The European Commission’s department for Climate Action (DG CLIMA) has proposed changing the timing of auctions for its Emission Trading System (ETS), the world’s first and largest international scheme for the trading of greenhouse gas allowances. Industry representatives and environmentalists alike have been eagerly waiting the move as the scheme, which enters its third phase in 2013, has suffered badly from a collapse in prices due to oversupply.
The ETS works by the ‘cap and trade’ principle: a cap is placed on total greenhouse gases within the system and under this cap companies receive emission allowances which they can sell to or buy from one another. At the end of each year each company must handover enough allowances to cover all its emissions. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company. However, if the company exceeds its allowances, it must pay a heavy fine. The number of allowances is reduced over time so that total emissions fall. The limit on the total number of allowances available should ensure that they have a value, however oversupply has diminished their worth.
Shortly before the summer break in Brussels, the Commission proposed changing the timing of when allowances are auctioned in an effort to improve the functioning of the market. Specifically, the Commission wants to postpone or ‘back-load’ some auction volume from 2013-2015 towards the end of phase three (2013-2020). This will require a change to legislation on the ETS which must first be approved by the European Parliament and the Council.
At the announcement of the proposal, Climate Action Commissioner Connie Hedegaard noted, “The EU ETS has a growing surplus of allowances built up over the last few years. It is not wise to deliberately continue to flood a market that is already oversupplied. This is why the Commission today has paved the way for changing the timing of when allowances are auctioned. This short-term measure will improve the functioning of the market. If the political will is there, all the necessary decisions can be taken before the next auctioning phase starts at the beginning of 2013. Now it is up to the European Parliament and Member States to deliver. After the summer recess, the Commission will also finalise the options for long-term structural measures.”
While environmental groups Greenpeace and WWF welcomed the news, they expressed disappointment that the Commission has not yet suggested structural measures to reform the carbon market, such as permanently removing allowances or increasing the EU’s emission reduction target.
Greenpeace EU climate policy director Joris den Blanken said, “We need swift and decisive action or the scheme will deteriorate fast and will not deliver any real reduction in carbon emissions for at least a decade. The number of allowances needs to come right down or companies might as well be trading Monopoly money.”
Phase three of the scheme, which covers emissions from power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board, aims to bring emissions down by 21% compared to 2005 levels. During this phase an EU-wide cap per sector will be introduced rather than the previous per-country cap and more than half of the allocations will be auctioned as opposed to the mainly free allocations of previous phases.
The ETS covers about 11,000 industrial installations in 30 countries and, at the end of August, it was announced that Australia intends to be the first non-European country to sign up to the scheme. If the Commission’s plan is approved by the European Parliament and EU governments , the Commission will release a detailed proposal specifying the timing and exact amount of allowances that should be withheld from the carbon market.
Aoife O’Grady is an Irish, Brussels-based journalist focusing on environmental issues.
European Commission: ETS ec.europa.eu/clima/policies/ets/index_en.htm
Greenpeace/WWF: Strengthening the EU emissions trading scheme and raising climate ambition
Facts, Measures and Implications www.greenpeace.org/eu-unit/en/Publications/2012/ETS-report/