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Short Fix to the Ailing ETS: What next for the world’s largest carbon market? (Newsletter #2)

Although the back-loading plan was meant to be a small intervention to prop up carbon prices, the last seven months of heated debates make this a ‘make or break’ deal.

This past week, the Environment Committee in the European Parliament voted in favour of the European Commission’s ‘back-loading’ plan to amend the EU Emissions Trading Scheme (EU ETS) auctioning timetable and temporarily set-aside 900 million emission allowances from the carbon market. The plan, dubbed a ‘short term fix’, is supposed to prop up depressed prices in the EU ETS that last week hit a new record of 2.81 euro per tonne of CO2.  While a step in the right direction, it is a shy step towards reforming an ailing EU ETS that is increasingly losing credibility as an effective climate change policy instrument and needs deep structural reform.

The EU ETS is currently facing an existential crisis. With an estimated over-supply of emission allowances at around 2 billion it will hardly bring about the strong carbon price EU needs in order to achieve the long term decarbonising goal of more than 80% by 2050  . A massive over-supply of emission allowances has been building rapidly because of the influx of cheap Clean Development Mechanism (CDM) and Joint Implementation (JI) offset credits. To add, dire macro-economic indicators have slashed the demand for these allowances leaving prices currently looming at around 4 euros per allowance. To tackle this massive over-supply, the European Commission has taken a two sided approach: using a short term fix to temporarily set-aside 900 million allowances as the backloading plan and using a set of structural reforms that would ensure stability of the carbon market price in the long term.

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Although the back-loading plan was meant to be a small intervention to prop up carbon prices, the last seven months of heated debates make this a ‘make or break’ deal. The Parliament’s Environment Committee argued on many occasions that a market-based mechanism like the EU ETS should not be subject to the intervention of the regulator whenever prices are ‘depressed’. But Climate Commissioner Connie Hedegaard publicly insisted on numerous occasions that backloading should be a ‘no brainer’ as an over-supplied ETS would only drag down carbon prices and this would fail to put industry on a low carbon trajectory. The Parliament retorted in saying it did not want to allow the European Commission ‘carte blanche’ to interfere in a free market mechanism.

When the Industry, Research and Energy Committee rejected the backloading proposal following a non-binding vote in late January, the markets reacted aggressively and brought down the price of one carbon allowance to an all-time low of 2.81 euros. More recently, the positive vote that the Environment Committee made came at the expense of a compromise amendment that the intervention would be a one off measure during ETS phase III, which will last up to 2020. A full plenary vote is expected to be scheduled for 15 April 2013.

What is most important to underline in the backloading debate is that the allowance set-aside is a temporary measure. For long term intervention, the European Commission has published the report “The state of the European carbon market” in November 2012, proposing a set of structural measures to correct the surplus in the EU ETS. Following the report, the Commission launched a public consultation on structural options for the EU Emissions Trading System from all interested stakeholders. Emphasizing the need for several measures, Carbon Market Watch made a submission focusing in particular on one option proposed in the Commission report related to limiting access to international credits. Carbon Market Watch recommends:

1.            Eliminating access to international credits post-2020

2.            Implementing use restrictions for non-additional international credits pre-2020

For details of the submission, click here.



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