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EU emissions drop shows need for carbon market reform

  • 03 Apr 2013, 13:30
  • Mat Hope

Credit: FutureAtlas

EU emissions fell by 1.4 per cent in 2012, according to new European Commission data. While that may sound like good news, some analysts say it really shows the extent of the problems with the EU's carbon trading scheme.

Falling emissions

The European Commission released the results yesterday, based on preliminary data reported by the projects and companies covered by the emissions trading scheme (ETS). Around 90 per cent of the included projects have so far reported to the Commission. 

Overall, emissions covered by the scheme fell by about 28 million tonnes according to data from market analysts Reuters Point Carbon - largely because of the state of the European economy. The emissions-intensive industrial sector saw a four per cent drop, as the recession meant less industrial activity. 

Reuters Point Carbon says cement production fell by 13 per cent, construction activity dropped five per cent, and crude steel production was down three per cent. It says a collapse in the cement industry in Italy was largely responsible for the country's six per cent emissions reduction, and this trend doesn't look like changing any time soon. 

Konrad Hanschmidt from market analysts Bloomberg New Energy Finance tells us that the "manufacturing sectors are showing little sign of recovery and could see emissions drop further in 2013".

The data also shows EU power sector emissions fell by 0.4 per cent, which Bloomberg New Energy Finance has attributed to a surge in renewable electricity generation.  

But Reuters Point Carbon points out that overall "the decrease in emissions would have been greater had fuel switching from gas to coal not increased emissions in the power and heat sector last year". This fuel switch meant some of the EU's largest economies increased their emissions - UK emissions rose 4.7 per cent, France's by nearly four per cent. 

So it was the economic recession which lowered demand. Some analysts say this shows how broken the ETS actually is. To be effective the scheme should limit the number of permits to pollute that are available. But the economic downturn means there's a surplus, driving the price down, and stopping it from sending a long term signal to polluting industry to decarbonise.

Need for reform

The European Parliament is due to vote on a measure to breathe new life into the ETS on April 16th. If approved, the plan would temporarily withhold 900 million permits from the market - known as backloading. This would decrease the supply, and should boost the carbon price.

This is a step Damien Morris from campaign group Sandbag - which works on EU ETS reform - believes is essential. He says:

"To function as an environmental policy, an emissions trading scheme must limit pollution below business-as-usual levels, but the EU scheme has so far singularly failed to meet this criterion. It will be difficult enough for Europe to meet its share of the global climate challenge without awarding itself superfluous carbon allowances along the way, and we can ill-afford to take the pressure off the sectors most amenable to cost-effective abatement."

The Czech Republic, Slovakia, Hungary, Bulgaria and Romania are thought to oppose the plan, and two UK Conservative MEPs defied the government's position and voted against it in a February committee vote. Even if it passes, the backloading plan is only a temporary fix as permits would be gradually re-introduced in later years. 

Getting the scheme working well in the long-run may require more fundamental reforms - such as setting up a central permit bank to withhold permits when supply is too great, or introducing an EU-wide price floor similar to the one the UK government rolled out this week. But these measures would mean abandoning some of the ETS's founding free market principles, and may be even more unpopular than backloading.

So while an overall drop in emissions may seem like good news in the short-term, a wider view suggests the ETS is going to need considerable reform if it is going to help the EU reduce emissions in the future.

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