Climate Change and Cornerstones

Blog post for the subject Sustainability Policies in the E.U

The European Union’s Emissions Trading System (EU ETS) is the cornerstone of the E.U’s climate policy. It also happens to be the cornerstone of both my doubts and optimism that we will be able to successfully mitigate climate change through economic market-based approaches. In this post, I will first discuss the key policy debate currently surrounding the EU ETS, namely, the increasing debate about supply side management. Next, by examining the position of Poland as an example, I will aim to give an overview of the policy making process in the EU and identify the different actors who can shape this debate and thus direction of policy. Finally, I will conclude with an analysis of both the costs and benefits of this process and whether it is effective in terms of reaching the broader EU goals of sustainable development. From this, I will explain why the ETS remains a cornerstone of both my doubts and optimism for the future of today’s long term decarbonization objectives.

According to the EU ETS Directive, the objective of the ETS is to “promote GHG reductions in a cost-effective and economically efficient manner”. That is, the ETS is designed to facilitate the distribution of carbon allowances across the EU market to those who can cut emissions with the least economic impact. Through this market approach, another long term objective of the ETS was to create a situation where an increasingly scarce supply sent clear price signals about the price of carbon in the future for investors. However, due to over-allocation in phase I, international credits and the economic recession, there is now an over-supply of allowances in the market which has resulted in market not meeting this broader price signaling objective. Even though the ETS is working as any market economic market should, the ETS is not just any economic market. It was create for a purpose. That purpose is to facilitate the EU in achieving its sustainable development goals outlined in the European Energy Efficiency Plan 2020 and The Low Carbon Economy 2050 roadmap. This lack of a clear price signal in the market is therefore is a threat to the success of the EU’s ability to meet these broader goals.

Given the current situation of the market, the key debate that now surrounds the ETS is regarding how to address the over-supply of allowances and how to increase its effectiveness. A range of different options have been thrown around the union as proposals on how to best fix the market. While some demand side measures have been suggested, the majority of debate focuses of the issues of how to manage supply over phase 3 and 4. At the top of list has been the European Commission’s proposal to ‘backload’ the auctioning of future allowances from 2013-2015 to 2018-2020 (Phase 3). This proposal supposedly has the potential to address the current over supply and strengthen the future policy framework which could also help to provide increased certainty to future investors about the long term price of carbon. However, this backloading proposal would have different impacts on the different member states and this proposal is currently being reviewed and contested through the EU policy reform process.

In order to introduce the actors in policy reform process in the EU I will examine the position of Poland. What is Poland’s problem with backloading? Well, Poland believes that the backloading proposal will severely disadvantage its use of the allowances it was allocated for free to compensate it for the transition of its existing carbon intensive energy sector. The backloading proposal represents the possibility that these allowances may be cancelled. Poland therefore is facing the risk of loosing considerable value in its ETS based transition incentive ‘compensation package’.

Therefore, Poland wants the European Union member states to reject the European Commission’s backloading proposal based on free-market principles. That is, that this proposal would amount to intervention in the market and that intervening with new measures like backloading would just add more uncertainty for investors about the regulatory framework of the market. Moreover, Poland therefore distinguishes between the role of the EU in creating the market to reduce emissions and the right of the EU Commission to play with market price.

So how does the EU settle its policy proposal debates? Well, with more “amending Directive” proposals of course. The Commission had to submit another proposal which would give it the ability to amend the existing ETS legislation. The original proposal was therefore delayed while this second proposal is being approved by a committee of member state representatives. While the majority of member state support the backloading proposal, Germany is still deliberating over the proposal and its official position. Given Germany’s weight in the EU, the debate could still take another turn if Germany decides to reject the proposal. Given the lasting debate surrounding this proposal, the European Parliament has now been called into action in order to allow ‘the people’ of the EU to now have their say.

As the above example shows, policy debate through the EU involves many different actors and can be influenced from top-down (European Commission), from the individual member states (i.e. Poland/Germany) and also from the Parliament who are representing the EU’s citizens. Furthermore, this example shows how challenging it is to make sustainability policies fly and function in the E.U. Sustainability policies in the EU, face not only the prerequisite of cooperation among its members but now also faces new challenges presented by its current socio-economic situation, such as the case with the ETS. If the member states and different actors do not see eye to eye, then the policy process is extremely slow, as in the case of the amendments to the ETS directive which is still failing to alleviate the concerns in the market.

In conclusion, the ETS was undoubtedly an ambitious project by the EU and they have paved the way for the rest of the world to follow and learns from its mistakes. However, given the global cooperation required to tackle climate change, the very fact that even within the EU community this market-based approach has been so difficult to agree on, would it ever be possible to implement a truly global and thus effective carbon market so that reductions in the EU were not just in vain? Furthermore, the market based approach, as we have seen in the ETS is highly susceptible to unforeseen events and given the urgent need for climate change mitigation, I have my doubts whether this approach is appropriate. We need clear signals about the price of carbon now and not before its too late. Nevertheless, the creation of a ‘functioning’ economic market itself is on the other hand a reason for some optimism because it shows that there is considerable political will and effort being devoted to achieve long term sustainable development goals even in the face of economic recession. Furthermore, with the E.U currently in discussion with Australia about linking the EU ETS with the Australian Carbon Pricing Mechanism, there may be some signs of hope that one day a truly global emissions trading scheme could be created that would be appropriate for mitigating a truly global problem. However, given the ongoing challenges faced by creating an effective carbon market just within the E.U, the question undoubtedly stands…how long would such a market take to create and would it even be effective in time to limit climate change below devastating levels to our planet?

Comments Off on Climate Change and Cornerstones / 25 Mar 2013 por Daniel Salter
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