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EU emissions trading scheme saved - for now

  • 19 Feb 2013, 09:30
  • Mat Hope

A major vote in the European Parliament today may have saved the European Union's emissions trading scheme (ETS) - for now. The scheme was on  "life support" earlier this year as an oversupplied market set the carbon price plummeting to record lows. Now, the approved plan should boost the carbon price by €2-3 and prevent 900 million tonnes of carbon dioxide from being released into the atmosphere.

The European Parliament Environment, Public Health and Food Safety committee (ENVI) today voted by a comfortable majority to temporarily prevent 900 million permits being released into the ETS. 

The EU climate commissioner, Connie Hedegaard, said the plan would "stop overflooding an already overflooded market". The vote comes almost a month after an advisory committee recommended Parliament reject the plan.

Damien Morris from carbon market campaign group Sandbag says the approval is "a promising first signal that policymakers recognise the current threats to the EU ETS and are prepared to salvage it".

The plan

Companies buy and sell permits to emit carbon dioxide under the EU ETS. If they emit less than their permits allow, they can sell the excess for a profit. The scheme is meant to reward those that cut their emissions, and it relies on a shortage of permits. 

The ETS is not uncontroversial - 92 environmental groups signed a letter earlier this month calling for the flawed ETS to be replaced with a more effective climate policy.

One of the ETS's main problems is over-supply. There are currently too many permits in the system which means that polluters don't need to cut their emissions and the price of permits has slid to record lows. The over-supply is partly due to the economic slowdown - demand is low, so power plants don't need all their permits. 

Backloading means the withdrawal of 900 million permits - each representing a tonne of carbon dioxide - from the market between 2013 and 2015. They will be released gradually back into the market in 2019 and 2020. Market analyst Reuters Point Carbon expects the approval to drive the carbon price up by €1-2, to around €7 per tonne of carbon dioxide. 30 industry organisations yesterday signed a letter encouraging the committee to approve the measure.

The ENVI committee

The committee is made up of members of the European Parliament (MEPs). ENVI must now guide the measure through a vote by the whole parliament. The UK, France and Belgium have been the major supporters of the plan.

MEPs from Poland came out against the measure in the build-up to the vote - arguing Poland would lose 1 billion euros in revenue from permit sales. But the commission dismissed their arguments, arguing backloading would benefit all European economies.The Czech Republic, Slovakia, Hungary, Bulgaria and Romania also oppose the plan.

In the end, the measure passed by 38 votes to 25 - a "larger than expected majority", according to Sarah Deblock from the International Emissions Trading Association.

What it means in the long-term

Even with the backloading measure, the ETS may need greater reform in the long term. Ultimately, some or all of the withheld permits may need to be cancelled. 

Reuters Point Carbon says if the permits are not cancelled, then prices could remain between €8 and €10 per tonne between 2013-2015 and then collapse to €6 in 2020 when the permits are reintroduced. 

Dr Cameron Hepburn of the London School of Economics says that the while the vote is "good news", it ultimately "does nothing to address the need for fundamental reform, especially a credible, rules-based price stabilisation mechanism".

It's also not clear whether all the performance over the vote was really necessary. Laura Dzelzyte from market traders CF Partners tells Carbon Brief the European Commission can actually adjust the number of permits in the system without parliament's immediate say so. 

According to a directive, the commission could have just withheld the permits. If parliament doesn't raise any objections within 3 months - which it rarely does - then the move becomes law. 

Dzelzyte says today's vote was "just to be sure" parliament wouldn't object at a later date, rather than a necessary move right now. The commission may still act alone to enact further reform. 

Temporary solution

Backloading seems to have worked for now - and the vote was an important symbolic moment showing key players are behind the plan. But the EU ETS needs more than a temporary measure if it's going to carry on working as an effective climate policy. Deblock says the vote "is a positive sign that will help market confidence" but is not a "standalone measure" - for the ETS to remain healthy there needs to be greater structural reform.

Update: Next steps

The next step is for the ENVI committee to vote on whether to take the backloading proposal to a meeting with the European Council and commission. The ENVI committee will try to find common ground with colleagues from the industry committee that currently opposes the plan - both groups of MEPs have to agree if the proposal is to proceed. 

That vote will take place on February 25 or 26. 

On the news of today's vote, the carbon price actually dropped by about one euro - to €4.09 per tonne. Reuters Point Carbon market analyst, Marcus Ferdinand, says the fall was a "classic buy on rumours, sell on facts reaction" - in other words, the market expected this decision but remains unconvinced that the measure will pass the whole process, so the value of the permits is still low.

He added while today's vote was "one small step in the process", all it really did was "buy some time" for more reform.

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