The Heat Is Online

EU deals potential "death blow" to carbon trading

Europe Vote Sets Back Carbon Plan

The New York Times, April 16, 2013

LONDON — Europe, which led the world in creating a system of emission permits to combat greenhouse-gas emissions, dealt a potential death blow to that system on Tuesday.

Focusing on immediate economic concerns over future environmental ones, the European Parliament narrowly rejected a proposal to cut the number of pollution permits. Fewer permits would have raised companies’ costs to emit greenhouse gases, which scientists have linked to global warming.

In voting down the changes, lawmakers seemed less worried about the global environmental implications than on holding down energy costs as Europe continues to emerge from a deep economic slump.

“This is a sign of a new era,” said Fabien Roques, an energy analyst at the market research firm IHS CERA in Paris. “It is a signal that policy makers will have to take into account competitiveness and costs.”

The measure was meant to put teeth into efforts to reduce carbon emissions from the smokestacks of utility companies and manufacturers by curtailing the availability of permits that allow companies to emit greenhouse gases.

Critics say that when the trading system was put into place in 2005, too many emission permits were created. The weak economy, which has reduced economic activity, has added to the glut, driving the price of permits, some of which are now auctioned, to nearly zero.

The proposed measure, which in effect would have made it much more costly to pollute, was rejected by a vote of 334 to 315.
While carbon emissions continue to rise globally, Europe’s own emissions have dropped 10 percent from 2007 to 2012, with the sluggish economy responsible for much of the decline. That has weakened the political will among European lawmakers to adopt tougher measures to cut carbon production.

At issue is the European Union’s Emissions Trading System, which, when introduced, was considered a potential global model for gradually raising the costs of emitting greenhouse gases and encouraging industrial users of coal and other carbon-heavy fuels to pursue cleaner types of energy.

Carbon emission permits are essentially licenses to release greenhouse gases, priced in units that allow the holders to emit a ton of greenhouse gases. Because a big user of coal-burning power plants might release millions of tons of greenhouse gases a year, the higher the price for the permits, the higher the cost for polluting.

The idea behind the Emissions Trading System, a concept called cap and trade, was to create a market in allowable emission credits by putting a cap on the amount of those credits and letting companies and investors trade those rights.

But a glut of permits has meant prices have been so low that big carbon polluters have had little incentive to curtail their smokestack emissions. After the vote Tuesday, the market price of a carbon allowance, which lets a factory emit one ton of carbon, fell about 40 percent, to 2.63 euros, or $3.47, a ton. Later in the day it recovered to 3.15 euros.

“Prices will sink very low — potentially below 1 euro a ton and liquidity will dry up,” wrote Kash Burchett, another IHS analyst.

Analysts say a price of 30 euros a ton or higher would be needed to persuade companies to switch to cleaner fuels like  natural gas, the main alternative to coal for producing electrical power. Natural gas is priced about three times as high in Europe as in the United States, which is benefiting from a shale gas boom.

Some European industry groups and conservative politicians on Tuesday applauded the defeat of the measure, which would most likely have put upward pressure on electricity prices and have added to the costs of manufactured goods.

“Arbitrary interventions in the carbon market would just make it more difficult for businesses to produce cost-effectively in the E.U.,” Eurochambres, which represents millions of European businesses, said in a statement after the vote.

Conservative British members of the European Parliament, who opposed the measure, seemed to be concerned about both tampering with a market and the possible economic consequences. Doing so, they said in a statement, “will only serve to discourage green investments” and “undermine much needed market predictability as the E.U. economy strives to find a way out of the economic crisis.”

Advocates of carbon trading systems conceded that the vote was a severe blow to the European effort to use carbon permits to reduce greenhouse gas emissions.

This is a crisis in European leadership on the climate issue,” said Anthony Hobley, head of the climate change practice at Norton Rose, a London law firm. The emissions trading system “has ceased to be an effective environmental tool.”

The vote rejected a proposal from the European Commission, the executive arm of the European Union, to effectively raise the price of carbon allowances by limiting their availability. The plan had called for postponing about one-quarter of the allowances that would be auctioned through 2015, deferring them until 2019-20.

The price of allowances have plunged to less than 3 euros earlier this year, to 7 euros a ton last year, down from 25 euros a ton in 2008.

The idea behind the rejected proposal was to “stop the bleeding” and halt the price decline, Connie Hedegaard, the European commissioner for climate action, said in a telephone interview.

Ms. Hedegaard noted that the commission was also preparing more fundamental changes for the emissions trading system. But she noted that those, which could include the permanent retiring of some allowances, might be even more difficult to push through the European Parliament than the proposal rejected Tuesday. “This is difficult stuff and challenging when you have a crisis and the focus is on all sorts of costs, ” she said.

Still, Ms. Hedegaard indicated that she had not given up hope of either resurrecting the defeated measure or more fundamental fixes. She took heart, she said, from the interest in cap-and-trade systems in other parts of the world. China, for example, has several pilot projects under way, and Australia is well on the way to adopting a cap-and-trade system, though Europe’s troubles could help its critics.

The United States House of Representatives passed a cap-and-trade program in 2009 but it died in the Senate, and there is no prospect of its being revived anytime soon. California, on the other hand, has begun a carbon trading system, and a group of states in the Northeast is also operating a regional one.