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Triple shock: Draft report would keep Europe’s carbon market in dysfunctional state

In June, the rapporteur of the European Parliament’s environment committee (Ian Duncan) published his draft report on the EU’s carbon market reform, kicking off the legislative debate. Disappointingly, the proposal fails to address the most pressing issues that need fixing in order to make the EU ETS fit-for-purpose and in line with the Paris climate agreement.

The main aim of the EU’s Emissions Trading System (EU ETS) is to put a price on greenhouse gas emissions to make it attractive for companies to switch to renewables and improve their carbon efficiency. A high carbon price should ultimately reward frontrunners that have invested in climate friendly technologies as they would have lower carbon costs than their competitors.

In every year since its existence, the EU ETS has suffered from a massive oversupply of pollution permits which has led to very low prices. Analysts estimate that in order to reach the Paris Agreement’s goal of keeping global warming well below 2 degrees Celsius, the carbon price should be above 40 euros per tonne.

see noCurrent prices hover at €6, far below what’s needed to incentivise emissions cuts or drive low-carbon technologies investment. Despite his previous statements, Duncan’s report does little to ensure that the price for pollution permits will be high enough to drive decarbonisation. Analysts estimate that the changes by Duncan would raise prices by a mere €2 above those under the Commission’s proposal, to an average of €16 per tonne.

System in turmoil

The ongoing reform sets out the level of climate ambition for the next fifteen years – the period up to 2030. Worryingly, rapporteur Ian Duncan leaves the level of ambition unchanged from the Commission’s proposal, which is much too low to deliver the necessary emission cuts to avoid dangerous climate change.[1]

Ian Duncan’s report falls short of bringing the EU ETS in line with our climate objectives. He proposes to postpone the discussion on raising ambition to well after 2023 decoupling the EU from the Paris agreement, where the first stocktake is scheduled for 2018.

If Europe wants to stay credible on its global climate pledge, it cannot postpone action any further. Insufficient emissions reductions for another 10 years or longer would close the window for staying well below 2 degrees of warming and make the EU ETS a completely irrelevant climate instrument.

In order to compensate for the failings of the EU’s carbon market, policymakers in countries such as the UK, Germany, France and the Netherlands have already implemented, or are planning to implement, national measures such as carbon floor prices.

Windfall profits for heavy polluters

The EU ETS is meant to make the polluter pay, but has so far subsidised bumper pay-outs to industry. A recent study shows how industry across Europe has earned a €24 billion windfall from 2008 to 2014 under the EU ETS. This is because companies were awarded too many free pollution permits that they could sell for a profit in the market.

Rather than limiting these pollution pay-outs, Ian Duncan in his report proposes to give out even more carbon permits for free to heavy industry than under the Commission’s proposal. As a result, industry’s emission cuts will be at risk of coming to a standstill in the coming 15 years (according to the European Environment Agency) while significant emission reductions are still possible without risking competitiveness (see study).

Instead of incentivising decarbonisation the EU ETS has at times even caused an increase in carbon emissions through these perverse free allocation rules and fossil fuel subsidies. Disappointingly, under Duncan’s report, the EU ETS would continue to be used as a tool to subsidise coal power production in Central and Eastern European Member States.[2]

Open questions on aviation

Duncan’s report proposes to shift power away from the European Parliament to the European Commission to exclude international aviation from the EU ETS in the event of a global agreement (regardless of quality) on emissions from aviation. Shifting power from elected Parliamentarians to the Commission on such an important issue, represents a clear step backwards, leading to little democratic scrutiny.

The International Civil Aviation Organisation (ICAO) is currently negotiating on a mechanism for addressing emissions from aviation. It is expected to be finalised in October.

By Femke de Jong, Kaisa Amaral

(Kelsey Perlman, Urska Trunk contributing)

[1] According to Bert Metz, former co-chair of the IPCC Working Group Mitigation, the EU needs to reach net zero by around 2040 to limit global warming to below 1.5°C, which would mean that ETS emissions need to decline by 4.2% each year.  The Commission itself has stated that emissions need to decline by at least 2.4% to stay below 2°C warming.
[2] A provision in the EU ETS allows low-income Central and Eastern Member States to give free pollution permit to their energy providers on the condition that they invest the same equivalent money in projects that support diversification of their energy mix and move towards sustainable, renewable energy sources. A recent report by Carbon Market Watch and CEE Bankwatch finds that these investments have overwhelmingly gone to subsidise existing fossil fuel installations.


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