Blog

While Australia has been forced to put emissions trading plans on ice until 2012 and the US struggles to achieve the 60 votes necessary to pass any kind of progressive energy policy (that may or may not include the creation of a carbon market), China it seems is quietly moving forward with plans to introduce its own internal market in emissions reductions.

According to an article in China Daily this week, the next five-year plan beginning in 2011 could contain an emissions trading policy to help create a broad based stimulus for lower carbon investment. Until now China has focused on more command and control policies designed to shut down the least efficient of its industrial plant and to spur development of specific renewable technologies. This article states that China has realised that there are limits to how effective such policies can be and that a broader, outcomes based approach would be less costly and more efficient.

This is welcome news. As ever the devil will be in the detail, with China developing at such a pace arriving at any kind of cap that doesn’t create hugely inflated volumes in emissions rights will be a big challenge. But the report hints that on at least one detail they may have already learned a valuable lesson from the European ETS experiment: it makes sense to start with a limited number of participants and that should be those in the power sector. If we’d done that in Europe we’d have created a much less cumbersome and much more ambitious scheme. The UK Government is consulting at the moment on the hugely complex rules for handing out free permits to heavy industry according to benchmarks. Anyone contemplating introducing a trading scheme would do well to read this document and take note that starting with 100% auctioning from the outset is by far and away the easiest option and that can be introduced from the start in the power sector.

Part of the reason China’s per capita emissions are catching up with the West – recent figures suggest they already match those of France – is because the carbon intensity of their electricity system is so high. According to the website CARMA, China’s emissions per MWh generated are over 850 kg – much higher than the US’s (600kg) or UK’s (550 kg) where old coal is less dominant. A well-designed carbon market which meets targets for achieving a lower carbon intensity, even while overall demand grows, could stimulate investment in efficiency upgrades and fuel switching to lower carbon fuel sources such as gas and energy from waste. It will also help to make renewables, nuclear and carbon capture storage more cost competitive.

If this report is true, and let’s hope it is, then by 2012 the dominant players in the carbon market may well be Europe and China. If Europe can implement some important changes and China gets the design right it could mark the beginning of a genuinely impressive market for delivering global emissions reductions. One that the US should pay close attention to since it may find that as well as being reliant on imports of expensive fossil fuels it will also be reliant on importing all the technologies it needs to wean itself of them.

European companies, whilst claiming tougher emissions targets would be ‘impossible to meet’ [1] and are damaging their competitiveness, are making extensive use of offsetting to meet their targets and even using it to directly subsidising their international competitors by for example purchasing offset credits originating in Chinese and Indian steel works.

A new report by climate campaign group Sandbag into the use of international carbon offsets to meet legally binding caps in Europe in 2009 reveals for the first time direct evidence of how Europe is subsidising its competitors and calls for reforms.

In 2009, European companies used 78 million international offsets, with an estimated value of €860 million, from developing countries (CERs) to comply with their caps under the EU emissions trading system (ETS). This represents 4.2% of total emissions from capped sectors, which include all power generators and many heavy industry sectors such as iron and steel works.

The vast majority of offsets used in 2009 (84%) originated from industrial gas projects in China, India and South Korea. These provide healthy profits to chemical companies in these countries and in China provided a source of tax income for the Government. However, a significant number have also been sourced from more directly competing sectors, For example over 2 million steel CERs worth approximately €22 million were used for compliance in 2009.

EU steel companies have been very vocal in pointing out that they compete in a global market and that caps on emissions have to potential to force them to move overseas resulting in so-called ‘carbon leakage’ out of the EU. Sandbag can reveal, however, that iron and steel companies are voluntarily sending cash to their competitors in developing countries – undermining their claims.

The single biggest purchaser of offsets in 2009 was steel company Salzgitter’s ‘Glock Salzgitter’ plant, which offset 99.5% of its emissions in 2009 using CERS. 89% of these CERs used were from HFC and N2O projects but an additional 40,000 were sourced from an Indian steel work CDM project.

The report and interactive map published today which uniquely link the types and locations of offsets with who has used them, recommends the EU reform its rules to phase out the use of credits from industrial projects in rich developing countries in favour of more sustainable projects in least developing countries.

The report’s author Sandbag’s Rob Elsworth said,

“The EU’s policy on offsetting needs updating – it has great potential to harness the flow of capital to deliver big advances in clean technology in developing countries but at the moment it is being used to make industrial companies in rich countries even richer. The EU can and should introduce changes both to protect our own industries and make sure finance flows to the most deserving projects and countries.”

Sandbag founder and director, Bryony Worthington said, “Frustratingly, it seems that EU installations seem to have a greater incentive to fund abatement projects amongst their competitors rather than invest in these improvements themselves. While it is perfectly legal and on one level economically rational to do this, it begs the question of why companies would choose to send a direct subsidy to their international competitors if fears of carbon leakage were so pronounced.”

For more information contact Bryony Worthington +447876130352 / bryony@sandbag.org.uk or Rob Elsworth +447771871448 / rob@sandbag.org.uk

Notes to the Editor

Sandbag is a UK based not-for-profit campaigning organisation dedicated to achieving real action to tackle climate change and focused on the issue of emissions trading.

The full report can be accessed at: http://sandbag.org.uk/files/sandbag.org.uk/offset2009.pdf

Our new and improved interactive maps can be accessed at: http://www.sandbag.org.uk/offsetmap

Salzgitter’s ‘Glock Salzgitter’ surrendered 40,000 steel CERs from CDM project (id 696) ‘Usha Martin Limited - Waste Heat Recovery Based Captive Power Project activity’.

All value estimations are based on the assumption of an €11 CER price

One of the many disappointments in one of the least green budgets you could imagine was the lack of detail about key elements in the coalition Government’s green agenda. Having announced that they intend to intervene in the energy market in various ways to support low carbon investment it is important that a clear timetable is adhered to and yet there were no more details made available in yesterday’s budget. If ideas such as the green investment bank and introducing a carbon floor price take a long time to be realized, rather than encourage more investment, they are likely to dissuade investors who will not want to commit funds to projects if the rules of the game are about to be changed.

The issue closest to our heart is the potential introduction of a floor price into the carbon market in the UK and we’ve written a briefing looking at what I means and how it might operate.

The basic idea is to reform the existing Climate Change Levy so that it applies upstream and acts as an insurance policy against lower than expected prices in the carbon market. There are lots of details that need to be fleshed out before a conclusion can be reached about whether it is a sensible policy or not.

A few things can be said already, however:

Reform of the CCL is long overdue as it currently taxes energy use not the carbon content of the energy used, so looking again at its design is a welcome development.

The carbon floor price may create a clearer investment opportunity in the UK, however, it will not save a single tonne extra of carbon unless fewer permits are issued into the market. (This is because caps are preset by the number of permits handed out so any policy that just affects price and not the supply of permits has no additional environmental impact overall). So in terms of value for money it must be assessed as an industrial rather than environmental policy. And it must not become an alternative to seeking the long term solutions to the problems in the carbon market which are tighter caps, more use of auctioning and more limits on offsetting.

Finally, if introduced now it has the potential to deliver large windfalls to existing low carbon generation currently on the system and already paid for/ subsidised by the public purse or via our energy bills. One of the main beneficiaries would be EDF/British Energy who currently operate a large portion of the UK’s existing nuclear power stations. They also have public plans to build more.

Call me cynical but this could be a well-timed windfall-generating policy mainly benefiting one major company. UK consumers of electricity should be very interested in this and demand to know the proposed details as soon as possible.

Judging from last night’s address from the Oval Office it seems Barack Obama is moving away from a policy of introducing a price on carbon via comprehensive cap and trade legislation in favour of more specific energy policy regulations.

In the 18 minute long speech last night he set out a plan of action for addressing the Mexican Gulf oil crisis which included clean up plans, sorting out corruption in the Minerals Management Service and requiring that an independent third party administer the handing out of compensation payments provided by BP.

Many people had expected the plan also to contain a reference to the need to pass legislation to deliver on the US’s climate reduction targets. There was speculation that he would use the opportunity to reaffirm his backing for the need to introduce carbon pricing to help wean the nation of fossil fuels in favour of cleaner alternatives. They were disappointed. Instead the President said he was 'open to ideas' and that inaction was the only idea he would not consider. He name checked a few: applying similar regulatory standards to buildings as have been passed for vehicles, requiring higher percentages of energy to come from wind and solar and as yet unspecified ways of encouraging industry to invest more in energy R+D.

This appeared to be an open invitation for legislators to bring forward 'energy only' bills without cap and trade elements. On Monday Senator Jeff Merkley unveiled his proposals for how the US can end its addiction to oil taking a regulatory approach to improve energy efficiency, boosting use of alternative fuels, including biofuels, and encouraging modal shift. There was no mention of carbon pricing or cap and trade. He it seems may now have the ear of the President who may see this as a less politically contentious way to move forward on an agenda to reduce dependence on oil and emissions.

This new turn of events was perhaps inevitable given the vehemence of opposition towards cap and trade in some quarters and the apparent difficulty in securing the required number of votes for legislation, but is still nevertheless disappointing. To achieve absolute emissions reductions in a cost effective and efficient way there is no better policy that a cap and trade system using auctioning of permits. Other countries who have tried to use less comprehensive energy regulations to reduce emissions, such as the UK, have found that such measures are not able to keep pace with the rising demand for cheap energy and consequently emissions keep rising. Energy efficiency may reduce emissions per vehicle or appliance but the total use of energy can continue to rise as more units are used more often. Increased use of renewables and alternate fuels can reduce emissions but only on a relatively small scale initially and they do nothing to stimulate the important switch from high carbon fuels such as coal and oil to the low carbon fuels such as gas and nuclear. Modal shift in transport is also a difficult and expensive thing to achieve if it goes against market realities and consumer and business preferences.

Obama says he is open to ideas but sadly I suspect the one idea that is no longer on the table is the application of cap and trade on emissions from power and transport. Both sectors are not exposed to international competition and both have the potential to deliver large volumes of emissions reductions quickly. It is still possible that the EPA will press ahead with plans to introduce caps on large stationary sources of emissions using existing powers under the Clean Air Act but their confidence may also now be dented thanks to the lack of mention of carbon pricing in yesterday’s speech.

And although making oil companies pay for the pollution arising from the use of their product would clearly be the best way to steer investment into alternatives it now seems this has little to no chance of being passed in the near future. This is a great shame and one which both the US and world may live to regret.

Last week saw Sandbag present some of our latest research at a public hearing in Brussels organised by the Greens/European Free Alliance parliamentary parties.

The hearing was designed as a forum to air different views on the problem of so-called “carbon leakage”. Carbon leakage is shorthand for the concern that climate policies in Europe – especially the EU Emissions Trading Scheme – may disadvantage manufacturers here, and encourage operations to migrate abroad where the carbon intensity of production may be higher. The real concern underlying the issue however is job leakage.

For companies with industrial plant covered by the ETS, the threat of carbon leakage has become their major bargaining chip in lobbying the Commission for generous free allocations. Without free allocations, they argue, the price of carbon will push up the costs of production to a level where they cannot compete against foreign producers who do not face carbon costs. This, they suggest, will push production overseas resulting in more carbon pollution than Business-As-Usual operations here. But with emerging economies increasingly investing in newer, more efficient industrial plant, it is becoming questionable whether fugitive operations necessarily mean increased emissions globally.

Wednesday saw familiar dividing lines appear between industry, on one side, and Green MEPs and Environmental NGOs on the other: Industry lobbyists – by far the most represented group in the room – exaggerated the leakage threats and job losses, argued aggressively for free allocations, and forestalled moving to 30% 2020 targets until a more comprehensive global deal was reached. While we and others called for an end to excessive cosseting of industrial companies under the scheme, highlighted the economic opportunities and called for a rapid unilateral move to 30%.

Our chief input was to highlight how industry had not only been protected from potentially imaginary carbon leakage threats in Phase II but had, in fact, been competitively advantaged by Member States through excessive allocations of free carbon allowances. Our research showed that industrial sectors as a whole had accrued surpluses of some 248 million permits over 2008-2009, currently worth €3.7 billion, and were likely to grow to something like 529 million permits (worth €7.9 billion), by the end of the Phase. Following the progress of the ten most over-allocated companies from 2008, we find steel, iron and cement companies – supposedly most endangered by carbon leakage – are projected to accrue some 370 million million permits worth €5.5 billion by the end of 2012.

The existence of these surplus permits within the scheme represents a missed environmental opportunity to save CO2 equivalent to three years worth of emissions from these ten companies.

These carbon assets could be sold on to help artificially sustain these industries during the global downturn – a purpose they were never designed to fulfil – or used to buffer them against whatever Phase 3 carbon caps are set out for them in future.

The Steal Sector

If the large surpluses we’ve identified in the iron and steel sector begin to make the threat of damaged competitiveness seem implausible, research by CE Delft makes it look like a sham. Their research indicates that nearly all the opportunity costs of free allocations (i.e. their full value on the open market) were passed on to consumers between 2005 and 2008. So much for the competitiveness fears!

As a final outrage, research done by Climate Strategies suggests that the export tax China imposes on domestic steel manufacturers (principally as a means of maintaining affordable steel supplies for domestic use), equates to a carbon tax of €30-40/tonne against our current carbon price of €15/tonne.

Industry posturing

The industry mantra for the day was “free allocation is not a free lunch”, though our work and that of CE Delft clearly tell the opposite story.

An unexpected plea from Business Europe was that we should not “choke the budding global carbon market”, by restricting the quality or quantity of offsets entering the scheme from outside. This was a remarkable statement to make in a discussion about carbon leakage – as offset projects include energy efficiency subsidies to foreign competitors in exposed sectors. When taken to task on this by the Climate Action Network, Business Europe deflected the conversation on to intellectual property concerns.

Perhaps the most concerning element of the day was the consistent undermining of the evidence against risks of leakage by a representative of the Directorate General for Enterprise who seemed to consider methodological transparency as evidence of a studies’ weakness, and took any level of conscientious admission of uncertainty as grounds to dismiss evidence. The irony in this is that most of the uncertainties are a result of the deep opacity of industries’ operations within the scheme.

DG Enterprise could help to resolve some of these problems if it were to release more information relating to their assessments of sectors exposed to ‘carbon leakage’, the methodology for which was itself riddled with weaknesses. They could for example publish the installations in the 164 subsectors DG Enterprise has concluded are at risk of carbon leakage so that we can make a proper assessment of the surpluses accruing in these sectors. They could also undertake more research into the impact of the flow of offsetting finance into competing sectors in developing countries. Sadly, for now they seem to be more interested in echoing the concerns of certain vocal industry lobby groups. If it wants to deliver a clean, efficient and competitive 21st century industry for Europe, DG Enterprise must start looking past the short term lobbying concerns of incumbents and pursue a bolder vision.

Sandbag has today released analysis showing how Europe’s carbon caps have turned into a carbon trap. This analysis is launched ahead of the European Commission’s communiqué expected this week, which will analysis the options for moving beyond a 20% emissions reduction target. Leaked versions of the communiqué have been widely circulated and indicate that the EU acknowledges there are problems with the systems and the oversupply of permits, recommending removing 1.4bn tonnes from the scheme from 2013-20. Sandbag analysis shows that that this number is too low, for caps to become effective 2.3bn tonnes need to be removed.

The EU ETS is facing a number of problems which may leave it redundant. To prevent this from happening and rescue the EU ETS Sandbag have highlighted four fundamental problems with the current system that must be addressed to salvage the scheme.

Problem 1: Inappropriate targets
The traded sector, which accounts for just under half of the greenhouse gasses in the European economy, currently aim to cut emissions 21% against 2005 levels by 2020 as part of a wider programme to achieve economy reductions of 20% against 1990 levels by 2020. With a drop in emissions of 11.6% in 2009 across the EU, the target of 20% suddenly does not look to difficult. Ambitious targets are critical in tackling climate change as well as giving Europe a head start in the global green economy which is estimated to be worth some $2.3trillion by 2020.
Sandbag recommends the EU move to the proposed 30% midterm emissions target reduction which would reflect in a 34% target for the traded sector. This would save an estimated 1.4bn tonnes of CO2.

Problem 2: Sectoral ovrallocation
The ETS is currently oversupplied by 233 million allowances, however, this net position disguises asymmetries in the effort required by different sectors under the cap. Where the power sector carries most of the burden, heavy industry and a significant number of manufacturing plants are currently failing to shoulder any of the load. 70% of participants in the scheme were given more allowances than needed to cover their emissions (have a look for yourself using our new and improved emissions map of the EU). Successful lobbying by industry has meant they have been able to secure generous allocation which does not reflect their actual emissions.
Sandbag recommends deriving Phase III caps from historical emissions rather than from Phase II allocations which are distorted by overallocations. Sandbag has calculated the Phase III cap against recent historical emissions, drawing a baseline from generous estimate of average 2005-2009 emissions delivers a Phase III budget some 2.3 billion smaller than the current proposal

Problem 3: Carbon lock-in
Emissions have dropped across Europe, however, this has almost exclusively been the result of recession rather than shrewd policy. Perversely though, the current design of the ETS prevents us from capturing any environmental benefit of this downturn. Rather this carbon saving is allowed - under the ETS Directive - to be banked and saved for a rainy day. This means that the 233 million tonnes of spare permits left over from 2009 will be used to allow future emissions to take place, emissions it seems are now predetermined.
Sandbag recommends that a strategic carbon reserve be established, which would hold back a quantity of permits in case of a sudden drop in demand. A reserve could protect the scheme from excessive surplus in the event of a repeat recession, with an annual share of the reserve released into the market after each year which passes without incident. A reserve would also allow the scheme to respond more quickly to new scientific assessments of climate risk.

Problem 4: Unused offsets and New Entrants reserve
A further 1.4 billion credits are likely to be introduced into the scheme, this figure is made up of unused permits from the New Entrants Reserve which are likely to be released into the market at the end of Phase II, as well as some 830 million unused Phase II offset credits and a further 375 million offsets are expected to be available in Phase III. Together with the Phase II surplus, a 1.5 billion permit carryover could allow emissions to grow unabated until 2017.
Sandbag recommends an EU wide agreement to control the quantity and quality of offsets, this is to prevent offsets entering the EU which have originated from projects with no or limited sustainable development benefits for the host country. It is also recommended that unused NER permits are cancelled; France, Ireland and Malta have already declared their intention to cancel unused NER permits at the end of Phase II. An EU agreement to cancel unused NER permits would prevent an estimated 192 million permits becoming available in Phase III.

The ETS is vulnerable to being rendered irrelevant if it is unable to adapt to the dynamic system in which it operates. Tightening the cap remains of paramount importance, for saving carbon, spurring green investment and helping Europe to move toward a green economy in a more cost effective way.

There was some very good news for the environment and for supporters of emissions trading in Europe this week. The move to a higher 30% emissions reduction target is, according to the Commission, looking much more affordable and, importantly, the German Environment Minister, Norbert Roettgen, has said he backs it. Such a move would trigger tighter caps under the trading scheme helping to re-balance supply and demand, leading to less emissions and higher prices.

One of the first actions Commissioner Connie Hedegaard took on taking office was to ask for a report into the implications of a move to a higher climate change reduction target. The official report is not expected to be made public until late May but leaked copies of the consultation draft are already circulating. The EU’s number crunching appears to conclude that it would now cost only around €11 bn more to meet a 30% target than the original estimated cost of hitting 20%. The cost difference has reduced drastically as a result of the recession. The Commission originally predicted carbon would trade at around €30 tonne in this trading phase, however, the large surpluses of emissions accruing to industry under the recession have contributed to permits trading at around half this value.

When emissions data for 2009 was published at the start of April it revealed emissions had fallen by 11%, compared to the year before, which followed a fall in the previous year of 6%. The net result: emissions are now below the caps for the first time. Next week Sandbag will launch a new and improved interactive map of all the installations in the EU scheme, illustrating the huge number of installations currently sitting on caps that are comfortably above their emissions. The only way to re-create incentives for investment in abatement in these plant is to shorten the supply of permits. To do this Europe can and must move to a higher target.

Since the failure of Copenhagen, a number of countries have been vocal advocates of the EU adopting the higher target unilaterally, decoupling the decision from the fraught international negotiations. France and the UK have led the way but Germany, until now, has remained quiet. But on Wednesday Environment Minister Norbert Roettgen indicated his support for the policy, making it much more likely it will be adopted. The main blockers remain Italy and Poland but it remains to be seen how strong a resistance they can muster if all the other major countries are in favour. Since Connie’s arrival, the Commission, who had previously been cited as being against the move, have adopted a neutral stance and are busy preparing a scenario for how the higher target could be achieved if it were adopted.

The logic of a higher target and tighter caps is inescapable for those who support the principle of carbon pricing via emissions trading. Rather than creating regulatory uncertainty through discussions about price floors or limits to banking, a tighter cap would be the most efficient way to increase the value of investments in abatement technologies. There is more than enough slack in the system to reduce allocations and still not require drastic cuts from industry. The power sector has always been required to shoulder the effort to meet reductions and is almost certainly set to continue to do so. According to leaked information contained within the Commission’s report, all it would take is for 1.4 bn tonnes of permits to be set aside in a reserve and the ETS could comfortably take us to our higher target. This is important, as Yvo de Boer correctly said, it would be a piece of cake for the EU to meet its current unilateral target – if we want to keep pace with other countries who are embarking on large investments in low carbon solutions we need to up our game. The signs this week indicate that this is more likely than we had thought and this is very welcome news for the environment and for the carbon market.

In 2009, emissions in the EU were for the first time lower than the legal caps that have been set to try to constrain them. To increase incentives to invest in emissions reductions, the caps need to be tightened but a number of Member States have been trying to do the opposite by taking the EU to court to ask for more permits.

Poland's legal wrangling with the European Commission has come to an end after the approval of its new national allocation plan (NAP) submitted on the 9th April. The dispute began in 2007 when the Commission rejected Poland's NAP - which requested a carbon allowance of 285 million tones per year - for being too generous.  The EU regulator cut the countries carbon allowance by 27% reducing it to 208.5 million tones. Poland retaliated by taking the Commission to the court of First Instance which ruled that the Commission had exceeded the limits of its power of review. The court clarified that the Commission was not able to set target, but has only the power to reject or approve NAPs.

Poland's new NAP has been approved by the Commission after no fault or concern was found with it. The new NAP requests a total carbon allowance of 208.5 million tons per year. The ability of each Member State to set their own NAP is seen as a weakness of the emissions trading system, allowing countries to set themselves generous allocations. This is set to change, from 2012 the issuing of allowance will be centralised in the hands of the Commission.

Climate Action Commissioner Connie Hedegaard said: The Commission's decision has removed uncertainty for Polish companies and most importantly maintains the environmental integrity of the EU Emissions Trading System.
 
The new allowance of 208.5 million tons is welcome news, however, with EU emissions dropping by 11% in 2009 there is strong evidence to suggest that this figure is still generous and will not create the incentive needed for industry to invest in new green technology and reduce emissions. With Poland's 2009 emissions looking set to come in lower than its cap, at 188 million tons, the approved NAP allowance of 208.5 million tons is still set to give Poland a comfortable surplus of allowances in the future. Polish emissions fell by 8% in 2009 compared to 2008, giving a surplus of allowance equivalent to more than 13 million tonnes. Allowances which can be banked and surrendered in the next phase of the emissions trading system.
 
The Commission appears to have used the threat of recalculating Poland's NAP using updated economic projections, which would have supported an even lower number, to get it to agree to the original number proposed. We now need them to apply the same logic to the EU-wide caps to be set from 2013 onwards, as new economic forecasts will show we can relatively easily tighten caps to deliver a more ambitious climate reduction target.

New data released today reveals greenhouse gas emissions across the EU are in steep decline. Emissions covered by the EU Emissions Trading Scheme between 2008 and 2009 dropped by 11%, following on from a cut of 6% the year before.

This would be welcome news for the environment and provide a silver-lining to the grim economic recession that has contributed to the cuts, if it were not for one thing: unless caps are tightened there will be no overall reduction in pollution levels. Permits issued under the EU trading scheme can be banked forward indefinitely meaning they will sooner or later be used to pollute.

The 11% drop in 2009 has left the caps on European emissions higher than actual emissions for the first time since the second trading phase started in 2008. The first phase of trading from 2005-07 had exactly the same problem with caps languishing high above actual emissions thanks to Member States handing out overly generous allowances. This phase was meant to be tougher but the effect of the recession combined with continued generous allowances to heavy industry has but pay to that.

Overall there were 62 million more permits in circulation last year than there were emissions. An additional 70 million were released for sale in auctions taking the total surplus to 142 million. But this masks the fact that there is a tug of war going on between the power companies of Europe and heavy industry. Power generators saw their emissions fall by 119 tonnes (8%) last year but that still left them 124 tonnes short of permits. On the other hand heavy industry including steel and cement saw a fall of 96 million tonnes (18%) leaving them with 185 million tonnes of permits spare or 30% more than they needed. If they were to sell them at today’s prices this would raise €2.4 bn with most of this money would coming from consumers of electricity.

This is significant because it is the heavy industries who have been the most vociferous opponents of Europe taking on tougher emissions targets. In fact these surpluses give them a very comfortable cushion against the effect of any future caps and enable them to make a profit if they choose.

A decision about future caps on emissions between 2012 and 2020 has to finally be reached in June of this year. At the moment, under the EU’s target of a 20% cut in emissions by 2020 this would mean a reduction in the cap of 1.74% a year. Today’s figures revealed that we are already half way to achieving that reduction level with a decade still to go. Given the cuts achieved to date, which can be banked, and the levels of reductions rich countries like the EU are now expected to deliver, it would seem tighter targets are the only sensible way forward.

Nevertheless some oppose tightening caps in a recession for fear that it will lead to demands for caps to be loosened in a period of economic growth. However, the purpose of the laws introducing caps is to deliver an environment outcome – tightening caps is completely in line with that objective whereas loosening them is not.

The arrival of Connie Hedegaard as the new Climate Action Commissioner has seen a subtle shift in the Commission position on whether or not to take on tougher targets and caps, hinting that a more ambitious target could be adopted ‘when the time is right’. In an article today she was quoted as saying: “To achieve a 20 percent reduction by 2020 is not nearly as ambitious today as it was two years back before the crisis”. A move to the higher 30% target would help to save the EU’s flagship emissions trading policy from becoming irrelevant by taking more permits out of the system more quickly.

The biggest challenge for the UK and the EU is to ensure that its growth out of the recession is sustainable – this means delivering real economic investment in new more efficient technologies. Flaccid caps on emissions will slow down this investment and mean a return to the status quo meaning more severe and costly cuts in emissions have to made later.

The rapid decline in EU emissions was predicted by many analysts in the carbon market so there is unlikely to be a sudden drop in price resulting from this new data. But it is certain that the lack of demand for permits is acting as a break on the market. With so many permits spare in the system the need for overseas offsets is very likely to decline.

More ambitious targets and tighter caps must be set if we want strong investment signals and the growth out of recession to be green. We hope the Commission will take this fully into account when it makes its recommendations later this year.