What next for the EU ETS?

posted by Bryony on 16th Apr 2013

The future of the ETS in Europe the short term looks pretty bleak – the carbon price has already fallen by close to a half, from an already rock bottom level, as the market absorbs the news that the Parliament has voted against throttling back some of the supply into the already overloaded market. The immediate implications of this are that forthcoming auctions may struggle to go ahead as technical reserve prices, intended to prevent sales significantly below the market price, could kick in as they already have before in Greece and Austria. This could serve as sort of stop-start temporary ‘backloading’ but it unlikely to lift prices by very much. Member States who have been banking on incomes from auctions to fund public services or supporting green policies will find they have a hole in their finances and this could prompt the introduction of more carbon taxes to compensate – as was recently introduced in the UK. This will be bad for business as the once level carbon playing field across Europe starts to splinter distorting trade. The low prices are also bad news for Europe’s more efficient, well-run companies who will no longer be rewarded for doing the right thing. In the short run it’s also bad for the two thirds or so of installations currently holding comfortable surpluses as there will be no-one interested in buying their spare allowances, removing a source of income at a time when all potential cash flow represents a potential lifeline.

In the medium term, there is the possibility that a different, more ambitious proposal will emerge from the Council, Commission or indeed the Parliament. There were a number of abstentions in the vote today – if they can articulate what their concerns were and have them addressed, something new could emerge. Equally, some members of one of the most powerful blocks the EPP have claimed they do support fixing the ETS just not through backloading so they may support a different approach if one can be agreed on. There is a slim chance something could be agreed ahead of the next parliamentary elections in May next year. If that fails then it will be two years or more before anything can be done at an EU level.

In the longer term the ETS will simply carry on regardless as there is nothing in the legislation that causes it to cease. By around 2020 much of the industrial surpluses will have run out and future free allocations to industry will be fast disappearing. Offsetting provisions will also run out. So if the policy does not change then prices will inevitably rise again in about 10 years or so. Sadly for the EU, to sit around doing very little for the rest of the decade means loss of investment and sends a very bad signal – especially in the run up to the 2015 UN negotiations when the world is meant to try and agree the next international treaty. For this reason it seems likely the focus of the Commission will now shift to deciding climate targets for 2030 which if they are accompanied by changes in the ETS trajectory could serve to lift the carbon price from the doldrums a lot earlier than it would otherwise.

Looking outside of the ETS the failure to fix the ETS could derail political will in other countries – most notably Australia and Korea – however there could also be a plus side as countries currently copying the EU model may well think twice when considering their own plans and introduce safeguards against such drastic price crashes, following more closely the Californian model.

Overall the EU ETS is down but not out. We are losing time and investment opportunities while it remains on the floor but it will bounce back and we intend to ensure that this happens sooner rather than later.


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