The EU carbon market today suffered a potentially catastrophic blow, as the European Parliament rejected a plan to temporarily breathe new life into the flagging scheme. The news sent the carbon price tumbling to around â?¬3 per tonne.
Despite some hope that the vote could focus EU efforts to reform its carbon policies, most commentators fear it will prove a major setback for market-based emissions reduction.
MEPs today voted by a narrow majority to reject a proposal that would withhold 900 million permits from the EU emissions trading scheme (ETS) – known as backloading. The emissions trading scheme has been in decline for months, with the carbon price hitting record lows earlier this year.
Companies buy and sell permits to emit carbon dioxide in the 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. But the economic slowdown meant the market became over-supplied, sending the carbon price sliding to record lows and removing the incentive for polluters to cut their emissions.
Backloading would have reduced the number of permits on the market, which policymakers hoped would boost the carbon price. That plan is now “politically dead”, according Marcus Ferdinand from market analysts Reuters Point Carbon.
Today’s vote was expected to be close – and so it proved. 315 MEPs voted for the backloading plan, but 334 MEPs voted against.
That the vote was decided on just 19 votes shows there are “two equally strong groups of MEPs on either side of the debate”, according to Ferdinand.
The vote hinged on parliament’s largest political group – the centre-right European People’s Party (EPP) group, which includes the UK’s Conservative MEPs. Before the vote, a majority of the group opposed the plan, arguing backloading would lead to higher energy prices. Today the group split over the vote, with the majority of EPP members voting against the plan.
The outcome disappointed NGOs. Greenpeace’s EU climate policy director, Joris den Blanken, calls parliament’s failure to adopt the plan a “historic failure”. And Baroness Worthington of carbon market campaigners Sandbag says:
“[The vote means] the EU will miss out on much-needed investment in increased industrial efficiency and the low carbon economy at precisely the time when other countries such as China and the US are starting to catch up.”
Future of the ETS
The EU’s climate commissioner, Connie Hedegaard, previously said backloading was just a short-term fix intended to “stop the bleeding”. But parliament is now “back to square zero” according to Sarah De Block of the International Emissions Trading Association (IETA). Attention now turns to longer term reforms.
The European Commission has a shortlist of measures that could be implemented to breathe fresh life into the ETS – from reducing the overall number of permits to extending the scheme to more sectors, or setting up new mechanisms to manage the carbon price.
Member state climate policies will also become more significant, according to Konrad Hanschmidt of market analysts Bloomberg New Energy Finance. He tells Carbon Brief:
“The seeming failure of the backloading plan makes it all the more likely that individual member states will go their own way – as we have seen with the UK price floor – moving away from a common energy policy that several companies are calling for.”
But the vote is not necessarily the end for EU climate change policy.
Climate finance advisor Laura Dzelzyte says:
“[E]ven though we have a ‘no’ vote today, the EU will stay committed to GHG emissions reductions and choose an appropriate and acceptable instruments to continue.”.
Head of Environment and Energy at thinktank Policy Exchange, Guy Newey, adds:
“Scuffling over a short-term, temporary measure is a sideshow compared to the need for real reform of the ETS and Europe’s wider approach to climate”.
Sandbag’s Rob Elsworth says attention now shifts to the European Council, which is expected to meet to discuss the future of the carbon market later this week.
So while the ETS suffered a major blow today, it has possibly created the space for a wider debate on the EU’s climate change policy in the longer-term. Nonetheless, Stig SchjÃ¸lset, Head of EU Carbon Analysis at Reuters Point Carbon, says today’s vote is likely to have made the ETS “irrelevant as an emissions reduction tool for many years to come”.