Can the EU’s cap-and-trade system be saved?
The European Union’s top climate chief vowed to save the area’s crumbling cap-and-trade system after carbon emission permit prices plunged earlier this year on the EU Parliament’s rejection of a quick fix to the system.
“We are preparing structural [longer-term reforms],” said Connie Hedegaard, EU commissioner for climate action. “We will have new meetings for stakeholders, in parallel with an impact assessment. We are preparing an initiative.”
The European Parliament rejected a plan to temporarily take emissions permits out of the cap-and-trade system to raise the price of emitting CO2. The market has already plunged twice this year due to an overabundance of emissions permits in the system which have driven down prices.
The low permit prices have led analysts and observers to call into question the efficacy of the cap-and-trade system as a way to combat climate change.
Earlier this year, The Financial Times reported that after the cap-and-trade market hit two record-low prices within four days some analysts began calling the carbon permits “worthless.”
“The rejection of the Commission’s proposal to postpone the auction of 900 million allowances effectively renders the ETS impotent as a tool for shifting investments into less polluting generation technologies,” said Josche Muth, secretary-general of the European Renewable Energy Council.
“Emissions trading is a market artificially created by politicians. Probably this is the reason why it works,” said Holger Krahmer, environment spokesman of the the classically liberal German Free Democratic Party in the European Parliament. “The attempt to save the system by selective interventions is hopeless.”
Furthermore, Reuters reported that the bank Societe Generale cut its EU carbon permit price forecast by 30 percent, due to price crashes.
“Negative news and events relating to the EU [Emissions Trading System] continue to pile up and come from all sides. So it is not at all surprising that EUA prices have fallen and have continued to be quite volatile,” they said. “The EU ETS has become a one-way market, spiraling down.”
The EU’s cap-and-trade system began in 2005 to address climate change by cutting carbon dioxide emissions, and it is one of two major carbon dioxide emissions trading schemes in the world. It’s now in dire straits which undercuts Europe’s reputation as a leader in fighting climate change.
“[T]he EU’s biggest joke of a climate policy—by far—has been the Emissions Trading Scheme, a cap-and-trade,” writes William Yeatman, energy policy analyst at the Competitive Enterprise Institute.
“It’s actually failed twice. During its first phase, the over allocation of carbon rationing coupons led to windfall profits for utilities, but no actual emissions reductions, as the carbon price plummeted,” Yeatman added. “EU bureaucrats shouldn’t fret over their climate policy failures, which were inevitable.”
However, the European Commission remains determined to fix the carbon trading scheme.
“The Commission remains convinced that back-loading would help restore confidence in the EU ETS in the short term until we decide on more structural measures,” Hedegaard said. “We will now reflect on the next steps to ensure that Europe has strong EU ETS.”
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