US carbon market a model for struggling EU ETS

By John Parnell

While the latest research suggests the EU Emission Trading System (ETS) is headed into the abyss, a healthy US-based system has just proposed targeting yet deeper emission cuts.

The EU ETS was damned by Thomson Reuters’ Point Carbon analysts this week, labelling the collapse in the price to a low of €2.81 at the beginning of the month “dramatic” and “enduring”.

Plans to hold back 900m credits from the next phase of trading are currently under debate in Brussels. Proponents say “backloading” it is the best to lift the price, even campaigners and analysts alike consider 900m an insufficient quantity to hold onto.

EU members with carbon intensive economies are reluctant to do anything to lift the price of carbon and the first committee vote on the subject prior to vote by the European parliament saw the backloading plan defeated.

But despite setbacks in Brussels, there is plenty of movement in other parts of the world, eager to learn from the EU ETS experience.

And on the other side of the Atlantic, the Regional Greenhouse Gas Initiative (RGGI), a cap and trade market on the East coast of the US with nine member states including New York, Maine and Massachusetts, is in fine health.

Electricity suppliers in the US states taking part in RGGI could have 45% fewer carbon credits to play with as of 2014. (Source: Flickr/Foto43)

It has just proposed a 45% reduction in the number of emission allowances that it distributes between electricity providers. essentially, all the utility firms will have 45% less permissible CO2 permits before they have to start putting their hand in their pocket to pay for the excess.

Any revenues raised are reinvested into energy efficiency programs to help reduce the cost of power in a part of the country with high bills.

“Emissions trading was always intended as a learning by doing exercise and as such it would be irresponsible to ignore the lesson learnt from the initial implementation of any ETS,” said Rob Elsworth, policy analyst with the carbon trading campaign group Sandbag.

The RGGI proposals would also establish an annual cut in the number of allowances in circulation by 2.5% a year. If prices become too high, a series of price triggers would put more credits into the system to protect the companies taking part.

“Those US states participating in the RGGI have clearly demonstrated that they have learnt from their initial experiences with emissions trading and are moving forward to strengthen their scheme – benefiting both the environment and the regional economies of those participating states. Put bluntly there is a valuable lesson here for the EU,” Elsworth told RTCC.

Despair

The EU ETS is a more unwieldy beast with a diverse membership and layers of additional bureaucracy. The debate over backloading, a no-brainer to many, has left analysts despairing.

“If they can’t agree on a fairly unambitious target of [backloading] 900m credits it doesn’t bode well for the agreeing on a more meaningful, ambitious policy intervention,” Kash Burchett, senior European energy analyst with IHS Energy told RTCC last week.

RGGI is showing that a more flexible approach can yield results on a number of levels. Emissions reductions from electricity providers will increase dramatically up to 2020 at least. Consumers are able to reduce their bills and the utilities are left with more efficient and price shock resistant infrastructure.

“The regional energy program already has demonstrated itself a powerful and proven engine for economic activity in the region,” said Mindy Lubber, president of Ceres, a sustainability advocacy group based within the RGGI area.

“Today’s announcement makes our region stronger in the long run and will help move us toward a cleaner, more prosperous energy future.

“The new cap level sends a strong signal that will shift more investment to clean power, goods and services,” added Lubber.

The bones of the EU ETS have been used by China and Australia to develop their own systems with early errors and loopholes removed, such as banning projects that can earn perverse amounts of credits through destroying certain industrial gases.

The EU will not ban these until May 2013.

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