Backloading is a temporary fix, the emissions trading scheme needs bolder reform

June 19, 2013

Today the European Parliament’s Environment Committee will attempt/ attempted to fix Europe’s flagship decarbonisation policy, the beleaguered Emissions Trading System. The proposal will see some permits (permission to emit a tonne of carbon) withdrawn temporarily from the carbon market. If this sounds familiar, it is because it tried exactly the same thing in April, only to be voted down by the full parliament. The committee has made a few tweaks, but the premise remains unchanged.

Unfortunately, the premise is a political fudge masquerading as an important intervention. It tries to prop up the carbon price in the short term without addressing fundamental weaknesses of the current cap and trade system. The EU would be better served by turning its attention to fixing the long-term problems afflicting the ETS. If it fails to do so, then the backbone of Europe’s climate policy will remain fractured and Europe will have shown it is not serious about tackling climate change.

Getting carbon pricing policy right is an important way to stop pumping more greenhouse gases into the atmosphere. The current scientific consensus argues for cuts in carbon emissions to mitigate risks from dangerous climate change. But many potential responses to climate change are expensive. Only a system that can identify the cheapest low carbon technologies can help keep those costs as low as possible. The ETS, which is designed to cap carbon emissions and then allow technologies to compete, should deliver such an outcome.

Like all markets, it may lead to surprising and innovative outcomes. But it should find the cheapest way to a low carbon economy. As long it achieves the carbon cuts expected of it, does it matter whether it is achieved by better insulated homes, new nuclear power stations or wind turbines? And the cheaper the cost of decarbonisation, the more likely it is that the effort is politically sustainable and that other countries, notably the US and China, will follow Europe’s example.

In a report we launched this morning, Policy Exchange calls on the EU to radically strengthen the ETS. That means setting an ambitious, carbon target that stretches out to 2035 giving investors clear, long-term direction. It also entails ditching the expensive renewable energy targets that have added unnecessary costs to European energy bills.

Moreover, it means establishing a system that can respond to major changes in the economic, political or scientific circumstances. The slack under the current ETS cap has led to the current price having collapsed to €4/tonne, compared to about €20 just 3 years ago. The ‘business as usual’ case used to set the cap turned out to be highly inaccurate in the wake of the financial crisis. Without any straightforward means of tightening the cap, Europe has resorted to the current highly politicised process for intervention.

Recommendations stumble back and forth between the European Commission, Parliament and its committees. Each time it is lurches in a different direction, its political credibility is damaged. As a result, even coal, the most polluting of power sources, is having a mini-renaissance.

Our report argues that an independent agency, modelled along the UK’s Committee on Climate Change is imperative if we are to avoid the current chaos. The body would make firm recommendations on when politicians should intervene (with politicians still making the final decisions). It should be set up with clearly defined rules and on a set timetable. Intervention would only be necessary if: macroeconomic circumstances changed significantly (as in the global financial crisis); if progress on an international deal failed (or was more ambitious than expected); or if the climate science changed. Crucially, such a body would not intervene just because the price was lower or higher than expected. If you want a market system, you have to trust the price signal.  So long as emissions are being cut sufficiently, low prices should be celebrated.

Such an agency would be better placed to navigate between the need to retain stability, giving longer-term investment signals and ensuring that decisions taken about its ambition keeps pace with world events.

The EU is now contemplating a package of climate policies for 2030, with separate carbon reduction and renewables targets. The consultation, out only a few weeks ago, suggests a 40% carbon reduction target and a 30% renewable energy target. The Commission should be more ambitious on carbon and ditch the distraction of the renewable target.

However, unless it fixes the ETS and trusts market processes to deliver the low carbon economy, all the political posturing in the world will not hide Europe’s empty words.

This article originally appeared on BusinessGreen (£)

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