Emissions trading - A first assessment and the way ahead

16 January 2006

The European Policy Centre and the College of Europe jointly hosted a debate on Emissions trading - a first assessment and the way ahead with keynote speaker Frank Convery, Heritage Trust Professor at the University College of Dublin, and panellists Jos Delbeke, Director, Air and Chemicals, Environment Directorate-General, European Commission; Matthias Duwe, Director, CAN-Europe; Robert Jan Jeekel, Trade and Economic Affairs Manager, Eurometaux; and Vittorio Prodi MEP. The debate was moderated by EPC Senior Advisor Eberhard Rhein, and the event was opened and closed by Raimund Bleischwitz, Toyota Chair for Industry and Sustainability, College of Europe, Bruges.

In his keynote speech, Professor Frank Convery said that one year on, the EU’s emission trading scheme had defied many of the warnings voiced by critics at the outset.

There had been fears that prices would be too low to provide any great incentive to trade and make a real market in allowances. But prices had in fact been healthy, chiefly because demand had been higher than expected. Concerns that the scheme would need market management had also proved unjustified, and there had been no consumer revolt at rising prices.

What was still missing, however, was the kind of tremendous innovation borne of the restrictions introduced to clamp down on acid rain. It was vital for the same thing to happen with greenhouse gas, driving a whole new wave of technologies and approaches. Some of this would come from the market, from price signals. But policies also needed to be clustered to support innovation, and political will was needed.

Professor Convery concluded that the trading scheme would survive. There was such faith in the project that there was no need for the Kyoto treaty to act as a spur (the system had, in fact, been agreed before Kyoto was ratified). Businesses were now also used to their carbon allowances being an intrinsic part of their balance sheet and would be reluctant to give them up. And as the notion of trading had now become part of the whole ‘chemistry’ of climate change, it was here to stay.

The Russia-Ukraine dimension would also be crucial and it was vital that both benefit from the Kyoto process. That might mean some bilateral country-to-country trading - controversial among environmental campaigners but a necessary price to pay in order to get these important players integrated into the system. If other countries like Japan and Canada initiated emission trading schemes, the impetus towards this model as part of the solution to climate change would take on a global dimension, which would perhaps be the decisive stimulus for the US to act.

To date, there was no fulcrum from which change could be driven in the cheapest way and in a manner that created the stimulus to innovate. Europe had that now in the ETS.

Presenting the EU institutional view of what happens next, Jos Delbeke said the European Commission was pleased with progress in the first year, but it was already time to look ahead. The discussion would concentrate on guidance for the second trading period coming up, but also a review of the directive. The latter might seem premature, but was a requirement incorporated into the institutional agreement between the European Parliament and Council of Ministers.

Mr. Delbeke said the allocation plans needed to become much simpler and more transparent. The charm of the trading scheme itself was its transparency, but the same was not quite true of the national allocation plans.

Member States introduced a lot of complexities when drawing up their national plans, particularly on allowances for new entrants and company closures. While there might not be much scope to go beyond what was already in the directive, a signal was needed that there should be limits to what Member States could elaborate in this area. Also, it would have to be made clear that there could not be ex-post adjustments once a trading period had started. If this started to happen, it would result in quasi quota management, which was less transparent.

In the review of the directive and for the next allocation period, there might well be calls for even more predictable allocation rules. Mr. Delbeke said the need for more harmonised rules on new entrants and closures would certainly have to be examined.

If successful, the ETS should be widened to cover more sectors and more gases. There might also be a need to consider longer allocation periods for the sake of commercial planning, with many calling for periods of ten years or more.

Robert Jan Jeekel turned the focus towards the energy companies themselves. While users like his members (one of the most energy intensive industries) were facing heavily distorted and uncompetitive power markets, the power companies themselves were ratcheting up prices under the guise of covering the cost of carbon cut-backs.

Responding to claims that the ETS was fostering innovation through incentives to squeeze energy use, Mr. Jeekel said his industry had already reached the limit of reduced power consumption, and for a sector like his, there was no room for further significant innovation. He also warned that including other sectors, in particular aviation, would be counterproductive. Aviation would end up being a net buyer of allowances, forcing prices up and prompting higher electricity prices as a result.

Matthias Huwe said environmentalists were less interested in the instrument itself, as long as it achieved the environmental objective - namely, to cut emissions - and very few Member States had asked their sectors to make real reductions. In the long term, there must be a review of the windfall profits problem, whereby industries benefit from inheriting (or ‘grandfathering’) rights from their carbon-profligate pasts. More auctioning of rights could help reduce this problem.

But for the ETS to remain relevant, the Kyoto protocol must stay alive. To this end, discussion should focus on future targets beyond those set out at the Montreal UN Climate Change Conference in December. Furthermore, the ETS was designed as a means of reducing emissions, and it was in this context that it should be reviewed in future. In that way, the EU could help to influence others, like the US. A system which led to domestic reductions would prove that the Union was credible when it talked of leading the way on climate change.

Vittorio Prodi MEP said that for the European Parliament, the emissions trading and climate change issues were closely bound up in the overarching policy of sustainable development. The ETS was addressing a genuine problem with a rational instrument, but Mr. Prodi expressed surprise that there had been no related talk of turning to alternatives. Why not consider wind power? Or solar power? Why not look at biomass as an alternative energy source?

This would also provide agriculture with a completely different perspective. It could mean putting farmers on their feet as real entrepreneurs without subsidies, while at the same time tackling head on the problems of climate change.

At the same time, said Mr. Prodi, there had been moves towards other policies to cut greenhouse gases. The European Parliament had already witnessed attempts to regulate emissions in terms of CO2 equivalents, by, for example, putting ceilings on emissions per kilometre for the automotive industry, regardless of whether they came from the in-car air conditioning or the engine, and for all greenhouse gases.

What was heartening about the present ETS was that it was working. But there needed to be a change in the way people think about the problem of climate change and how energy is produced.