No vote on ‘backloading’ will hamper EU’s ability to combat climate change

FactoryI am extremely disappointed that today the European Parliament, with support from many UK Conservatives and other East Midlands MEPs, voted to reject a proposal to help preserve the EU’s Emissions Trading Scheme (ETS).

The ETS is at the heart of the EU’s climate change policy.  As the only system of its kind, it has helped to make the EU a world leader in the fight against global warming, with emissions from Europe’s power stations falling by 1.74% each year.

The aim of the ETS is to use market forces to drive investment in low-carbon and green technologies and thus combat climate change.  The EU set a cap on the amount of carbon that can be emitted by factories and power plants and emissions permits were then either allocated for free or auctioned, with companies able to trade these with each other.  A company that reduced its carbon emissions would therefore require fewer permits and could profit from selling unused permits on to other companies.  This would provide a financial incentive for companies to reduce their carbon emissions by investing in clean, low-carbon technology, which is needed in order for the EU to meet its target of reducing CO2 emissions by 20% on 1990 levels by 2020.

However, the reduction in industrial output due to the economic downturn, combined with an over-allocation of carbon credits in the previous two rounds, has undermined the ETS by creating a surplus of emissions permits, which means the price per permit has fallen.  The price of carbon is now below €4/tonne – much lower than the anticipated €30/tonne when the scheme was first launched – and as a result it has become more cost-effective for firms to pay for permits than to try to reduce their carbon emissions.

The report we voted on today proposed a short-term reduction in the number of permits auctioned – so-called ‘backloading’ as 900 million permits that were due to be released would be held back.  It was hoped that delaying the release of permits would push the price of carbon back up and help to keep the scheme viable.

We always knew the vote would be tight, with the EPP (the European Parliament’s main centre-right group) split on the issue and many UK Conservatives determined to vote against.  This was particularly absurd because their own Government supports the proposal, with UK energy secretary, Ed Davey, saying a rejection would imperil investments in green technologies.

The UK Government has already agreed to set a minimum price for carbon in order to give a degree of long-term certainty and encourage low-carbon investment, but with the European price having fallen so low, this will actually have the effect of putting UK firms at a disadvantage unless the EU-wide price of carbon can be pushed back up.

Climate change is not confined within national borders and so it’s clear we need to work together with our European partners to combat it.  However, there are fears that this rejection could lead to EU Member States all developing their own schemes, leading to a complex patchwork of climate legislation that will only serve to ensure companies are not operating on a level playing field and inhibit the single market.

Within industry itself, many big companies recognise that the ETS is important for economic growth, jobs and investment.  As for fears about interference in the market, even major global corporations like Shell have argued that sometimes intervention is necessary in order to restore confidence in the market.  It’s also important to remember that the proposal was for a one off intervention to buy time while reforms to the system were considered.

The rejection of this proposal not only severely weakens the ETS and risks the EU not meeting its own carbon reduction targets, it also damages the credibility if the EU as a world leader in climate policy.  As the IEA chief economist, Dr Faith Birol, highlighted today, saving the ETS “is important not only for Europe but also for the global fight against climate change.”

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