Europe’s Emissions Trading Muddle a Setback to Global Environmental Efforts

BRUSSELS—Europe’s reputation as a leader in climate change policy took another beating this month when the European Parliament rejected, by 334 votes to 315, a proposal to reform the EU Emissions Trading System (EU ETS). The vote leaves Europe’s carbon-trading market — the world’s largest — at risk of collapse and threatens to fragment and complicate efforts to tackle climate change on both sides of the Atlantic.

The EU ETS was set up in 2005 as a market-based alternative to reduce greenhouse gas emissions. It gave companies the choice of reducing their emissions or buying emission allowances from other companies. It also put a price on carbon in order to encourage companies to invest in new technologies or processes to reduce their emissions. Allowances (equivalent to one ton of carbon dioxide) traded at an average of over €20 during the whole of 2008. But the recession since 2008 and subsequent drop in industrial output in Europe resulted in a huge oversupply, and the price fell to around €5.

The European Commission proposed stabilizing the EU ETS by postponing a forthcoming auction of allowances. After the European Parliament voted to reject the Commission’s proposal, the price of allowances dropped to a new record low of €2.63. The European Parliament may take another run at the vote this year, but failing that and given the size of the market overhang, there is now almost no prospect of allowance prices in Europe rising back to pre-crisis levels before 2020.

The defeat of the Commission’s proposal signals the difficult task the EU faces in reforming its carbon market. Some of the opposition was certainly opportunistic — some conservative MEPs saw the vote as a chance to voice their opposition to the EU as a whole — but there was also deep ambivalence about the proposed reform. Market purists worried, with good reason, that the proposal would signal to investors that the market would always be prone to political interference.

Others argued that the Commission’s aims were not ambitious enough. As Stacy VanDeveer and Tim Boersma described a year ago, even more comprehensive reforms planned for the long-term would have fallen short of the fundamental changes that are needed to create permanent, predictable, and sufficiently high carbon prices. Many green campaigners and private companies supported the Commission’s measure for what it was: a flawed intervention but the only chance to boost the carbon price in Europe before a wave of elections at national and EU levels from 2014.

Europe’s climate policy will not entirely wither with this vote. The EU ETS itself remains the law and will continue to operate, albeit at a low price and trading volume. Addressing climate change remains popular among electorates and is still a priority for some member states. But the trend is not encouraging. Central and Eastern European countries, led by Poland, are increasingly opposed to a strong climate policy. The failure of the EU ETS to set a price signal is causing individual EU member states to introduce ad hoc measures like carbon price floors and energy taxes. The vote may strengthen demands for technology-specific measures like performance standards for power stations and taxes on specific kinds of energy or activities. Instead of a unified EU policy that provides investors with predictability and coherence, there is a risk of a patchwork of policies and measures across the continent.

This echoes recent events in the United States. For all the blemishes in the cap-and-trade bill that was defeated by the U.S. Congress in 2010, it would at least have set a long-term price on carbon. The failure of that bill is causing the Obama administration to look instead at a regulatory approach through performance standards set by the Environmental Protection Agency and other command-and-control measures. Emissions trading was supposed to be the simple market-based alternative to such measures. But the failure of its European pioneers to address underlying design flaws is jeopardizing the model.

The failure of top-down global attempts to address climate change had given way to national or regional programs such as the EU ETS, whose individual successes could have generated imitations elsewhere. The European Union has just begun a process to define new targets for reducing its emissions by 2030. Having failed so far to rescue the EU ETS, Europe’s political leaders need to rediscover some of their old ambition if the continent is to repair its reputation as an environmental leader.

Thomas Legge is a senior program officer in the Brussels office of the German Marshall Fund of the United States.

  • Emmanuel Haton

    Faliure or success? After all, according to the law of offer and demand, carbon price coming down may simply reflect the fact that emissions have decreased.

  • Thomas Legge

    True, although the surplus is partly due to overallocation of emission allowances in the first place. But the “muddle” is that the EU didn’t *just* want to bring down emissions at lowest cost, but rather also wanted to achieve a sufficiently high price on carbon to send a signal to investors.