The EU carbon trading scheme in crisis: Save it or scrap it?

PHOTO Credit: Carbon Brief.

In 2012, the value of global carbon markets fell by 35%, from €96 billion to €62 billion. The average global carbon price fell by 49% to €5.82 per tonne in 2012, down from €11.45/t in 2011 and €13.09/t in 2010.

The EU ETS is the world’s largest carbon market. Carbon prices have crashed mainly because of the economic crisis in Europe that has led to reduced emissions and therefore less demand for carbon. Anders Nordeng, an analyst at Point Carbon points out that the ETS is “over-allocated all the way to 2020”.

Carbon credits under the UN’s clean development mechanism are worth even less. The average price for CDM credits in 2012 was €2.54/t. In October 2012, Point Carbon predicted that UN carbon credits would be worth €0.50/t by 2020, because of the huge oversupply of allowances. In the last two months of 2012 the price collapsed to €0.40/t.

Unless EU policy makers act, “We are now facing the prospect of the carbon prices in Europe inching ever close to zero,” Point Carbon’s Nordeng commented in a recent statement. Nordeng explains that,

The climate summit in Doha did nothing to support CDM prices nor to create new sources of demand, and despite the healthy growth in California and imminent activity in Australia and South Korea, the EU ETS remains by far the dominant market segment. Against the backdrop of Europe’s protracted economic downturn and the lack of political will to intervene in the market, the carbon market should brace itself for another year of low prices.

The carbon price increased slightly this week, with traders betting on the outcome of an EU Parliament Committee vote on action to boost carbon prices, scheduled for 19 February 2013. The proposal to save the ETS involves postponing the sale of about 900 million carbon allowances until 2019-2020, in an attempt to deal with the over-allocation.

There are two responses to this collapse. The first, is that the ETS must be reformed, for example by postponing carbon allowances. The second is that it should be scrapped. It’s interesting to see who is lining up behind these two positions.

Industry is lobbying the EU to reform the ETS. On 14 February 2013, a group of 30 companies and associations (including the Prince of Wales Corporate Leaders Group) wrote to the European Parliament, Council and Climate Change Committee:

The EU ETS was designed to be the most cost effective means to reduce greenhouse gas emissions in line with the EU’s 2050 climate target, whilst at the same time, creating incentives for investments in low-carbon technologies by reinforcing a clear, long-term carbon price signal.

Companies involved include Shell, Statoil, Unilever, Carbon Capture and Storage Association, E.On and Électricité de France. When a massively polluting company like Shell is so enthusiastic about carbon trading, surely it’s time to ask why. This is a company that profits from selling fossil fuels. Obviously Shell is not lobbying for meaningful emissions cuts, or structural changes to the fossil fuel industry. But Shell is lobbying to save the EU carbon market.

Investors also like carbon markets. The Institutional Investors Group on Climate Change (IIGC), whose members manage a total of €7.5 trillion, put out a statement on 14 February 2013. Stephanie Pfeifer, Executive Director of IIGC, said,

“A properly functioning Emissions Trading Scheme is essential to the financing of Europe’s low-carbon future and critical to tackling the dangers of climate change…. Investors are hopeful that MEPs will support the proposal and take what would be a crucial first step in the process of enacting the structural reforms necessary to ensure the long-term viability of the Emissions Trading Scheme.”

Recently, NGOs produced a statement titled, “Time to Scrap the ETS”. So far, 69 organisations have signed on:

After seven years of failure, the European Union’s claims that it can ‘fix’ its collapsing Emissions Trading Scheme (ETS) no longer have any credibility. We believe that the ETS must be abolished no later than 2020 to make room for climate measures that work.

Meanwhile, Banks are closing their carbon desks and cutting staff numbers. In January 2012, Barclays closed its US carbon trading operations. A few days ago, Point Carbon reported that a leading carbon market analyst has left Barclays. Morgan Stanley and Credit Agricole have cut back carbon trading activity or staff over the past year and two weeks ago Deutsche Bank reported that it has closed down its global carbon trading operations.