To be or not to be: Is the EU’s 2030 climate pledge enough to participate in international carbon markets?

to be or notIn October 2014 EU leaders agreed to at least 40% binding domestic greenhouse gas reduction target by 2030 compared to 1990. This significant move away from allowing the use of international offsets also puts into question the EU’s plans to link up carbon markets under a new climate treaty. Experience from the EU’s carbon market shows why international eligibility criteria for participation in the global carbon market are needed.

The explicit domestic nature of the EU’s 2030 target is much welcome but leaves big question marks to the EU’s role in negotiating a future carbon market towards the climate negotiations in Paris. An obvious question is how the new domestic climate target will affect the EU’s plans to link its domestic carbon market to other countries. For example, the EU and Switzerland are currently negotiating the possibility of linking their emissions trading systems. At the same time, more and more countries have implemented or are in the process of implementing an emissions trading scheme with China expected to roll-out their national carbon market by 2016.

However, linking the EU’s carbon market with emissions trading schemes outside of Europe would open the EU’s domestic market to “foreign” emission allowances, effectively undermining the domestic nature of the 40% GHG target. Moreover, neither the EU nor potentially linkable trading regimes have linking safeguards in place. This would permit allowances from potentially over-supplied carbon markets to dilute GHG reduction targets.

The EU’s existing carbon market provides valuable lessons why strong eligibility criteria including an ambitious target are needed for countries to participate in carbon markets.

Europe’s carbon market is currently not functioning properly due to an oversupply of emission allowances in upwards of 2 billion which has depressed the carbon price to a historic low level. The surplus is the result of a combination of factors, including the large inflow of international carbon offset and the EU’s weak 2020 target. A current reform proposal under way – the Market Stability Reserve – should be the main instrument to address this demand and supply imbalance. But the reform proposal does not provide a permanent solution for the large overhang of allowances from the 2020 climate framework and could sabotage climate efforts for decades to come, both for the EU but also for countries that will link up to the EU ETS.

Moreover, the EU’s proposed climate target is not in line with the EU’s fair contribution to tackling climate change which would be in the order of at least 55% greenhouse gas emission reductions. Scaling up climate ambition is therefore necessary to be able to limit global warming below 2°C.

With a decision of an “at least” 40% reduction target, the EU has kept doors open to revise the EU’s pledge upwards. In the context of the negotiations in Lima, scaling up ambition and permanently ditching the large overhang of surplus allowances from the pre-2020 period will be necessary for the EU to participate in the global carbon market under a future climate treaty.

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