The operation was a complete success; shame the patient died. Who thought we’d see a need for that joke again in relation to the EU, so soon after Cyprus?
This time it’s the carbon emissions trading scheme, or EU ETS, and the consensus is it’s been dealt a near-mortal blow by a vote in the European parliament. Essentially, the parliament refused to deviate from the scheduled release of new emissions allowances, even though prices had already crashed because economic growth has been slower than was expected.
European climate commissioner Connie Hedegaard is looking to make structural reforms, but for the next few years, prices are expected to stay in the low single-digit euro doldrums. Point Carbon says big structural changes to the ETS can’t happen until late 2016 at the earliest, in a post-Barroso Commission.
This could be seen as a success. The EU is on track to meet its international emissions targets, and the price is meant to move; it’s a market, duh. That’s what the Polish government has argued in its battle to stop the backloading measures. From a paper they submitted to a meeting of EU environment ministers a year ago:
“Growth will return and the price will find its equilibrium again. No administrative meddling is needed or else we might create the impression that such measures are standard practice.”
That ignores the fact that the whole market is a construct. To expand on Izzy’s Bitcoin analogy, it’s a little like setting up a fiat monetary system, setting out a schedule for money supply and then leaving it on autopilot — with no flexibility to respond to changes in the economy. Sure, you might reach your targets that way, too.
One thing the ETS doesn’t seem to have been extremely successful at is helping the switch away from high emissions energy sources. The IEA points out today in its annual Clean Energy Ministerial report that global a price of 50/tonne of CO2 is required just to switch from coal-fired power to gas-fired — never mind renewables, nuclear or CCS. And yet emissions intensity is important, worldwide, and it is not improving.
Perversely, coal has become more attractive in Europe and renewables in some countries such as Germany appear to be displacing natural gas-fired plants, but not coal-fired energy:
It notes that some coal plant closures are happening in Europe — but those are due to new regulations on pollutants such as sulphur, not the emissions scheme.
If you’re going to try to create a market that captures externalities, fine; it’s a completely reasonable goal if you believe in both science and markets. However the goal of the ETS wasn’t simply to meet targets but to provide a market incentive to migrate to cleaner energy supplies. The European Union has an ambitious target to reduce its emissions by 80 per cent by 2050, compared to 1990 levels. Reducing greenhouse gas emissions can be done either by reducing electricity output or generating energy with lower emissions. In 2012 emissions were 1.4 per cent below 2011 — but much of the reason emissions have been below targets in the past few years is simply due to reduced economic activity.
Of course some improvements have been made in terms of energy efficiency and increasing lower-carbon energy supplies, but with little net change in Europe’s energy emissions-intensity, it might not be enough when stronger economic growth returns (yes, pipe down in the back, it could happen).
Related links:
EU carbon allowances as the new Bitcoin – FT Alphaville
EU greenhouse gas emissions targets – European Commission
EU carbon prices crash to record lows – FT