The Number One Reason why the European Emissions Trading System Needs Reform

Today the 'Sunday Times' has reported Sandbag's analysis that the world's largest steel company ArcellorMittal, led by Britain's richest man, Lakshmi Mittal, could make over £1 billion by 2012 from the EU Emissions Trading Scheme. The potential profits would result from the company selling an estimated 80 million surplus permits that it will have accumulated by 2012, permits which would allow into the atmosphere, pollution equivalent to the annual emissions of Denmark. Visit our ArcelorMittal page for more information or read our briefing .

The case of ArcelorMittal and the windfall profits they stand to make from the EU Emissions Trading Scheme shines a light on one of the problems that currently exists with ‘carbon trading’. The danger is, that in recognising such flaws, we are put off the concept of ‘carbon trading’ entirely. Indeed, there are many voices in the NGO community calling for the idea of emissions trading to be permanently shelved, but failing to propose credible and politically realistic alternatives. Our view is that whilst emissions trading in the EU may well be flawed as it stands, it can most definitely be fixed.

The EU Emissions Trading Scheme, and others like it currently being developed in the US and Australia, work on the basis of a cap on carbon emissions which politicians set. The cap acts as a maximum ceiling for emissions that companies covered under the schemes can emit. The main reason the EU Scheme has not delivered a great deal is not because it is fatally flawed as some claim, but because EU politicians have set a high ceiling for emissions and thus a weak cap. There are of course, other more technical niceties of the carbon market that are important to get right. For instance, companies should buy their pollution permits at auction rather than receiving them for free from government. But the cap is by far the most important piece of the jigsaw.

Blaming carbon trading and the market for the world’s collective failure to effectively tackle climate change is like throwing the baby out with the bathwater. The thing about markets is that they are not moral actors; they will deliver only what they are required to deliver and no more. So if politicians, who ultimately control the carbon market, require it to deliver very little, then that is exactly what we will get. If instead, they require it to deliver the carbon cuts we need to prevent dangerous climate change, then we will get impressive results. It is really political will that is lacking, and the reason for that is twofold. First there is the huge power of the industrial lobby, with the Sunday Times able to find that ArcelorMittal directly threatened the loss of to 90,000 jobs if there was tough environmental legislation. And second, well how many people do you know whose top priority when they vote next year will be based on what that political party promises on climate change? Critics of the carbon market forget that whatever the policies put forward to tackle climate change, they will all be subject to these twin pressures.

The good news is that next year we may have the opportunity to make the changes we need to the carbon market, but only, if NGOs and the public get together and campaign very hard. If the EU raises its target at Copenhagen above a 20% CO2 reduction from 1990 levels, then a review of the Emissions Trading Scheme will be triggered but there are many opponents to tougher environmental targets; the fossil fuel and heavy industry lobbies will be out in force to scupper progress, and they will be joined by member states where citizens have not bought into the need to save the climate yet. Lets hope even the market sceptics can get behind efforts to improve the system.

And in the meantime we will raising our efforts to get companies like ArcelorMittal to cancel their surplus permits to generate real environmental benefit. After all, the permits were received for free, so why shouldn't they be given away for free!