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The surplus in the EU ETS is an old story, but the longer we ignore it, the bigger it grows: Sandbag’s estimate is that by 2020 it will be between 3.9-4.4 billion tonnes including volumes in the MSR. And under current proposals the system will continue adding to the surplus even after Phase 4 starts, so the problem will continue to get worse. Ignoring it won’t make it go away.

 

Living off the surplus in the EU ETS means:

  • Missing out -43% ETS target by 2030 (see Figure 1 below);
  • Being out of touch with reality, or in a post-truth policy scenario, jeopardising the effectiveness of the EU’s carbon market (and its potential climate diplomacy and role in shaping other carbon markets developing around the world) all the way to 2030[1];
  • Missing the timely opportunity for cost-effective emissions reductions, allowing a continuing annual surplus and taking insufficient action in the 2020s to put us on the right long term pathway;
  • Storing up problems for the ever more necessary and much costlier reductions after 2030.


Figure 1: The ETS is on track to miss the -43% target for 2030

In a world that appears to be vulnerable to climate sceptics taking public office, you would expect the EU, as the main actor in global climate diplomacy to actively work towards fixing its internal shortcomings in order to continue to provide climate leadership. For that to happen, the European Parliament needs to put the ‘evidence’ back into ‘evidence-based’ policy-making for the EU, as to avoid locking us further into a post-truth world.

While some elements of the scheme are, unavoidably, political arbitrations (benchmarks, etc.), others (such as the real level emissions level which will be in 2020 what it will be) are not and should not be turned it into politicised topics – if we accept that reality and truth are what they are.

Re-basing the ETS

Re-basing adjusts the base of the scheme to account for developments in the energy market which have already taken place since the last baselining exercise (renewables revolution, energy efficiency uptake). At the moment we are using data from 2010 as the base for emissions in the 2030s.  From the perspective of evidence-based policy-making, in 2020 we should upgrade to the level that will be reached then. Such an adjustment is robust to developments over the next four years – it automatically adjusts to whatever the 2020 reality is. It is also the only option on the table that effectively and immediately addresses the most pressing problem of the day from the start of Phase 4: the surplus.

While the impact on the price has been mystified to the point of being turned into a hoax, Sandbag’s latest analysis shows that overall, while rebasing would lead to a more meaningful price than the current one, it would by no means be sky-rocketing (see Figure 2 below).

Macintosh HD:Users:suzicarp:Downloads:image (15).pngETS price projections

Figure 2: Indicative scenarios illustrating the effect of rebasing on the EU ETS carbon price
Source: Sandbag Analysis

 

Other proposals on the table, such as a cancellation of 300 milion (with an effect best labelled as ‘symbolic’) or just an LRF of 2.4% simply won’t adjust the supply demand imbalance by enough. This also applies to doubling the Market Stability Reserve (MSR) rate, which won’t remove the surplus until (too) late in Phase IV. While these options are useful in what they can provide, they are not the answer to the most pressing current problem. The functionality of these options is fundamentally different from that of rebasing. They are both needed, but only alongside rebasing.

Changing the LRF

A higher LRF won’t achieve the adjustment to reality that rebasing will, and will get policy-makers to 2020 emission levels only by the end of Phase IV. This means the LRF won’t do what it is intended to do, but would supplement what rebasing should do, by very slowly cutting through the hot air coming in from Phase III, all at the expense of the EU’s ability to drive cost-efficient innovation through the EU ETS. However, with rebasing, a 2.4% LRF would indeed predictably pave the way to the 2030 targets. A higher LRF should be in addition to rebasing, not an alternative to it.

Effect of the LRF

Figure 3: The effect of the Linear Reduction Factor

 

Last but not least, this factor will become increasingly important the closer we get to 2050 – but now, let’s focus on getting the scheme right for 2020 and re-basing is the only option on the table that can do that.

Policymakers committed to non-populist, evidence-based policy-making will be interested in keeping the EU’s carbon market responsive to the actual challenges of the 21st century.

 

Suzana Carp, EU Engagement Coordinator & Policy Advisor at Sandbag commented:

The time has come for the EU to make realistic policy, which looks at the evidence on the ground and devises concrete plans for the future. The power of a compromise is only as weak as its lowest denominator. Let’s get the lowest denominator to be sufficiently high to ensure Europe will have an effective carbon market for the next decade.

 

While intrinsically political, such policy negotiations as those taking place in the European Parliament are turning what should be an unquestioned commitment to starting the cap at real emission levels (truth) – in order to acknowledge reductions already achieved – into a political bargain. Evidence should not be an optional extra that may end up being lost in negotiations but rather the very foundation of responsible policymaking.