Economists warn of “lost decade” risk for EU carbon market

Ahead of key European Parliament vote next Tuesday, researchers urge early reform to flagship climate policy

European Parliament building in Strasbourg (Pic: Flickr/Emiliano)

European Parliament building in Strasbourg (Pic: Flickr/Emiliano)

By Megan Darby

The European Union faces a “lost decade” for low carbon investment without early and robust reforms to its flagship climate policy, researchers have warned.

Lawmakers in the European Parliament’s environment committee are to vote next Tuesday on proposals to prop up the ailing emissions trading system (ETS).

The European Commission has recommended bringing in a “market stability reserve” (MSR) in 2021 to tackle oversupply of pollution permits, which has depressed the carbon price.

Leading economists are urging MEPs to bring in the measure sooner, in a report from Climate Strategies.

Karsten Neuhoff, professor at the German Institute for Economic Research, said: “If the implementation of the market stability reserve is delayed until 2021, we risk a lost decade for investments in modernisation of energy intensive industries and the energy sector.

“All the models we ran indicate that the MSR should be introduced earlier than has been proposed. Bringing the start date forward to 2017 will significantly help the European Union stay on track with its efforts to switch to a low-carbon economy and reduce emissions.”

It will take ten years to reduce a glut of excess pollution permits under European Commission plans, warns Sandbag (Source: Sandbag)

It will take ten years to reduce a glut of excess pollution permits under European Commission plans, warns Sandbag (Source: Sandbag)

Analysts at think-tank Sandbag independently came to a similar conclusion. Under the Commission’s plan, it could take a decade to get the supply of allowances below current levels, they said.

The report stressed the importance of preventing an estimated 750 million unused allowances, each representing a tonne of carbon dioxide emissions, from flooding the market in 2020.

Instead, the surplus should be cancelled or placed straight into the MSR, which withholds permits from the market during periods of oversupply, it recommended.

Damien Morris, Sandbag’s head of policy, said: “Whether or not you want to increase Europe’s environmental ambition, just from the point of view of market functioning, we think it is really important to deal with this.”

Carbon leakage

Reforms to the ETS have proved contentious in the European Parliament, with its industrial committee failing to take a view after a heated debate last month.

A progressive alliance of green, left-wing and liberal MEPs backed changes that would lead to a higher and more consistent carbon price.

At present, polluters pay around €7 a tonne of carbon dioxide, which experts say is too low to foster the investment needed in carbon-cutting measures.

Right-wingers were more concerned about “carbon leakage”, the risk that a high price would make European heavy industry uncompetitive against foreign rivals.

Report: One fifth of proposed EU fund investment high carbon

The environmental committee is expected to take a more progressive line than the industrial committee. But if it does not gain a clear majority for reform, the matter is likely to go to a plenary debate, further delaying the process.

“There is a danger the ETS remains an irrelevant backstop policy, even though we have gone through this whole political process,” said Sandbag’s Morris.

The ETS is important not only to the credibility of the EU’s climate strategy, but also to global efforts to put a price on carbon.

On Tuesday, BP warned that without a “meaningful” carbon price, emissions are likely to overshoot the pathway to prevent catastrophic climate change.

In its energy outlook, the oil major assumed the price would rise to US$40/t by 2035, based on its interpretation of government policies.

The IEA has mapped an energy future consistent with limiting temperature rise to 2C above pre-industrial levels – the international goal – which counts on a price of US$100/t in 2030.

Analysis: 7 burning issues on the road to a Paris climate deal

As negotiators work towards a global climate agreement in Paris this December, the role of carbon markets is a hot topic.

A UK parliamentary committee on Tuesday said a Paris deal must allow carbon trading between countries.

Tim Yeo MP, chair of the committee, said: “Emissions trading allows us to set a cap on emissions and enables participating businesses to identify the most cost effective ways of reducing their emissions.

“Letting the market determine the price of carbon in this way is likely to be far more effective and politically palatable than carbon taxes.”

Socialist governments on the other hand are fiercely opposed, arguing polluters should not be allowed to trade away their obligations.

Read more on: Carbon markets | Climate politics | EU | |