NEWS ANALYSIS: Low price of emission rights ruining cap and trade system

By Heikki Arola
     
      The European Union began its trade in carbon dioxide emissions at the beginning of 2005. The system was supposed to become a cornerstone or the flagship of the EU’s climate policy, which would show the way to the other world powers following in its wake.
      Now, more than seven years later, the flagship is running aground, and the fleets of the rest of the world are each looking for their own courses.
     
The problem with the EU’s Emissions Trading System (ETS) is an oversupply of emission rights.
      Over the years far too many emission licences have been sold to industrial plants and electricity producers. Now that production has declined because of the recession, demand for licences is low, which has pushed the price of emission rights far too low – to about six euros per tonne of carbon dioxide emissions.
      One of the most important aims of the ETS was to encourage producers of electricity to move away from fossil fuels, such as natural gas and coal, to renewable sources. The higher price of electricity was supposed to encourage investments, which we consumers would have to pay as a result of emissions trading.
     
The higher the price of emission rights, the more electricity costs, and the more the producers of electricity earn. Everyone agrees that six euros per ton of emissions is too little to serve as an incentive for investments. The price should be at least EUR 20, or possibly even EUR 40.
      So EU officials and climate policy experts have a problem. The price should be pushed up. The best way to do this could be to withdraw some of the emission rights from the market, thereby reducing supply. But there are different ways of doing this and there is no agreement on which ways to choose.
     
The European Commission and the European Parliament have proposed that for 2013 and 2014 1.4 billion emission rights or more should be withdrawn from the auction that has already been promised.
      The problem is that decisions on the auctions have already been made in a directive, and they are now a part of EU legislation. If some of the emission entitlements are to be nullified, the decision would have to be approved after the fact in the national parliaments.
     
Administrative and political dabbling would also go against a basic principle of emissions trading. The original idea was that once the licences based on emission targets are released onto the market, the market can deal with the rest, according to supply and demand.
      EU business interests are split on the question. The big electricity producers favour a once-off nullification of emission rights.
      On the other side there have been calls from steel producers and other heavy industries to scrap the emissions trade directive and start from scratch.
     
One of the arguments in favour of the latter option is that the EU itself does not seem to have confidence0 in emissions trading. Initially the system was supposed to lead to reaching emission goals on its own, but then various directives and national goals for renewable energy emerged.
      Each country is free to strive for these goals in the best way that they see fit, such as national subsidies, which dilute the ETS, which was based on common rules.
      So far, emission licences have been distributed to industry and energy companies free of charge. Next year there will be a partial changeover to auctions which bring revenue to state coffers.
     
If the price of a ton of carbon dioxide is not raised, expectations of big revenues might end up being an unfulfilled dream.


Previously in HS International Edition:
  Study: emission trade could bring European electric utilities tens of billions of euros in extra profit (17.4.2008)
  Over 500 emission quotas allocated in Finland (15.2.2005)
  New emission trading period could cost nearly as much as 1990s bank crisis (7.8.2008)
  Study: Emissions trade could cost Finnish industry billions (13.3.2008)

See also:
  BACKGROUND: Voluntary emission offsets increasing (27.10.2009)
  COMMENTARY: Emissions trading for dummies (19.1.2008)

Links:
  Emissions Trading System (EU ETS)