Vote to support back-loading or those wanting to kill carbon pricing will claim a victory

posted by Bryony on 15th Apr 2013

On Tuesday the European Parliament will vote on a proposal to temporarily remove 900m allowances from the EU Emissions Trading Scheme auction. This is intended as a short-term measure to fix the massive oversupply in the market, while work continues on more fundamental long-term reforms of the policy. If the vote is won then proposals for a more permanent fix could soon follow, if it is lost, however, those who oppose any increase in European action to tackle climate change will claim a victory and interpret the result as a reason to delay and obstruct any further reforms.

At the moment it is too close to call which way the vote will go but if it is lost then it is clear that it will be because of right of centre MEPs since both the main Conservative groupings, the EPP and the ECR, have stated their group line is to oppose. This may seem odd since they are the parties that champion the power of the market to deliver social goods as opposed to more interventionist, dictatorial Government-led interventions. And the EU ETS has shown that it does harness market forces and is very effective at finding the least cost solutions – in terms of offsetting some have said that it has been too effective - seeking out ridiculously cheap and solutions which have helped drive down the carbon price globally. So why would a pro-market party be opposing an urgent fix to a policy which is all about the power of the market?

The answer is complicated. First of all in many countries the most vocal climate sceptics also tend to be Conservatives – this is not universally true but in the UK some of the most visibly outspoken opponents have been within the Conservative party, or in the UKIP party. So at least part of the reason is there are those that believe all action on climate change is an unnecessary burden on the economy and so the ETS, despite its efficiencies, must necessarily be one too.

The next oft cited reason for blocking reform is based on the belief that Europe need not and should not do any more than it already is in the fight against climate change. The line of arguments goes: the market is doing what we asked of it, emissions are falling there is no need to intervene. This would perhaps be a valid argument if it were not for the fact that the EU set itself very easy targets to achieve (we met out 2020 pledge in 2011), over estimating economic growth and underestimating how cheap it would be to offset emissions using the market. And it is certainly not the case that the fight against climate is over – if anything the science is pointing to an ever more urgent situation requiring more ambition from everyone to reduce the risk.

The fact that action is needed by everyone is the basis for another argument against fixing the ETS – why should the EU go it alone, they ask? This is easily countered. Firstly, we need to show leadership because we have grown rich exploiting fossil fuels and have over time contributed far more to the problem than to those who are only now industrialising. Secondly, it is no longer true to say we are on our own. Carbon markets now exist on both coasts of the US, eight pilot projects are being introduced in China, some covering volumes of emissions the match the largest EU countries, Korea will start trading in 2015, Australia has a carbon tax already and moves to carbon market in 2015. Many other countries are considering or piloting carbon market approaches. We have lead the world in implementing this policy and others are following, however, with a carbon price of zero we could soon find ourselves on the periphery of this new market rather than at the centre.

And the EU is currently benefiting from the industrial revolution it has started through its low carbon policies. Change is good for growth. The rest of the world is joining us in the fight and our balance of trade is being positively helped through exports of green technologies and know-how. We need to keep our ambition strong.

There is another argument cited by those opposed to the temporary fix and it is perhaps the most confusing and most regrettable, since it is being espoused by the EPP shadow rapporteur for the ETS policy – Finnish MEP, Eija-Riitta Korhola. As she sets the line for the rest of the party many could be blindly following her rather confusing lead. Korhola claims she is an environmentalist but she reconciles her opposition to the ETS fix using an odd argument. The carbon market she claims is broken because of subsidies for renewable electricity. These, in her view, over-generous incentives for green power have distorted the carbon market and at the same time pushed up power prices so we cannot afford to have any additional increases for fear business in Europe will be rendered uncompetitive. Of course higher power prices can affect competitiveness but it is largely the increase in global gas prices that have pushed EU prices up in recent years. It is certainly not fair to blame the entire problem on renewables. By subsidising renewables in the short term we are ensuring in the long term that the EU can better insulate itself from unpredictable fossil fuel prices in the future. Even if this were not true it is still incorrect to say that the arrival of renewable electricity is distorting the carbon market. All of the caps set in the ETS were set on the assumption that the EU’s legally binding renewable energy targets would be met in full. This means allowances were deducted from the power sector in anticipation of the reduction in emissions they deliver. So renewable can only distort the carbon market if they fail to be delivered and that will serve to push prices up not down.

The curious thing about Korhola’s argument is that the best chance we have of completely getting rid of the renewable subsidies she so hates, is through ensuring we have a high enough carbon price. This would mean they could more quickly stand on their own two feet relative to fossil fuel based power and would give policy makers the perfect opportunity to phase them out. Perversely, in blocking reform of the ETS, Korhola is almost certainly ensuring renewable subsidies are here to stay for the foreseeable future and making it more expensive to tackle climate change than it need be.

There is also another objection raised which is also worthy of mention and that is that the back-loading proposal simply doesn't go far enough and is just a sticking plaster that will have no effect. It is correct that the ETS needs much more fundamental adjustment, however, blocking this short term fix is no way to go about achieving broader reform, since it will send the political signal that the Parliament does not wish to see the ETS fixed.

If we do not introduce a stabilising measure now, the chances of getting more effective longer-term solutions will become more remote, not more likely. Only if back-loading vote is won will the Commission have the mandate to take the necessary next steps to begin proper reform of the policy. A vote against back-loading will in effect be interpreted as a vote in favour of delay and inaction and be leapt on as supporting evidence by the climate sceptics who oppose any action on climate change on ideological grounds.

Those who believe back-loading is not the correct way to fix the ETS must still vote in favour of it or those that wish to do away with carbon pricing altogether will claim a victory. The world is watching and the EU must continue to show leadership. We urge all MEPs, but particularly those who prefer market based solutions to Government dictates and direct subsidies, to vote in favour of back-loading and then to join us in then securing more fundamental reform of the policy as quickly as possible.

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