6 things to know about the EU’s carbon market reform
A massive overhaul of the Emissions Trading System (ETS) now being completed still leaves the bloc falling short on its commitments to cut its output of greenhouse gases.
The revamp does clamp down on the chronic oversupply of permits, but it’s unlikely to be enough to make the ETS what it was supposed to be — the game changer in EU climate policies.
The result is a split verdict, said Anders Nordeng, senior analyst for emission markets at Thomson Reuters Commodities Research and Forecasts. The fact that the cost of an emission permit has jumped from about €5 per ton of CO2 earlier this year to more than €7 shows the market expects that cutting the supply of emissions permits will have some impact. “That said, our forecasted carbon prices … would clearly not be sufficient to fundamentally change the long-term investment decisions of energy groups and heavy industry.”
Here are six takeaways on the EU’s (seemingly) never-ending battle to reform the carbon market.
1. What are we fixing, and why?
More than 11,000 power plants, factories and airlines have to cut their greenhouse gas emissions by 43 percent by 2030 — part of the EU’s commitment to cut total emissions by at least 40 percent by 2030.
The idea of the cap-and-trade scheme is straightforward: Set an annual cap on emissions from power plants, factories and flights within the bloc, and lower it every year. Then make polluters pay for each ton of carbon they emit (with permits they either buy or receive for free), and let the market work its magic. The less companies pollute, the more allowances they can trade.
But rather than forcing operators to shift to lower-emitting technologies, the emissions market has suffered from a glut of low-priced permits. There were two problems: The 2007 financial crisis drove down industrial production, and from the beginning the ETS set an overly generous emissions cap.
The reform agreed to in November aims to tackle the problem by removing more allowances from the market — down by 2.2 percent every year, rather than the current rate of 1.74 percent — and setting other measures to soak up and delete some of the surplus.
Analysts say cutting the supply of permits should boost the carbon price to more than €20 in 2030. The Commission says the measure will save 556 million tons of CO2 in the 2020s, equivalent to the U.K.’s annual emissions.
The reform, which was signed off by the Parliament’s environment committee Tuesday, is due to be formally approved by the Parliament and Council in February.
2. Countries act on their own
“ETS is improved, but won’t be the flagship for EU climate policies. Additional national and European policies remain essential,” Dutch MEP Bas Eickhout, the Greens’ lead negotiator on the file, tweeted after the European Commission, the European Parliament and the Council struck a deal in November to reform the market for 2021 to 2030.
Countries agree, and aren’t waiting for the ETS to start working. London sets an extra minimum price for emissions from power plants, at £18 per ton of CO2, which is more than double the current EU price of roughly €7. The measure helped push coal plants into early retirement, and was recently extended to 2025.
Others, like France and the Netherlands, are looking to do the same. France announced plans this year to set its own minimum CO2 price, and President Emmanuel Macron said in November that he would introduce new measures to get the price to €3o.
3. Blacklisting coal
Negotiators spent a lot of time trying to figure out how to prevent Central European countries from funneling energy modernization funds into coal projects.
The ETS reform creates a fund to help the EU’s 10 poorest members, all in Central Europe, upgrade their energy systems. Some, especially Poland, wanted the freedom to put those funds into technology to clean their existing coal plants. Western countries paying into the fund, and MEPs, wanted to make sure it wasn’t used to keep coal running.
The compromise: The money can’t go to solid fossil fuel projects — something Poland had lobbied for — but it can go to coal-fueled district heating systems in Bulgaria and Romania. Plus, the 10 members can use their free emissions allowances to upgrade their power sectors (something other countries can’t do), and get the option of more free allowances than originally foreseen.
A separate innovation fund is meant to promote clean energy technologies like carbon capture and storage.
4. Shielding heavy industry
The reform was always going to be a balancing act between keeping power-hungry factories and manufacturing plants from moving to less environmentally stringent regions (called carbon leakage), and making sure the system pushes these sectors to adopt greener technologies.
The reformed ETS will continue to give free emissions allowances to industries like steel, chemicals, non-ferrous metals, paper and pulp and cement. But the list of installations getting all their allowances for free was tightened to focus on those most in need. Less-exposed sectors will start by getting 30 percent of their allowances for free, a number that drops to zero by 2030.
Industries still weren’t thrilled by the outcome of the reform, but their outcry was fairly muted.
The steel group Eurofer was one of the loudest critics, saying even the most efficient European plants may face significant costs compared to international competition.
The European Chemical Industry Council was one of the most welcoming, resigning itself to the fact that policymakers “tried” to find a balance between strengthening the market and treating EU industries fairly. “Industry will be impacted in many places,” said Marco Mensink, its director-general. “However, we also see the need to close the debate now.”
Others still worry their handouts won’t cover the emissions costs for the electricity they use, even though countries have the choice to compensate industry.
“I’m pretty sure the innovation will happen, but I’m not sure it will happen in Europe,” said Cillian O’Donoghue, energy and climate change manager at the non-ferrous metals association Eurometaux. “People are not going to stay in the short- or medium-term if they’re losing money.”
5. Grumbling Greens
For many environmentalists, the carbon market reform falls far short of the EU’s responsibilities under the Paris climate agreement, which aims to limit global warming to well below 2 degrees Celsius and eventually 1.5 degrees by 2100.
Meeting that second, loftier Paris goal requires the EU to shrink the amount of pollution allowed in the market by 4.2 percent every year between 2021 to 2030, according to the NGO Carbon Market Watch. That’s nearly twice the 2.2 percent rate agreed in the reform.
The price rise is also insufficient, according to Carbon Market Watch. The price of an emissions permit is expected to go from roughly €7 per ton of CO2 now to €30 in 2030 — that’s still well below the whopping €100 the NGO says is needed.
“The ETS will continue to play the role it has been playing in the last couple of years — one close to meaningless,” said Wendel Trio, director of the NGO group Climate Action Network Europe. “We now need to focus our attention on additional measures at the national level.”
6. Brexit problems
An abrupt departure from the EU and its emissions market on March 29, 2019, could cost the U.K. almost £1 billion in 2018 alone, according to advisory firm Global Counsel. It could also flood the EU market with unneeded British emissions allowances.
Why? Because polluters have to submit their allowances for CO2 emitted in 2018 by April 30, 2019 and the timing of Brexit opens up a gap. That means British operators, knowing that they will no longer be part of the ETS, could flood the market with permits, which would depress the price and destabilize the system.
The Commission’s planned answer is to distinguish U.K.-issued allowances from the rest of the bloc’s beginning next year, making it easier to cancel them.
EU national representatives approved the measure on Thursday. But in a compromise, also included a provision allowing the U.K. to change the deadline for emitters to submit their 2018 permits before Brexit. That would avoid the risk of operators being stranded with junk allowances.
“It is a safeguard measure, let’s hope we don’t need to go there,” Yvon Slingenberg, director for climate negotiations in the Commission’s climate action department, said at POLITICO’s Energy Visions Series event in November. “We simply need to make sure that if ever there is a hard Brexit, which nobody wants, that there isn’t chaos.”