Utilities Unbundled issue 13

Reality check for emissions

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Has the economic crisis permanently dampened the EU Emissions Trading Scheme, or is failure not an option?

2020 emission targets are now too easy to reach due to the fall-off in economic output." - Stefan Dohler, Head of Asset Optimisation and Trading, Vattenfall

Introduced in 2005, the EU Emissions Trading Scheme (EU ETS) was heralded as an economically efficient means of reducing greenhouse gas emissions using a "polluter pays" principle.

A market was created in trading carbon allowances between low and heavy polluters, with an ever-decreasing ceiling on the level of emissions installations emit. It was intended to drive innovation in clean technologies as polluters sought to reduce emissions cost, lessening the impact of climate change.

It worked well for the first couple of years, until the economic crisis took hold. As economic output dropped, industrial emissions fell naturally. Since the beginning of Phase 2 of the EU ETS (2008 to 2012), the spot price per allowance has slumped from around €20 to €30 per ton of carbon dioxide emitted to around €6 to €8 per ton.5

So is the carbon price too low to incentivize low-carbon investment? And is intervention needed by way of price-fixing?

Emission targets made easy

The third phase of the EU ETS scheme, from 2013 to 2020, is about to begin. However, when 2020 emission targets were set by the EU, economic expectations were much higher.

Stefan Dohler, Head of Asset Optimisation and Trading at Swedish state-owned energy group Vattenfall, says that target setting doesn’t reflect today's macroeconomic reality: "Essentially, the mechanics of ETS work well. Low-priced allowances are not a failing of the scheme. Rather, 2020 emission targets are now too easy to reach due to the fall-off in economic output. The target path towards 2050 needs to be recalibrated."

Dohler is convinced that EU ETS is the right mechanism for the market and, over time, will fulfill its original brief of accelerating innovation in carbon-reducing technologies.

Tax or stimulus?

With the market flooded with allowances right now, the EU is considering delaying the auction of permits in the market from 2013. Dohler claims this is not enough. He wants a complete and permanent withdrawal of allowances from Phase 3 of the scheme to restore robustness: "By shortening availability, you restore a better balance between supply and demand and set a carbon price signal going forward."

The alternative is for the EU to scrap the scheme completely and to move towards a system of taxation, though this was never the intended purpose of ETS. If this happens, Dohler fears emissions targets would end up with underlying political, electioneering or national fiscal motivations.

The EU needs to act quickly, says Dohler: "A one-off intervention in pricing is preferable to changing the entire set up of a system that is fundamentally sound. The EU needs to stand by ETS as the tool of the future. It may push up costs to the end-consumer as carbon prices rise, but to me, backing ETS is a cheaper and better option than discrediting the entire ETS mechanism."

Emissions trading schemes around the world

Source: EY analysis

Scheme/proposed scheme Country/countries of operation Start date Proposed start date Trading instrument
Kyoto Protocol: Clean development mechanism Across 37 countries 2005   Certified Emission Reductions (CERs)
EU Emissions Trading Scheme EU6 2005   European Union Allowances (EUAs)
Switzerland Emissions Trading Scheme Switzerland 2008   Swiss Units (CHU)
The New Zealand Emission Trading Scheme New Zealand 2008   New Zealand Units (NZUs)
Regional Greenhouse Gas Initiative – RGGI US (North-East) 2009   Regional greenhouse gas emissions (RGGI)
Tokyo Metropolitan Trading Scheme Japan 2010    
Australia Carbon Pricing Mechanism Australia 2012    
Californian emissions trading scheme US ― California   2013  
Pilot carbon trading schemes China: in seven provinces and cities ― Beijing, Chongqing, Guangdong, Hunan, Shanghai, Shenzhen and Tianjin   2013  
RIO ETS (2013 -2015) Brazil   2013  
Western Climate Initiative US, Canada (California, Quebec)   2013  
South Korea emissions trading scheme South Korea   2015  
Mandatory energy efficiency trading scheme India   2014  
Voluntary emissions market Thailand   2014  
National scheme Vietnam   2018  
ETS with World Bank Partnership for Market Readiness (PMR) support Chile   None indicated  
ETS with World Bank Partnership for Market Readiness (PMR) support Costa Rica   None indicated  
Mexican voluntary CO2 emissions trading scheme Mexico   None indicated  
Taiwan Carbon Offset scheme Taiwan   None indicated  

For more information, contact Frank Bühring.

  • 5 Oliver Sartor, “The EU ETS carbon price: To intervene, or not to intervene?,” Climate Brief, No. 12, 02-12
  • 6 In 2007, non-EU members Iceland, Norway and Liechtenstein joined the EU ETS.

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