has become severely oversupplied after the economic down turn which has led to a decrease in production and with it a decrease in GHG emissions. The current oversupply is estimated to be about 2 billion allowances. In 2008, EU allowances were traded at around 30 euros. Currently the price is between 3 and 4 euros.

The back-loading proposal initiated by the European Commission in July 2012 suggested delaying the auctioning of around 900 million EU allowances in order to prop up depressed prices and breathe air into the ailing EU-ETS. The held back allowances may have been reintroduced into the market at a later point.  But the proposal was voted down in April 2013, raising even more doubts whether health can be injected in the EU ETS.

Energy intensive industries lobbied hard to have back-loading rejected. Many conservative EU Parliamentarians voted against “back-loading” following the neoliberal belief[1] that policy interference contradicts the logic of a free market system. They argued that once the EU’s economy will be back on a growth trajectory, the allowance price will respond to that and increase.

After the rejection, nine EU Member States including France, UK and Germany succeeded in having a vote rescheduled for June in the European Parliament’s Environment Committee. The full plenary assembly of the European Parliament is expected to vote again in July.  But it is unclear if another vote on the proposal this summer will result in a different outcome. These nine Member States also urged the Commission to deliver a proposal for long term structural reforms to the EU ETS by end of 2013 at the latest.

The argument that regulating and adjusting the EU-ETS would somehow disturb the natural developments of an unregulated “free” market is a fallacy. The EU-ETS is market that was created purely by government policies with the aim to put a price on GHG emissions. All good policy making requires adjustments to ensure that the policy’s operationalization fulfill the intended policy goals.

Back-loading is a first step into a deeper EU ETS reform that must deal with the overall stability and effectiveness of the scheme. It is estimated that back-loading could bring prices back up to at around 8 euros. Without deep structural reforms, the back-loading proposal will do little to improve the scheme long term. On the other hand if back-loading is rejected, it is difficult to see how deeper structural reforms intended to further stabilize the market will find political support.

 


[1] Neoliberalism is a political philosophy whose advocates support economic liberalization, free trade and open markets, privatization, deregulation, and decreasing the size of the public sector while increasing the role of the private sector in modern society.