Europe’s carbon trading system can be saved, but must avoid past renewables mistakes
The European Parliament’s decision to vote down a proposal to temporarily remove permits from the EU Emissions Trading System has sparked an outcry of doom-mongery that carbon trading is dead.
But the botched ‘backloading’ proposal must be recognised for what it was; a political fudge masquerading as an important intervention, to try and prop up the carbon price. It was inadequate to address the genuine problems with the Emissions Trading Scheme. What is now needed is proper reform of the ETS and Europe’s wider climate policy.
To make sense of this mess, it is important to understand the EU’s recent climate policy history and see what lessons it has for future efforts to cut emissions.
At a European summit in March 2007, Tony Blair and other European leaders took one very sensible step and one foolish one. Blair, only a few months before he was nudged out of Downing Street, was a key force behind the EU’s 2020 climate package. The package had two binding targets. Firstly, the European Union would reduce its greenhouse gas emissions by 20% compared to 1990 levels. Secondly, and disastrously, 20% of all Europe’s energy would come from renewables by 2020.
The EU is now considering a similar package 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 UK Government currently holds the correct position of vigorous support for the former and opposition to the latter. It now needs to convince the rest of Europe and avoid repeating some of the mistakes that have led to Tuesday’s ‘no’ vote.
Firstly, there should be unequivocal backing for an ambitious, binding 2030 target to reduce the overall level of EU emissions. Some reporting of the Commission’s consultation suggests even this carbon target may be at risk. This, though unlikely, would be a huge mistake.
Cutting carbon emissions is imperative to avoid the serious threats created by a rapidly warming world. The precise future effects of higher global temperatures are unknown, but they certainly risk significant damage to the planet’s water and food and weather systems, potentially undermining our way of life. Moreover, climate change threatens our wildlife and important habitats. As Roger Scruton says, as stewards of the natural environment we must lose the “habit of treating the earth as a thing to be used but not revered”.
However, the clear need for action on carbon does not translate into automatic support for renewable energy – even with the ETS delivering such a low price. After the vote, the traded price fell below 2 Euros. Surely now Europe needs more intervention, not less?
There are two main reasons for the pitifully low price: the recession, which has devastated demand for activities that generate emissions, such as power and heavy industry; but also the Renewable Energy Target itself.
The RE Target depresses the ETS price by making us do some of the most expensive things first. In the UK’s case, this is the mass roll out of offshore wind. Our current approach is like being given £1,000 to feed as many people as possible and starting by ordering caviar. This, combined with the recession, means that the traded price is inevitably low as most of the heavy lifting has been done elsewhere. We have essentially already achieved our cap for 2020, seven years early. It is amazing the price was not already zero.
Of course, a low price is not in itself a bad thing (nor is achieving targets early). A trading system should deliver the most cost-effective ways to cut emissions. Many low carbon options, such as improved industrial efficiency, are pretty low or even negative cost. This will not incentivise many renewables, or nuclear or CCS, but that is not the point of the ETS. The point is to limit the pollutant, carbon, and then allow technologies to compete to deliver lower carbon energy. We do need additional mechanisms for reacting to major, unexpected changes in the macro-economic picture, but the backloading botch is not the right way to do so.
We also need large sums of public money to support new and developing technologies. But our focus must be research, development and deployment that helps bring costs down for globally important technologies, and away from pointless targets that push up bills unnecessarily.
Despite the cleverness of economic modellers, the only honest answer to the questions of what gas prices will be, how much nuclear power stations or wind turbines will cost and how much energy we will need in 20 years is ‘I don’t know’. The history of the energy industry is littered with predictions that turned out to be completely wrong. Fukushima, shale gas and solar power (as well as the recession) have in different ways demonstrated the folly of consensus energy predictions in recent years.
The market is the best system we have for coping with these huge uncertainties, which is why carbon pricing must continue to form the backbone of EU carbon policy. The alternative, planned approach with sub-targets for renewables at arbitrary dates being added because a model, in this case the EU’s 2050 roadmap, says so is ridiculous and potentially expensive.
Like all markets, a carbon market will lead to surprising and innovative choices, but it should find the cheapest way to a low carbon economy. As long as the outcome is, in this case reducing carbon achieved at the lowest possible cost, does it matter whether it is achieved by better insulated homes, new nuclear power stations or wind turbines?
If Europe shuns a market solution and instead clings to the deceptive comfort of subsidies driven by the Renewable Energy Target, it is not really serious about tackling climate change. Such a choice matters because Europe needs to both protect its economy and provide a compelling decarbonisation example for the rest of the world to follow.