2011 was something of an annus horribilis for the EU emissions trading system, probably even worse than spring 2006, when the first officially confirmed emission figures for sectors and companies included in the system were made available, and showed a surplus of emission allowances. The information triggered a sharp drop in the carbon price and made many people ask whether the system was viable. Since then, the situation has improved. In 2008, a much more streamlined and centralised emissions trading system was adopted as a key element of the EU climate and energy package. From 2013 onwards, emission allowances will as a general rule be auctioned, and the number of allowances will be gradually reduced. It has also been decided that the revenue from the sale of 300 million allowances will be used as part-funding for carbon storage and renewable energy projects. The emissions trading system appeared to have been repaired and revitalised. But in 2011 there has been one problem after another.
To take some of the main problems – in summer 2011, the European Steel Association, Eurofer, challenged the European Commission in the EU Court of Justice, claiming that the technological standards or benchmarks it had adopted were far too stringent. Several Eastern European member states successfully appealed to the same court, claiming that the Commission had made excessive cuts in their emission allowance quotas for the period 2008–12. In combination with the continuing financial crisis, which has resulted in a decline in industrial production and thus in the demand for emission allowances, this resulted in a growing surplus of allowances for many industries and a drop in the carbon price. In autumn 2010, EU emission allowances cost around EUR 15. One year later, the price had dropped by half. This has had knock-on effects beyond the emissions trading system. An unstable and often low carbon price has reduced incentives for companies to develop and use techniques for reducing emissions. Towards the end of 2011, the European Central Bank sold the first tranche of allowances set aside to support carbon storage projects, but the revenue obtained was much lower than expected. It now seems that it will only be possible to provide funding for three or four projects. Moreover, efforts to include international aviation in the emissions trading system from 2012 have met with strong opposition from countries such as the US and China.
Towards the end of 2011, several major actors pointed out that the system has reached a crossroads and could even be scrapped. According to the CEO of the major German energy company E.ON, for example, “the European Emissions Trading Scheme is dead”. How has the flagship of EU climate policy managed to lose its bearings so badly? One key factor is that global progress has been slow. Many people hoped for a breakthrough for a global climate instrument in Copenhagen in 2009. This would have given EU actors, particularly in the manufacturing industries, clearer reassurance that their global competitors would not be subject to less strict requirements to reduce their emissions in the time ahead. But as we all know, there was no breakthrough. And at the same time, President Obama was unsuccessful in his efforts to push through a stricter domestic climate policy in the US that is more similar to EU policy. The main point here is that the EU leaders have not obtained the international backing they need for a more ambitious EU climate policy, which would also tighten up the emissions trading system. The financial crisis has worsened in a number of countries, and climate change has dropped further down the political agenda.
So are there any remedies – and are they feasible in political terms? Globally, the establishment of the Durban Platform for Enhanced Action in 2011 gave the EU and manufacturing industries the hope that their largely unilateral action would be matched by a binding global instrument within the foreseeable future. However, it is important to be aware of the uncertainty involved here: experience so far has shown clearly that global processes are very slow and can easily become deadlocked.
The Directorate-General for Climate Action under the European Commission and influential groups within the European Parliament have been ready to consider unilateral tightening of the cap (reducing the total number of emission allowances) under the EU system for the period 2013–20. The process of developing a more binding energy efficiency policy in the EU is also part of the picture. Improvements in energy efficiency may further weaken demand for allowances, and result in another drop in the carbon price. Development of the energy efficiency policy is therefore being used as a further argument for reducing the number of allowances, particularly by groups in the European Parliament. Important member states such as Germany and the UK are willing to consider more ambitious EU targets and thus tighten up the emissions trading system. This is perhaps a sign of a rather unusual alliance between environmental bureaucrats and ministries of finance, which see an opportunity for increasing state revenues as a larger proportion of allowances is auctioned from 2013 onwards. Moreover, more ambitious targets will result in a higher carbon price and therefore more revenue.
However, the campaign to tighten the emissions cap has met opposition in various EU bodies, some member states and key industrial actors. Although there are certain less permanent options (for instance postponing some auctioning) that could be implemented quickly, it should be noted that more fundamental changes to the system would have to go through the whole round of EU procedures, and would take time to implement. So far, Poland has been one of the main impediments to progress, probably supported by other Eastern European countries. These countries are highly dependent on coal and therefore sceptical to all environmental requirements that could make coal more expensive and thus reduce economic growth. However, an interesting report was published in Hungary in 2011, which pointed out that if the price of carbon rises, so will the revenues available to finance minsters. Perhaps calculations of this kind will also convince Poland in the long run? With Europe in the throes of a financial crisis, real progress is probably dependent on such down-to-earth, concrete arguments – perhaps combined with extreme weather and a “climate crisis”. But it is doubtful whether variable weather conditions will result in broad-based mobilisation and real change, such as Germany’s response to the accident at the Fukushima nuclear power plant.
Will the emissions trading system survive? I believe it will. A great deal of time and prestige has been invested in this new “grand policy experiment”. It has strong supporters within industry as well as among politicians. And it is not easy to envisage any alternative EU policy that could gain rapid, broad acceptance. A carbon tax is an obvious option, but has already been tried, back in the 1990s. The idea had to be abandoned, among other things because key countries refused to transfer the authority to impose taxes to the EU. The scars of that attempt are still in evidence. And there are some bright spots for those who favour a cap-and-trade system. New Zealand already has an emissions trading scheme. California is establishing one from 2012, and is by no means a negligible actor. Australia and South Korea will be following suit in a few years time, and China is considering whether to do so. If these schemes can gradually be linked together, it might even be possible to achieve bottom-up global cooperation away from the floodlights and the rhetoric of the costly, slow-moving global negotiations.