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New climate policy course needed as EU carbon trading flagship sinks

by Oscar Reyes on .

The European Union’s Emissions Trading System (ETS) is the world’s largest carbon market, and the model for similar schemes in California and worldwide. But it has hit the rocks and should be replaced, writes Oscar Reyes.

 The Emissions Trading System (ETS) is the European Union’s flagship climate policy and it is sinking fast.

 The stated aim behind the ill-fated “cap and trade” scheme was to set an overall legal limit on greenhouse gas emissions (a “cap”) and then grant industries a certain number of licenses to pollute (“emissions allowances”). Companies that do not meet their cap can buy permits from others that have a surplus (“a trade”). The idea is that a scarcity of permits to pollute should encourage their price to rise; and the resulting additional cost to industry and power producers should then encourage them to pollute less.

But for seven of the eight years in which the EU ETS has been in operation, the number of allowances circulating has exceeded the “cap” – a result of corporate lobbying, large offset allowances that allow companies to buy cheaper emissions credits from beyond the EU, and the effects of the economic downturn. As a result, the carbon price has collapsed. Today, it reached record lows of €2.62 (compared with highs of around €32).

The latest collapse follows a European Commission proposal to re-float the scheme involved delaying (“backloading”) planned auctions of carbon allowances, making them temporarily more scarce in order to sure up carbon prices in the short term. The European Parliament rejected this, with center-right Members of the European Parliament (MEPs) from across the continent voting against the measure. Their stated aim was to avoid market “intervention,” but their scarcely concealed intent was to give European industry a free ride from climate obligations.

Conservatives are not alone in their objections. Increasing numbers of non-governmental organizations, and some left-of-center MEPs are also calling for the ETS to be scrapped. “The vote on backloading is the wrong debate,” according to Hannah Mowat from FERN, an NGO specialized in forest policy. “No amount of structural tinkering will get away from the fact that the EU has chosen the wrong tool to reduce emissions in Europe. It is inherently too weak to get the EU to where it needs to be in the necessary timescale.” In short, it’s no use reaching for some buckets when we should be heading for the lifeboats.

These criticisms face particular opprobrium from those who believe that the only realistic course is to “save” the ETS. Opponents are treated as “useful idiots” playing right into the hands of those opposed to any climate legislation. But eight years on, and several reforms later, the ETS is still failing to reduce emissions, and at the same time has even rewarded polluters with large subsidies. Why should we expect different results from doing the same thing over and over again?

Saying “no” to the ETS is not the end of the story. It’s simply a way of refusing a forced choice, rejecting the terms of a debate that falls between rejecting legislation to address climate change and pursuing a policy that has been shown to achieve nothing. In Europe, we’ve already seen how “protecting” emissions trading has been used as an excuse to water down energy efficiency policies, which would be far more effective in reducing emissions. Emissions trading also contradicts policies like feed-in tariffs which, when applied correctly, create far better price incentives to stimulate the uptake of renewable energy.

Scrapping the ETS does not mean that climate policy will fall into a vacuum. Energy policy is largely controlled by EU member states rather than the Commission itself, and there are important lessons to be shared at a national level. Germany’s Energy Transition (Energiewende) has seen the share of renewable energy rise from 6 to 25 per cent over 10 years, with the biggest shifts driven by community and local investment rather than the energy multinationals. This has not been driven by the ETS, but rather by a guarantee that renewables will gain access to electricity grids, providing certainty for investors.

At the EU level, the Commission should re-focus on securing more ambitious climate targets now that “backloading” is dead in the water. Removing the ability to circumvent domestic action by buying carbon offsets would help considerably with that goal.

There are significant lessons, too, for other states that are considering emissions trading. Attempts to patch up the ETS ignore the schemes more fundamental failings. These start with the very notion of abstracting “carbon” as a tradablecommodity, which frames climate change as a problem of cost adjustments that can be managed by a market that is assumed to allocate goods efficiently, rather than as a historically embedded problem of the dominant fossil fuel-based development model.

Ultimately, the EU and other industrialized countries need to massively reduce its overall consumption of energy, including its outsourced emissions, which have continued to rise irrespective of emissions trading. This doesn’t require “flagship” emissions trading schemes, but rather a sea-change in our thinking about how policymakers can help to address climate change.

 A version of this article was first published by the EU Observer.

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