Carbon Market Watch calls for safeguards as emissions trading pact sets precedent for China and South Korea tie-ins
By Megan Darby
An EU-Swiss carbon market link is due to be agreed by the end of the year, officials said on Tuesday.
Carbon Market Watch warned the tie-up will dilute the EU’s climate ambition unless it is coupled with deeper emissions cuts.
With China, South Korea and US states also developing emissions trading systems (ETSs), the think-tank urged policymakers to bring in safeguards for potential future links.
“The impact of a link with the Swiss ETS is relatively small,” said policy analyst Femke de Jong.
“But once we start linking with China or South Korea, the impact will be quite significant for EU climate policies.”
The concern is that other regimes may have weaker standards and divert funds to projects of little merit, while relieving EU industries of the obligation to cut their own emissions.
For example, Switzerland is planning to offset up to 20% of domestic emissions by 2030 with international carbon credits, while the EU has banned use of international offsets after 2020.
At a lunchtime briefing webcast from Brussels, European Commission climate official Damian Meadows said carbon market partnerships gave an opportunity to positively influence other jurisdictions.
“A large part of the linking discussion is influencing other sovereign actors to design sensible systems.”
As countries work towards a deal in Paris this December to limit global warming to 2C, Meadows said carbon pricing was “essential”.
Connecting up different systems can make the market more liquid and achieve the same emissions cuts for a lower cost, he argued.
Sophie Wenger, from the Swiss government, agreed: “When it comes to an ETS, bigger is better. We can reduce emissions more cost-efficiently and create a level playing field for our companies.”
The EU model of issuing permits for heavy industrial emitters to use or trade has inspired other governments around the world.
In particular, it is seen as a key selling point for discussions with China on a potential agreement ahead of Paris.
EU foreign policy chief Federica Mogherini is visiting Beijing, where she told reporters she was confident the two economies could agree a common approach.
Observers told RTCC this was likely to include cooperation on carbon pricing.
Pascal Canfin, former France development minister and climate diplomacy expert at WRI, said: “It’s important that kind of pact between the EU and China happens – I’m fully supporting this.
“That would make a significant signal that we are moving in the direction that major economies will be covered by a carbon price.”
China is running seven regional pilot projects and plans to take carbon trading nationwide in 2016.
Li Shuo, Chinese energy and climate expert, said the process was already forcing businesses and policymakers to tighten up their carbon accounting.
In the long term, Beijing sees carbon markets as an area it could become a “rule maker” not a “rule taker”, according to Li.
Critics say the EU’s carbon market is not a great example for others to follow.
A glut of pollution permits has seen the price languish at around €7 a tonne of carbon dioxide, too low to spur significant low carbon investment.
Despite an emergency intervention last year, the latest data shows there are more than 2 billion excess allowances in the EU ETS.
It shows the need for “a much more ambitious programme of reforms”, according to Damien Morris, head of policy at think-tank Sandbag.
“The failure of the backloading decision to tackle the over-supply crippling Europe’s carbon market should serve as a stark warning against timid new fixes to the scheme.”
European lawmakers and officials today thrashed out a provisional agreement to set up a “market stability reserve”, which is meant to prevent future surpluses.
The European Parliament was pushing for early reform, while Poland led resistance in a bid to protect industry from higher carbon costs.
They compromised on a 2019 start date, with excess allowances going straight into the reserve.
— Matthias Groote (@Groote) May 5, 2015
Green NGOs and business groups welcomed the decision but said deeper reforms were needed.
Ivan Pineda, director of public affairs at the European Wind Energy Association, said: “The start date of 2019 shows that member states are prepared to compromise. It is also pleasing to see that a substantial number of excess allowances will not be returning to the market and will instead go directly into the reserve.
“But we have to acknowledge that member states and the Parliament could have been far more ambitious in the shake-up of the carbon market and that much more comprehensive reform is needed in order for this instrument to provide a meaningful signal to investors.”
Carbon Market Watch said unused allowances should be cancelled at the end of each trading period, to make sure Europe’s targets are met by genuine emissions reductions.
Damien Morris, head of policy at Sandbag, said: “Today’s agreement is a huge turning point for Europe’s flagship climate policy. After a decade of what seemed like terminal decline, this enhanced stability reserve has the potential to inject new life into the carbon market.
“But the policy is not out of the woods yet: key issues still need to be resolved during an overhaul of legislation expected later this year, the most important of which is the overall ambition of the emissions cap. This will need to be significantly tightened before we can truly say we have a carbon market fit for purpose.”