EU emissions plunge leaving emissions trading scheme high and dry

posted by Bryony on 1st Apr 2010

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.

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