What is the ETS?
The Emissions Trading System (ETS) is the EU-wide, cap-and-trade scheme that started in 2005 and is designed to cut carbon emissions. The scheme covers the most intensive carbon-emitters – 11,000 installations across Europe, according to British government figures. Between them they account for about 45% of the EU’s carbon dioxide emissions. Each installation is allocated an agreed emissions allowance. If they emit too much, businesses have to buy any further allowances they need in an EU-wide market. They can also sell allowances they don’t need. The idea is that by putting a price on carbon emissions the EU discourages people from producing them. Meanwhile, in theory at least, the ability to trade emissions allowances in a market allows carbon-cutting to be done in the most efficient way.
Has the scheme worked?
Up to a point. In the first (2005-2007) phase of the EU scheme, the price of carbon collapsed after too many free permits were issued. That hit confidence in the project (if the price is too low, there’s no reason for emitters to cut back). In the second phase (2008-2012), the scheme has stabilised but has faced further difficulties – including cases of ‘carousel fraud’ (a form of VAT scam) and a series of thefts of allowances from national registries that led the spot market to be suspended for three months in January 2011. It seems that in the rush to prove that the fledgling market could work, Brussels overlooked some key security flaws.
What effect has this had?
It has seriously damaged trust in a system that’s supposed to be a model for global efforts to tackle climate change. Some of the institutional participants have even withdrawn from the market. The system has also faced frequent criticism for perversely providing some of the biggest emitters with windfall profits in the form of unused allowances. According to Sandbag, the carbon lobby group, a combination of over-allocation and the economic downturn has left the steel, cement, chemical, ceramic and paper sectors with far more permits than they need – to the tune of €1.7bn in the case of steelmaker ArcelorMittal.
How has all this affected the price?
It’s far below where the scheme’s creators had envisaged. At present, the price of an allowance (priced in euros per tonne of carbon emitted) under the EU’s scheme is below €11. That’s even lower than last year, when it traded within a range of about €12-€15. (The cost of a certified emission reduction – CER – under which European firms are allowed to buy in, or ‘offset’, emissions allowances from UN-certified, developing-world emitters is lower still.) The low EU price is far below the rate at which critics say it would act as a stimulus to investment in energy-saving technologies and renewable energy. Experts variously put that price at between €20 and €50. In response to this failure, the British government is planning a so-called floor-price for carbon – achieved via a complicated system of regulations that would add up to a de-facto levy on emissions.
Doesn’t that defeat the whole point?
One of the points of carbon trading is to let the market decide the price of carbon. If politicians think they know what the price should be, they could simply tax it up to that price instead. The proposed floor has angered many businesses, as it could put Britain at a disadvantage compared to other European countries and would make life impossible for energy-intensive firms in sectors such as steel, cement-making and chemicals. Yet these firms are “key to the green economy”, a Confederation of British Industry spokesman told The Guardian. “These are chemical firms making lubricants for wind turbines, the aluminium smelters making supplies for electric vehicles, the cement firms responsible for the concrete that glues wind turbines in place.”
What’s the future for the ETS?
Next year the aviation industry comes within the scope of the system for the first time. The airlines say that it is going to cost them, and their passengers, billions. Last week, the European Commission announced that airlines will receive 85% of their emission permits for free in 2012, and 82% in 2013. So it’s to be a gradual start. According to EU climate action commissioner Connie Hedegaard, it amounts to a €20bn subsidy over the next decade, giving airlines time to “invest in modernising their fleets, improving fuel efficiency and using no-fossil aviation fuel”. The big fireworks will come in the third phase (2013-2020), when emitting firms will have to buy far more permits at open auction.
What the ETS costs Britain
The emissions trading system cost European consumers €15.6bn last year, according to Matthew Sinclair, director of the rightwing think tank, the Taxpayers’ Alliance, and a longtime critic of the EU’s scheme. In Britain, the cost is £75 per household (and would be far more if the carbon price reached its medium-term target of £30 a tonne). Critics such as Sinclair argue that the European scheme only ever made sense as part of the global deal – as was originally envisaged – for a single carbon market. Since such a deal looks further away than ever now, and with no prospect of America creating a similar system, the EU’s scheme has become a wasteful and complex flop that is fatally compromised. The solution is not to expand it, but to scrap it.