Abstract
After more than 8 years of operation of the world’s biggest cap and trade scheme, Phase III of which has just been initiated, it is time to evaluate the performance of the EU ETS as an environmental tool. Now is the time to analyse whether it has been effective in inducing emissions reductions at a price marginally lower than other tools, such as carbon taxes or command and control regulation. This chapter analyses the decision that policymakers face in generating a strong price signal for carbon. It describes the trend over time in the carbon price in the EU ETS and relates its dynamics to a number of different factors. Moreover, it describes a set of specific elements linked to the EU ETS experience with a view to drawing lessons for the future.
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Notes
- 1.
However, the EUTS is not the only carbon market approach which is facing hard times. After the Warsaw Conference of Parties (COP) to boost international carbon markets there was little development. The final text on the pathway to a climate deal in Paris does not specify any role for markets. Developing nations were opposed to this. As Flynn [2] states: “(…) talks on a new market mechanism were discontinued. They will be reconvened next year in Lima, Peru. And discussions on a “framework for various approaches” (FVA)—the means by which carbon pricing systems worldwide could be linked—were also postponed (…)”.
- 2.
The climate and energy package is a set of binding legislation which aims to ensure that the European Union meets its ambitious climate and energy targets for 2020. These targets, known as the “20-20-20” targets, set three key objectives for 2020: first, a 20 % reduction in EU greenhouse gas emissions from 1990 levels; second, raising the share of EU energy consumption produced from renewable resources to 20 %; and third, a 20 % improvement in energy efficiency in the EU [11].
- 3.
Two further Directives were enacted by 2009 to cater for the goals established in the climate and energy package: the Renewables Directive and the Fuels Quality Directive. A few years later, in 2012, another Directive was passed to deal with more issues related to energy efficiency. Although all these pieces of legislation deal in principle with different facets of the same problem and set different targets, the truth is that in practice they overlap various ways that affect the carbon price. For instance, the new Energy Efficiency Directive was passed with the praiseworthy objective of stimulating energy efficiency in diffuse sectors by promoting energy efficiency measures among end users, However the original draft, released in 2011, included power generation and refining, which were already covered by the EU ETS Directive, and caused a dramatic fall in carbon prices due to overlapping targets and the uncertainty created around the EU ETS Directive in the market [14].
- 4.
Phase I was a learning-by-doing period implemented by the European Commission “anxious to have a window of experience from which to learn and which would inform later stages of the trading scheme”.
- 5.
The scope of this chapter does not include road transport. For further information on this issue see [3].
- 6.
This is not the only item that hinders the predictability and the behavior of the system. There are other two factors that cannot be predicted: the future and real costs of abatement and future energy prices and policies.
- 7.
This chapter considers the case of a cap and trade system where allowances are allocated for free through quotas of allowances issued to facilities as in the EU ETS example. There are other cases of cap and trade systems where allowances are not allocated for free [10].
- 8.
“(…) Linking the Kyoto project-based mechanisms to the Community scheme, while safeguarding the latter’s environmental integrity, gives the opportunity to use emission credits generated through project activities eligible pursuant to Articles 6 and 12 of the Kyoto Protocol in order to fulfill Member States’ obligations in accordance with Article 12(3) of Directive 2003/87/EC. As a result, this will increase the diversity of low-cost compliance options within the Community scheme leading to a reduction of the overall costs of compliance with the Kyoto Protocol […] The plan shall specify the maximum amount of CERs and ERUs which may be used by operators in the Community scheme as a percentage of the allocation of the allowances to each installation. The percentage shall be consistent with the Member State’s supplementary obligations under the Kyoto Protocol and decisions adopted pursuant to the UNFCCC or the Kyoto Protocol” [15].
- 9.
In the case of the EU ETS this issue has played a major role in the plummeting of carbon prices. Production grew between 2003 and 2007 by almost 3 % per annum, but decreased by nearly 2 % per annum from 2008 to 2012. Therefore, demand for allowances substantially decreased. As Egenhofer et al. [6] mention: “At the time of the hard-won compromise of the ETS review for post-2012, there was a general conviction that the new ETS would be ‘future-proof’, i.e. be able to cope with the temporary lack of a global climate change agreement and address competitiveness, yet able to drive decarbonisation of the EU economy. The 2008–2009 economic crises, however, has destroyed that confidence by a seemingly permanent dramatic lowering of EUA prices due to a rapid and dramatic decline in economic output. Ever since, EUA prices have been lingering below €5 per tonne of CO2, going as low as around €2. Without political intervention, EUA prices are not expected to climb much higher throughout the period of up to 2020, largely because of the possibility to bank unused allowances between the second and third phase”.
- 10.
“(…) According to the European Commission (2012), some additional 500 million allowances from three exceptional sources have been brought to the market in 2012/2013: (1) Unused allowances from the second phase national new entrants reserves were auctioned at the end of the second phase. (2) The European Investment Bank is selling a fixed amount of third-phase allowances in order to fund a number of carbon capture and storage and innovative renewables projects (NER300 program) (3) Some third-phase allowances have been auctioned early in order to avoid the scarcity that was feared at the time the climate Package was negotiated in 2008/2009. As emission allowances not used in the second trading period (2008–12) can also be held over and used in the third trading period, a surplus of “well over 1.5 billion allowances, and even as large as 2 billion allowances” might have accumulated at the start of the third phase” [13].
- 11.
Several quantitative and qualitative restrictions apply to the use of ERUs and CERs. Credits from GHG emission reduction projects registered before December 31, 2012 can be used from all countries, except projects from: (i) Land-Use, Land-Use Change, and Forestry (LULUCF) projects; (ii) Nuclear projects; (iii) Large hydropower projects not in compliance with the World Commission on Dams guidelines; (iv) HFC-23 destruction projects (as from May 1, 2013); (v) N2O destruction projects from adipic acid production (as from May 1, 2013).
- 12.
According to a former head of carbon and coal at Barclays Plc, around half of the 30 brokers that were present in the market have already left it or at least reduce their desks in the last 5 years. In 2013 brokers share of the market was 10 %, all-time low and down from the 30 % registered in 2012, according to CME Group Inc.
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Martín Juez, J., Molinos, C.G., de Arbulo, K.P.R. (2015). The EU ETS as an Environmental Instrument. In: Ansuategi, A., Delgado, J., Galarraga, I. (eds) Green Energy and Efficiency. Green Energy and Technology. Springer, Cham. https://doi.org/10.1007/978-3-319-03632-8_14
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