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Is The EU ETS Now Obsolete
22/05/2013 In the wake of the European Parliament’s ‘no’ vote to backloading of allowances, we ask international players in the power sector if the European Union Emissions Trading Scheme (EU ETS) is now redundant as a tool to cut emissions and encourage low-carbon technologies? Matti Rautkivi, General Manager, Wartsila Power Plants Has the EU ETS really driven decarbonisation of the energy sector within the EU? No, it hasn’t. Low-carbon technologies – wind, solar and the latest nuclear plants – require additional support schemes, such as feed-in-tariffs. Secondly, over generous free allocations, combined with the economic recession in Europe, has led to an oversupply of allowances. This has caused prices to drop to levels below 5 EUR/t, at which point it makes sense to run even old coal plants having very high CO 2 emissions. In 2012, electricity generated by coal increased all across Europe, while gas gen’ation faced negative spark spreads. Simultaneously, we are building more and more intermittent renewable generation capacity, which requires flexible generation to balance the inherent variability of renewables. In the current situation, this flexibility is provided by old part loaded coal plants, instead of flexible gas generation, which would be the perfect match with intermittent renewable generation. Politicians have realized this awkward situation, whereby decarbonisation activities actually increase CO 2 emissions, at least temporarily. To change this perverse situation with the help of the EU ETS, the carbon allowance price should be around 30 EUR/t. On April 16, the European Parliament rejected the Backloading proposal by 334 to 315 votes, so it appears that there is not enough political will to fix the design failures of EU ETS in the current economic turmoil. Consequently, it is likely that member states will try to fix the situation at the individual country level by implementing national schemes, such as the UK’s Carbon Price Floor. The obvious drawback of these national “carbon tax” schemes is the market distortion between the EU countries. Nevertheless, it seems to be “the least harmful approach”, while the EU is looking for consensus and direction for its energy policy. Europe can’t turn the EU ETS into being an effective tool for cutting emission alone, since increasing electricity prices initiate an immediate debate on carbon leakage. Therefore, a global price for carbon is needed and all the main players, including the USA and China, must take part in this agreement. This raises another question: Why would, for example, the US implement a carbon trading system, since it has already been able to cut emissions with the help of cheap gas, which has enabled the rapid transition from coal to gas? The vision of the EU ETS and global carbon pricing as a tool for reducing emissions is a tempting one. Unfortunately, it seems to be neither very effective nor politically acceptable as a tool for decarbonisation, at least in the current economic situation. Ben Warren, Environmental Finance Leader at Ernst & Young The EU-ETS was once the largest and most established carbon trading scheme. It was seen as the leading force for carbon markets globally and the bastion driving European policy. It now paints a rather glum picture – painting carbon trading as being in a state of disarray and suffering from massive oversupply. The recent EU vote against the backlogging proposal meant to stem this oversupply has moved carbon prices to hover around the €3/tonne mark. This is far too low to have any meaningful impact on carbon usage or decision making. The mechanism in its current state looks extremely unlikely to have any meaningful impact on decarbonisation. Professor Tom Burke is a little more optimistic saying, “The decision on the ETS sent the wrong signal, but it is likely that some form of agreement will be made and the ETS will recover”. However, for now this is now left to individual member states under their national policies, albeit within the context of Europe-wide targets. Most people argue that a globally linked cap and collared carbon market would be the most efficient, fairest, most transparent way to incentivise the transition to a low-carbon economy. We are perhaps now further away than we were ten years ago. Harald Thaler and Jonathan Robinson, Frost & Sullivan We feel that the impact of the EU ETS on low-carbon investments is effectively nil. The system has now for some years completely failed to penalise coal-burning plants. It has been plagued by an oversupply of carbon permits for a long time, with the price for a tonne of carbon dropping from €30 at one stage to around €3 in 2013. The European Commission had proposed in late 2012 to withhold some of the carbon permits that were due to come onto the market between 2013 and 2015. This “backloading” proposal, however, was defeated in a crucial vote in the European Parliament in April 2013, leaving the entire scheme in complete disarray, since this measure was supposed to be the predecessor of a more fundamental cancelling of permits. While major utilities were generally in favour of the backloading proposal as a way of boosting the cost of carbon to encourage low-carbon technologies, large energy users and some key coal consuming countries such as Poland lobbied hard to defeat the proposal, arguing that the low price of carbon is merely a reflection of Europe’s economic realities of economic stagnation and recession. Effectively, the EU ETS has now become largely irrelevant as a way to encourage investments in renewables and nuclear power, so coal generation is the direct beneficiary. The oversupply of permits will continue for the rest of the decade, thus continuing to fail to penalise coal and other high-carbon energy sources. A prolonged period of high coal burn, as well as future investments in gas-based generation, will thus make it all but impossible for the EU to attain its long-term 2050 target to decarbonise the power sector by reducing emissions by 80 percent below 1990 levels. If a price floor can be agreed upon by member states, that could make a significant difference and return some bite to the EU ETS, but this looks like an extremely long way off.o boost investments in gas generation in 2013. The European Parliament’s ‘No’ to intervention in the EU ETS on 16 April led many market participants and observers to conclude that carbon prices will remain at very low levels for a long time. It quickly became clear that several MEPs had in fact pushed the wrong voting button, and statements from “pro-backloaders” indicate that although the battle was lost, the war is not yet over. Nonetheless, this fighting spirit cannot in itself dispel the genuine and strong opposition to political intervention in the carbon market. As market watchers delve into the usual speculations over what MEPs and member states need to do for backloading to become a reality, the more important question to ask today is whether the EU ETS is dead. Can it survive what will likely be several years of low prices for EU Allowances? The answer is the EU ETS will indeed survive, both politically in terms of support, and materially, in terms of continued demand for carbon allowances. To the extent that the EU ETS’s primary purpose is to secure emission abatement, it does deliver. The EU is well on track to reach its target of a 20% reduction on 1990 levels by 2020. If the current political gridlock continues to block any adjustments to the regulatory framework, the ETS Directive stipulates that by default the cap (the overall emissions ceiling) will be reduced annually by a factor of 1.74 per cent. Power generators, who represent more than half of the covered emissions, still need to buy allowances every year that the system is in place, to compensate for the output from their coal and gas power stations. The accumulated oversupply of carbon permits – some 2000 million tonnes – is less than utilities need to cover two years of generation (they surrender approximately 1100 million tonnes per year). If they were to stop buying, they would soon run out of allowances. A more detailed answer is more nuanced, however. A carbon price of €3 or less does little to incentivise green investments. Instead big utilities such as RWE and Vattenfall have recently increased their new coal power capacity, in what seems to be a bet on cheap coal and carbon for many years to come. The recent rejection of backloading shows that, against a backdrop of slow growth, a narrow majority of European decision makers have focussed their attention on keeping the electricity bills of households and factories down to a minimum. Climate change is no longer top of the agenda. At international level, the perceived failure of the EU ETS also poses a serious threat to Europe’s claim to be leading the way in global climate mitigation. A rough comparison with other carbon markets (without taking into account different rules for allocation, credit use, etc.) shows that Californian and Australian emitters are currently paying €11 and €17 respectively for their allowances, much higher than the European price of €3. If this situation should drag on, it could increase the political appetite for more ambitious climate targets in Europe, including a more permanent fix for the oversupplied carbon market. Giles Dickson, Vice-President, Environmental Policy and Government Affairs, Alstom Is the EU ETS now obsolete? Absolutely not. It is true the ETS is not functioning effectively today. With a supply/demand mismatch of around 2bn allowances, it is not functioning as a proper market. And with a CO 2 price of €3-4, it is failing to deliver either of its two objectives. It is failing (a) to incentivise urgently-needed investments in low-carbon technology and infrastructure. And it is failing ( to deliver cost-effective emissions reductions because, in the absence of a CO 2 price signal for investment, EU Member States are having to subsidise the deployment of low-deployment technologies more than they would wish. However, there is no doubt that the EU ETS remains the ‘best bet’ as the policy instrument to cut emissions and drive investment in low-carbon technologies. As a market-based instrument it stimulates investments where they make most economic sense – where they will cost least. With a variable CO 2 price it helps to even out costs over the economic cycle. It is technology-neutral and allows economic forces to pick winners. And, crucially, it is an EU-wide instrument that gives a single consistent price signal to investors all over Europe. Tax-based incentives, which by definition in Europe would be national, would not offer these advantages. What is needed now is reform to let the ETS fulfil its role. Most urgently, the EU needs to tackle the huge surplus of allowances by endorsing the European Commission’s proposal to ‘backload’ the auctioning of 900m EUAs. This will restore the necessary minimum of market confidence to shore up the ETS before the EU can agree more structural reforms. The latter should probably entail permanent withdrawal of the backloaded allowances and require steeper annual reductions in the ETS cap than the current 1.74%. Structural reform measures need to be agreed as soon as possible to give operators and investors in the power sector certainty about their operating environment up to 2030 and beyond. Jill Duggan, Policy Director, Doosan Power Systems On 16th April a plenary session of the European Parliament voted on an obscure proposal to ‘backload’ allowances in the EU Emissions Trading System. The proposal was to withhold 900 million carbon allowances from auction in the next few years to stem the drop in the European Carbon Allowance Price. The allowances would then be allowed back into the system when demand had picked up or bigger structural reforms had been made. The proposal was narrowly defeated, but it is not dead – the changes can be made through a committee of Member State officials. Nor has the ETS been ‘holed below the water line’ as The Economist said. But to continue and be restored as the cornerstone of EU climate policy it will need industry’s support. Industry and business still prefer Emissions Trading to regulation – as it provides access to least-cost emissions reductions, allows companies to choose their compliance strategy and gives certainty on the environmental outcome. But at around €3 a tonne it cannot make any impact in the board room, nor on immediate investment decisions. The alternatives to emissions trading are far less industry-friendly. Those who advocate a tax severely underestimate the difficulty in getting a single tax agreed across Europe. And in the absence of a strong carbon price we are already seeing a patchwork of differing regulations spring up across Europe, creating new competitive distortions within the single market. Countries are rolling out different carbon price floors, which do nothing to reduce the overall emissions in Europe but provide tax revenues to treasuries. The EU ETS is alive, its breathing is shallow, but it could yet make a full recovery. It is in the interests of industry to make sure it does. It is not a question of the ETS or nothing, but of something very much worse. Continue reading
EU Urges Energy Market as U.S. Shale Gas Widens Price Gap (1)
European Union leaders are set to urge faster integration of the bloc’s power and natural-gas markets to lower energy prices as the U.S. shale-gas revolution widens the EU’s cost gap with its largest trading partner. The 27-nation EU must accelerate efforts to implement energy legislation aimed at breaking down national barriers by 2014 and develop interconnections to end the isolation of some member states from networks by 2015, according to a new draft of conclusions for a leaders’ summit in Brussels today. The summit initiative comes after a record drop in private investment in Europe and the biggest-ever slump in the EU carbon market, designed to cut pollution and stimulate a shift to cleaner fuels. “The EU’s energy policy must ensure security of supply for households and companies at affordable and competitive prices and costs, in a safe and sustainable manner,” according to the conclusions obtained by Bloomberg News. “This is particularly important for Europe’s competitiveness in the light of increasing energy demand from major economies and high energy prices and costs.” At stake is an EU campaign to win energy-policy authority from national officials that compares with existing European powers over monetary, antitrust, trade and agriculture matters. Some governments, including the U.K., are lagging behind in introducing rules in line with EU legislation more than two years after a deadline passed. Price Gap If the EU becomes a fully integrated market, it could save as much as 35 billion euros ($45 billion) a year in electricity costs in 2015 compared with 2012, according to the European Commission, the bloc’s regulatory arm. Shale-gas production has contributed to a widening gap between U.S. and EU industrial prices for energy, according to a commission report prepared for the summit. “In 2012, industry gas prices were more than four times lower in the U.S. than in Europe,” the report said. As the EU’s oil and gas import dependency is set to increase to more than 80 percent until 2035, the U.S. is on its way to become a net exporter, according to the International Energy Agency. The increase in European energy prices is linked to the inconsistency of EU policies to boost the share of renewable energy, increase energy efficiency and cut greenhouse gases, as well as to national policies that distort the internal market, according to a study commissioned by BusinessEurope, a Brussels-based employers’ federation. ‘Cost Burdens’ “The U.S. industry already has a head start on global markets — this means that any additional cost burdens on European industry should be avoided if competitiveness is to be ensured,” Frontier Economics Ltd. said in the study. While companies such as Chevron Corp. (CVX) have begun drilling exploration wells in countries including Poland, shale-gas production in Europe won’t make the region self-sufficient in natural gas, according to a 2012 study by the EU Joint Research Centre. Under the best-case scenario declining conventional production could be replaced and import dependence maintained at a level around 60 percent, it said. Indigenous Resources As some member states and environmental groups are seeking stricter controls on shale gas exploration, EU leaders will say it’s crucial to “further intensify the diversification of Europe’s energy supply and develop indigenous energy resources,” according to the draft conclusions. Poland’s Prime Minister Donald Tusktold reporters today he was satisfied with the proposed wording as it treats shale gas as an opportunity and lets countries explore it as an option in national energy mixes. Europe needs to diversify its energy sources, boost efficiency, modernize infrastructure and complete the internal market, although shale gas development in Europe may not be a “silver bullet,” according to lobby group Shale Gas Europe, which is supported by companies including Royal Dutch Shell Plc. (RDSA), Halliburton and Statoil. Energy costs in the EU will remain above the U.S. because of differences related to infrastructure, rock structure and legislation, Iain Conn, head of BP Plc (BP/)’s refining and marketing unit, said March 16. ‘Cheap Coal’ “Europe is more dependent on imported energy and although Europe is benefiting — if I can call it that — from cheap coal coming from the U.S. as a result of this, Europe’s cost of energy for the economy is going to be higher than in the U.S. for the foreseeable future,” he said. As a net importer, Europe can boost energy efficiency, create a market based on smart infrastructure, exploit conventional and unconventional energy sources and bet on innovation in order to ensure secure and competitive prices, according to the commission. By 2020, the region needs to invest 1 trillion euros to reach its goal, the commission said. Financing investment in “new and intelligent infrastructure” should primarily come from the market, according to the draft summit conclusions. Private investment in Europe tumbled by a record 350 billion euros in 2007-2011, 20 times the drop in private consumption and four times the decline in real gross domestic product, according to a report by the McKinsey Global Institute published last year. Carbon Market “This makes it all more important to have a well-functioning carbon market and a predictable climate and energy policy framework post-2020 which is conducive to mobilizing private capital and to bringing down costs for energy investment,” according to the draft conclusions. EU leaders will return to the issue of 2030 energy and climate rules in March 2014, after the commission comes forward with a “more concrete proposals,” they said in the draft document. By then ministers will have discussed policy options in that regard, taking into account objectives set for a global climate deal sought in 2015, the document showed. Prices in the European emissions trading system tumbled to a record low of 2.46 euros a metric ton last month amid a surplus of allowances and concerns that lawmakers may fail to reduce the glut. That compares with 25-30 euros expected by policy makers when the cap-and-trade system was created in 2005. EU leaders will call on the commission to study how energy prices are affecting Europe’s competitiveness and what response is needed. The EU will need to look at innovative financing methods, improved liquidity in the energy market and the issue of the contractual linkage of gas and oil prices, they said in the draft statement. To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Continue reading
South Korea To Launch Ambitious Carbon Trading Scheme, Says Report
South Korea is preparing to introduce the world’s most ambitious emissions trading scheme, potentially paving the way for carbon costs as high as $90 a tonne for many of the country’s key industries. That is the stark conclusion of a major new report from Bloomberg New Energy Finance (BNEF) and Ernst & Young, which hails the proposed scheme as the world’s most ambitious carbon-pricing policy but warns that changes to the proposals may be required before the scheme is introduced in 2015 to avoid “punitive” costs on industry. “If the government implements the scheme without any changes, it will have major implications for Korean companies,” said Richard Chatterton, lead analyst for carbon markets at BNEF, in a statement. “A carbon price will lead to higher power prices and impose additional costs on industrial firms. The government is mitigating the impact for covered entities by handing out most allowances for free, but costs could still rise quickly.” The report calculates that if South Korea adheres to its national target of cutting emissions to 30 per cent below business-as-usual levels by 2020 emissions reductions delivered through the planned emissions trading scheme would have to reach 836 million tonnes between 2015 and 2020. But it also predicts the “need to reduce emissions will, however, exceed the options available within industrial companies and from the country’s current fleet of gas fired power stations”, meaning that the target is likely to be missed and the price of carbon in the scheme will effectively be set by a $90 a tonne penalty price for company’s exceeding their emissions cap. The government hopes that businesses will be able to comply with the cap by accelerating the shift toward lower carbon energy sources, such as gas, renewables, and carbon capture and storage plants. But the BNEF report warns that the cost of such technologies is likely to be significantly higher than the penalty price, meaning many firms are likely to opt to exceed their targets. It recommends that the government consider a number of options to improve the proposed scheme, including relaxing the number of offset credits companies can use to count towards their carbon target or loosening the over-arching cap on emissions. “The challenge is to put in place a carbon price high enough to impact investment decisions, but low enough to transition smoothly towards a carbon-constrained economy,” said Milo Sjardin, head of Asia research for BNEF, in a statement. “With the proposed design, demand and supply within the ETS are not well-matched and will lead to unnecessarily high carbon prices. Policy-makers will need to look at cost containment measures closely while not compromising the ambitions of the scheme.” However, Yoon Joo-Hoon, senior manager at Ernst & Young, warned that while changes to the proposals could be made businesses still needed to be preparing now to the likely impact of the scheme, arguing that firms should be looking at carbon mitigation options and developing a plan for operating effectively under an emissions trading scheme. Continue reading
