EU PARLIAMENT REJECTS PROPOSAL TO PROP UP CARBON MARKET

Tamar Hallerman
GHG Monitor
4/19/13

European lawmakers this week narrowly rejected a plan that would have propped up the European Union’s rapidly nose-diving Emissions Trading System (ETS). The European Parliament voted 334-315 April 16 to reject a proposal that would have temporarily removed 900 million carbon allowances from the ETS in order to boost the carbon market’s prices in the near term. More than 60 lawmakers abstained from the vote on the so-called ‘backloading’ proposal. The news sent carbon prices rapidly tumbling more than 40 percent to an all-time low of €2.63 ($3.45) on Tuesday as observers grappled with the cap-and-trade scheme’s fate.

The vote on the backloading proposal was a resounding defeat for the leadership of the European Union’s executive arm, the European Commission, which strongly backed the last-ditch effort. “Europe needs a robust carbon market to meet our climate targets and spur innovation,” European Commissioner for Climate Action Connie Hedegaard said in a statement following Tuesday’s vote. “The Commission remains convinced that back-loading would help restore confidence in the EU ETS in the short-term until we decide on more long-term structural measures. We will now reflect on the next steps to ensure that Europe has a strong EU ETS.” The proposal will now be handed back to the Parliament’s Environment Committee, which must decide on a path forward, but many reports indicated that the proposal is effectively dead.

The proposal called on removing 900 million carbon credits from the ETS over the next three years and reinserting them back into the market in 2019 and 2020. The hope was that the temporary removal could address the glut of credits currently flooding the market and allow time for the ETS to gain some economic momentum in the medium-term. Analysts have said that the current carbon price is far below what is needed to deter large emitters from polluting and invest in low-carbon technologies like carbon capture and storage and renewables. Current prices are down from an all-time high of €28 ($37) before the financial crisis in 2008.

Opponents Say Plan Would Have Raised Energy Prices

Opponents of the proposal cheered the vote. They argued that implementing the backloading proposal would have raise energy prices in Europe, a move that would have hurt the continent’s already-fragile economic recovery. The coal-reliant Polish government and heavy-emitting industries that took the lead in opposing the effort also argued that the proposal would have put European companies at a disadvantage compared to American ones, which they said are already benefitting from low-energy prices due to the shale gas boom.

The business trade group BUSINESSEUROPE said it “welcomed” the result. “It is time to move past the divisive and unhelpful debate around backloading and focus on the real priorities for the EU: how to secure a cost-competitive, secure and climate-friendly energy policy for 2030,” the group’s Director General Markus Beyrer said in a statement. “The increasing energy cost gap with the U.S. is a major challenge for European business which must be tackled.” The group said that letting the market control the carbon price on its own would eventually boost the EU economy and raise the price of carbon credits on its own.

‘Historic Failure’

Greenpeace’s EU Climate Policy Director Joris den Blanken called the outcome a “historic failure,” warning that without a fix to the ETS’ chronic oversupply of emission permits, the system—the world’s first cap-and-trade scheme—would not be able to pursue its central purpose of dissuading carbon pollution and encouraging clean energy investments. “In its present form, the carbon market will not stop a single coal plant from being built,” den Blanken said in a statement. “As long as EU decision-makers cannot make the European carbon market work, member states should fill the vacuum by introducing national climate measures, such as taxes on coal use and phase-out schemes for coal-based power plants.”

Countries like France and the United Kingdom had stepped out in favor of the backloading proposal, arguing that it was necessary for the 27-nation bloc to reach its climate goals. Other industry groups also spoke out in support. Ahead of Tuesday’s vote, Shell and a group of 40 other companies ran a full-page ad in the Financial Times advocating for the fix, according to Reuters. “Without agreement on the backloading proposal the price will fall further threatening the long-term survival of the EU ETS and lead to fragmentation of the single energy market through a patchwork of national regulations,” the wire service quoted the ad as saying.

Carbon Price Will Impact European Money for CCS

The state of the ETS moving forward will have a profound effect on the amount of European funding being offered to CCS projects in the coming year. The EC recently kicked off the second and final round of its New Entrants Reserve competition (NER 300), widely seen as the last major chance for CCS projects to net significant European funding. The Commission said it would be accepting bids from CCS and ‘innovative renewables’ projects through July and that it will soon begin gradually selling off 100 million carbon allowances set aside for the competition on the ETS, likely announcing winners by mid-2014. But a low carbon price will mean less money available for projects. No CCS projects won EU funding in NER 300’s first round because the EC said member states sponsoring those projects did not provide firm enough financial support.