Experts unconvinced latest reforms will save the European carbon market
- 29 Jan 2014, 12:00
- Mat Hope
Credit: Karlis Dambrans
Policymakers have long asserted that making
polluters pay is an effective way to reduce greenhouse gas
emissions. But with Europe's carbon market floundering, the EU is
having to rethink how to go about setting a carbon
Carbon pricing only works as a climate change policy if the cost
of emitting carbon dioxide is high enough to make companies change
But the European carbon price has rarely been high enough to
make that happen, and has plummeted in recent years. That means
polluters have had little incentive to reduce their emissions.
With that in mind, the European Commission last week announced
the next in a series of reforms
it hopes will boost the carbon price and save the carbon market.
But is it too little, too late?
A year ago, the European carbon price hit a
record low of €2.81, damaging the effectiveness of the
Companies buy credits to emit through a mechanism called the emissions
trading scheme. If a company emits less than the number of
credits it holds, it can sell them - setting a carbon price. In
theory, the higher the carbon price, the more companies will do to
The recent price dip is mainly down to the economic recession,
which forced many European
industries to rollback. That lowered demand for energy and
therefore permits, and caused the carbon price to fall.
But despite decreased demand, the number of permits in the
system stayed the same. As such, companies started to stockpile
credits to use in later years in case the economy - and demand -
recovers. If that happens, companies will be able to crank their
emissions back up without having had to pay for the privilege.
The economic recession highlighted a fundamental flaw with the
way the market is was originally designed. As there was no way to
adjust the number of permits in the system, it meant companies'
could effectively delay their emissions, rather than making efforts
to reduce them.
To try and overcome this problem, the commission last year
implemented a plan to temporarily take out 900 million carbon
credits - known as
backloading. The move helped boost the carbon price back up to
around €5, where it has stayed since.
But the credits are set to be
reintroduced in 2020, so the commission's plan is only a
With the longer term health of the carbon market in mind, the
commission last week announced plans for another reform:
implementing a 'market
Under the proposal, the commission would be allowed to tinker
with how many permits are in the market. If there are too many
permits, the commission will put 12 per cent into a reserve. If
supply gets too low, the commission will slowly release these back
into the market.
Permits will only be removed from the market if the there were
more than one billion in circulation the year before. The permits
in the reserve will then be released back into the market, one
million at a time, if the number of permits in circulation dips
below 400 million.
The commission will announce whether it will adjust the number
of permits months ahead of doing so, to prevent companies panic
buying. That way, the price should gradually increase, rather than
The reform should help the price stay at a reasonable level,
without the commission having to directly adjust the price, says
Damien Morris, from market reform campaign group, Sandbag. Market
analysts, Reuters Point Carbon, suggest the reform could mean the
carbon price rises to
€12 euros higher than it otherwise would have been.
But while boosting the carbon price could make the scheme more
efficient, there are downsides.
Speaking at an event organised by policy thinktank, Carbon Connect,
Morris argued that the commission had given in to political
pressure when it settled on the market reserve proposal. More
effective mechanisms to fix the carbon price - such as price
ceiling and floors, like
the one in the UK - were overlooked as they were "politically
unviable" to countries who want no interference in the market, he
More problematic, however, is the fact that the reform doesn't
kick in until after 2019, he says. That means companies can
continue to emit freely until then, with a carbon price hike - and
emissions reduction efforts - potentially being put on hold for the
rest of the decade.
And then there's the small matter of getting the European
Parliament and member states to agree to the proposal, which
proved to be tough last time the commission tried to reform the
Even if the proposal was fully implemented, it may not be enough
to save the carbon market.
Speaking at the same event, Oxford University economist Cameron
Hepburn said the reforms were "too little, too slow". He said the
carbon market had been designed badly from the outset, and the
commission was only just getting round to rectifying its original
Unfortunately, it's doing so at a time when public scepticism of
any measure which may push up energy prices is high - making long
term reform of the market a hard sell, he argued.
Nonetheless, the commission's proposal shows
European policymakers are still committed to making one of the EU's
landmark climate policies function in the long run - even if the
experts aren't convinced its tinkering will work.