The European Commission presents short-term options to strengthen the EUA

Publish date: August 2, 2012

BRUSSELS – Bellona welcomes proposals from the European Commission to boost the CO2 emission price of the EU Emission Trading Scheme (ETS) on the short term. However, the options given in the proposal – certainly the lower range – might be too careful to give the necessary effect, and they provide no long-term security for green investors. Bellona therefore calls for the European Parliament (EP) and European governments to swiftly give support to DG CLIMA to take ambitious short-term measures, while simultaneously preparing the ground for structural measures to ensure a stable environment for green investments in the coming decade.

Last week, the European Commission’s DG CLIMA proposed in a staff document options for a short-term fix of the ETS, in order to correct a price which was projected to be well above €20/tonne of CO2 emitted – even that too low to ensure broad and swift deployment of green technologies – but which currently fluctuates around €7. In short, the Commission proposes to “backload” or set aside a number between 400 million and 1.2 billion CO2 emission allowances (EUAs, each representing one tonne of CO2) in the first three years of the next ETS phase (2013-15).

The high end of the range, removing 1.2 billion EUAs for the next three years, would have a significant impact on the EUA price. Still, even this is falling short of the European Parliament’s Environment Committee’s (ENVI) call for a 1.4 billion EUAs set-aside. The Commission fears that this would just slightly postpone the problem; when the set-aside EUAs are reintroduced toward the end of the phase, they will inevitably flood the market and price expectations will thus remain low.

Bellona agrees with the Commission that such a backload is not sufficient, and that structural measures are needed. A floor price like that of the UK could be one option, another is permanently setting aside (or cancelling) a large number of allowances. The UK NGO Sandbag indicated in a recent report that the number of allowances which must be cancelled to retrieve the EUA scarcity envisaged before the financial and economic crisis (and thus the projected price) is approximately 2.2 billion – 3.1 billion if including the over-allocation to certain industries.

It is crucial that Parliament and Council now agree fast on a significant set-aside by the end of the year, while simultaneously showing commitment to such structural reform to ensure not only short-term EUA scarcity but also expectations of future scarcity, which have a high impact on the price. European lawmakers recently failed to introduce such structural changes to the ETS in the context of the agreement on the new Energy Efficiency Directive. The directive’s included measures have the potential to undermine the ETS price further, making the Commission’s proposal even more urgent. It is heartening to see a coalition of some more ambitious EU industry companies breaking lines with BusinessEurope and other industry associations not only to welcome the proposal, but to call for the EP ENVI proposal of 1.4 million EUAs as a minimum.

Unsurprising, other parts of the European industry is opposing any intervention in the ETS, claiming it is a functioning market according to supply and demand. Notably, the steel and cement sectors –having received €3.4 billion worth of surplus EUAs between them only in 2010 – have raised their voices against the proposal, quoting to Euractiv a lack of existing technologies that could help them reduce emissions significantly. Bellona takes the opportunity to remind them that CO2 capture and storage (CCS) has a potential to slash their emissions deeply and at a lower price per tonne of CO2 than for the power industry. Incidentally, CCS is one of the climate technologies that struggle due to the weak ETS.

Obviously, unlike the power sector these heavy industries are subject to global competition, but rather than opposing EU ambition on climate change, they ought to cooperate in finding ways to protect their trade against producers in countries with no emission restriction. Border adjustments could be one such option that seems ever more realistic, says Bellona Europa Chairman Paal Frisvold, pointing to the recent clarification from DG CLIMA regarding the EUs legal right to discriminate fuels derived from tar sand petroleum production based on their higher CO2 emissions. The Commission then stated that such measures are compatible with WTO rules.

The Commission has launched a stakeholder consultation about the ETS proposals, which runs until 3rd October. It also indicated at its press conference on 25th July that a carbon market report, including proposals for structural change, would be presented by the end of the year.

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