Tag Archive | "Emissions trading"

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.

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The U.S. clips its own wings by outlawing the EU’s new airline emission standard

As the rate of international air travel continues to soar, so do emissions from airlines.  For 15 years, the International Civil Aviation Organization (ICAO) has dragged its feet on developing a global approach to trim airline emissions. Tired of waiting around for ICAO to strike a meaningful deal—which many believe is unlikely—Europe has moved to rein in aviation emissions by including them in the EU Emissions Trading System.  As of this year, all airlines, not just European carriers, must hold emissions permits for flights landing in or leaving from the EU.

Airlines, which will initially receive free emissions permits from the EU to help them comply, will likely enjoy a bump in profits in the near term. Studies supported by the Federal Aviation Administration estimate that the EU law will not cut into airline profits and will only cost transatlantic travelers roughly $3 more in ticket fees per flight. Nonetheless, the new EU rule has few fans on Capitol Hill.  A measure under consideration in the U.S. Senate would make it illegal for U.S. airlines to comply with the new EU rule and put U.S. tax payers on the hook to pay fines that U.S. airlines accumulate while in violation of the EU law.  The bill for tax payers could total close to $22 billion over the next eight years.  A similar measure has already passed the House.

Passing laws that forbid U.S. companies to comply with the laws of other countries sets a dangerous precedence. It not only invites retaliation, it could also damage relationships with key U.S. allies and undermine our own national security.  Imagine if other nations similarly snubbed U.S. laws, for example compliance with U.S. airport security regulations or safety standards.  U.S. lawmakers and the American public would be outraged.

Every nation has a sovereign right to establish laws to protect the health, safety and environment of its citizens.  Europe has exercised this right by including air travel in its emissions trading system, a move that will improve the fuel efficiency of air travel.  Just as the United States expects other nations to comply with U.S. laws when they do business in the U.S., Europe and others should expect no less from the United States.

Cathleen Kelly is the Director of the Climate & Energy Program at the German Marshall Fund of the United States

Image by Airliners.net.

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CO2 Emissions ETS price

The Price Isn’t Right: Saving Europe’s Flagship Climate Change Initiative

BRUSSELS—The European Union’s flagship climate change project, the Emissions Trading System (EU ETS), is in a slow-motion crisis that threatens the EU’s ambitions for a green economy. The original purpose of the EU ETS was not just to reduce emissions from factories and power stations — which it has done very successfully — but also to send a signal to the market that carbon emissions would come at a price, preferably of about €30 per tonne of carbon. The magic of the market would then encourage companies to slash their emissions and to invest in innovative, low-carbon technologies like solar power without the heavy hand of government direction.

But the recession has conspired against this outcome. Over the past three years, the price of carbon allowances has been steadily dropping, descending last week to just €6 per tonne of carbon dioxide from an average of over €20 per tonne during the whole of 2008. Even though emissions from the power sector are limited under a cap that is lowered every year, the demand for carbon allowances has been so weak that the vital price signal to spur clean-technology innovation is absent. The excess supply of emissions should not matter because companies are allowed to “bank” their allowances for use in future years, but at the moment there is simply an oversupply of carbon allowances to sustain a high-enough price.

If the unthinkable were to happen and the collapse in carbon prices in the EU ETS were to become permanent, what would become of EU climate policy? Europe would have an impossible time meeting the target of reducing its greenhouse gas emissions from 1990 levels by 20 percent by 2020 and 80-95 percent by 2050. Individual EU countries would have to set diverse regulations and standards that would be vastly more complex and expensive for industry than the current EU-wide ETS. A carbon tax on fossil fuel energy could send a similar price signal — possibly with more certainty for industry — but new EU-wide taxes are not easy to introduce. A collapse would also destroy hopes that the EU ETS could eventually form the basis of an international market, linked to imitator trading programs from California to Australia to China.

Last week, EU energy and environment ministers met informally to discuss ways to tackle the oversupply of carbon allowances, either by setting a minimum price for allowances or removing surplus allowances from the market. After Connie Hedegaard, the EU Commissioner for Climate Action, brought forward a review of the EU ETS to later this year and signalled her openness to delaying the supply of new allowances, their price jumped to above €7 per tonne for the first time in months.

This fix will not come easily. EU policymakers are reluctant to send a signal to the private sector that the carbon price is subject to arbitrary change, although many market participants are calling for intervention precisely to ensure that the price will not collapse. But the biggest obstacle comes from divisions between the EU member states. Poland, which depends on coal for about 90 percent of its electricity, is quite happy with the current low price of carbon allowances and is reluctant to see measures that could drive it up again. In the end, Poland’s agreement is not essential — changes to the EU ETS require the support of a majority of EU member states, not unanimity — but EU leaders are keen to avoid a rift on this signature policy.

The Commission’s review of the EU ETS will inevitably evolve into a larger debate about the future of the program and its effectiveness. This will be closely watched abroad, including in the United States where, despite presidential elections in November, there is an outside chance that legislators could turn to a carbon tax as a way of raising new revenues to reduce the federal deficit. If there is one message that U.S. policymakers should take from the EU experience, it is that putting a price on carbon — whether by a trading scheme or a tax — works, but it must be set at the right level if it is to drive the innovation necessary to transform energy systems and lower emissions.

Thomas Legge is Senior Program Officer with the Climate & Energy Program of the German Marshall Fund of the United States in Brussels.

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COP17 Protest

Using Durban to Bridge the Transatlantic Climate Divide

BRUSSELS — Expectations are low at the beginning of the 17th annual United Nations conference on climate change that began this week in Durban, South Africa. The European Union and the United States have assumed contrary positions and even disagree over what would constitute a successful outcome. But, behind the talks, and despite that standoff, the threat of global warming continues to cry out for transatlantic leadership.

The talks themselves – which will culminate next week in three days of ministerial talks – are intended to add definition to the political agreements that were reached at last year’s talks in Cancun, Mexico, such as on a new fund to help developing countries reduce their greenhouse gas emissions. But what will attract the biggest attention in Durban is the Kyoto Protocol, the 1997 treaty that binds industrialized countries to reduce their emissions by a certain amount by 2012. There is no provision for a second “commitment period” beyond next year, so the EU is calling for a sequence of actions to lead to a new treaty by 2015. The United States rules out a new treaty before 2020 and only if large emerging economies like China are similarly bound; Japan, Canada, and Russia have aligned themselves with this view. There seems to be no way to reconcile these two positions.

But Europe and the United States are divided even on the significance of this divide. Among the U.S. negotiators, and echoed in many Washington, DC, think tanks, the Kyoto Protocol (or any successor treaty) is seen as irrelevant to the climate talks. Instead, an effective response to climate change lies in vigorous domestic action by the big emitters. Many U.S. commentators consider the Kyoto Protocol an obstacle to progress because of its outmoded distinction between developed and developing countries and its zero-sum emphasis on legally binding emission caps. The EU counters that a legally binding treaty is the only way to bring clarity and to drive domestic action, and points to a growing chorus of international bodies – from the UN to the Organisation for Economic Co-operation and Development – that warn that we have no more time to delay action to reduce global emissions if the Earth is to have a hope of avoiding temperature increases that would change the face of the planet.

While the United States may think that the EU has tied itself to a sinking ship, Europeans visiting the United States express exasperation at the U.S. failure to grapple with climate change and at the prominence afforded to pundits who dispute the scientific consensus on climate change. It is common to hear European officials suggest that it is time for Europe to look elsewhere and focus on building cooperation with developing countries. But it would be a grave mistake to give up on the United States. The two continents, working together, have the political and financial capacity to drive global change through policy leadership and the market effect of their domestic policies. Disagreement threatens to hinder international action when there is no time left for delay, and to sour transatlantic relations, as seen in the brewing dispute over the inclusion of U.S. airlines in the EU Emissions Trading System beginning in 2012.

In Durban, the EU and the United States will probably manage to avoid an acrimonious falling-out. Memories of the rift in transatlantic relations following George W. Bush’s decision to withdraw from the Kyoto Protocol in early 2001 are still raw. The EU is sympathetic to the domestic political constraints that U.S. President Barack Obama faces and the real actions that his administration is advancing, such as new regulations to control pollution from power stations and to improve efficiency standards in automobiles. Whatever deal is struck in Durban, it will probably be enough to allow the Kyoto Protocol to continue in some form without forcing the United States to denounce the agreement.

But outside the negotiations, Europe has a good story to tell about its response to climate change, and it needs to do a better job at persuading the United States to partner with it on this enterprise. In European capitals, policymakers are busy with plans to build new renewable electricity generating capacity, transform the electricity grid to carry the power, and train a whole generation of new engineers who can operate it all. The European Commission is preparing to publish a new “roadmap” for a low-carbon energy system by 2050, the latest in a series of policy statements and regulations since 2008 that are slowly accumulating momentum that could take the EU on a low-carbon trajectory. No conversation on anything like this scale is happening in the United States, nor is one expected until at least after next year’s presidential election.

The United States holds that international treaties like the Kyoto Protocol are less relevant than action on the ground. The EU thinks that such action on the ground is a result of the downward pressure of international commitments. Surely there is room to agree here on the outcomes, if not the cause? If the United States were to embark on an ambitious plan of reducing its emissions, and to lead international efforts to imitate it, the EU would be quick to agree that a treaty would be superfluous to this end.

Thomas Legge, based in Brussels, is a senior program officer for the German Marshall Fund’s Climate & Energy Program.

Image by Meraj Chhaya

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On Climate, Focus on Financing not Legislation

WASHINGTON, DC — Europe had been waiting patiently for the United States to enact domestic legislation to cut its carbon emissions.  After months of negotiations between the U.S. Congress and utilities, oil companies, and other stakeholders on the details of comprehensive climate and energy legislation, the Senate in late July abandoned hopes of passing such a bill before it entered its August recess. A lack of Republican support meant that even a scaled-down cap-and-trade proposal — covering only utilities — was unlikely to pass. Partisan rancor in the lead-up to mid-term elections and concerns over carbon pricing mean that legislation will be off the table for this year, at the very least. While a small chance remains that Congress will consider a carbon tax next year as part of a deficit reduction strategy, the window for a comprehensive bill could possibly be shut until 2013.

Having watched these efforts unravel, observers in Europe and the rest of the world have begun to wonder whether the United States will make good on its commitment to cut its emissions over the next decade. European leaders worry that without a comprehensive climate and energy program in place, the United States will not meet its emission targets.  Fortunately, it still can, at least in the near term.

At the international climate negotiations in Bonn this week, the United States took pains to give other countries confidence that it was not backing away from President Obama’s promise to reduce its emissions by 17 percent below 2005 levels by 2020. A new World Resources Institute study finds that if the federal government fully flexes its regulatory authority and states take aggressive climate action through 2016, the United States could come close to meeting the U.S. emission reduction goal in the near term. The United States also appears to be on track to deliver its share of the $30 billion in climate financing that developed countries promised by 2013 to help impoverished nations cope with the worst consequences of climate change.

But there are bigger worries to keep European and other climate delegates up at night. Although the United States can use tools other than legislation to reduce its emissions over the next several years, the chances are slim that it will deliver the promised emissions cuts over the long term without a cap on carbon emissions.  Even more problematic is the absence of a clear plan to meet its commitment to help raise $100 billion per year in climate aid by 2020. When Secretary of State Hillary Clinton made this commitment in Copenhagen, she was counting on U.S. cap-and-trade revenue and new private investment mobilized through a global carbon market.  To date, the Obama administration has met its climate financing commitments through budgetary requests to Congress—the President requested $1.4 billion in climate aid for 2011, a 38 percent increase over 2010 levels.  As pressure to trim the U.S. budget deficit grows, this approach will not be sustainable over the long-term. The United Nations High-Level Advisory Group on Climate Change Financing is exploring ways to meet the $100 billion goal.  Options include ear-marking fossil fuel royalties for climate action and taxing international shipping and aviation to generate new revenue for climate aid.

In advance of the next UN climate summit in Cancun this December, Europe and the rest of the world should resist the temptation to focus primarily on encouraging the United States to meet its emission reduction goals. Instead, they should push it to deliver the promised climate financing.  Unless all developed countries, including the United States, do their part to meet the stated goal, the developing world will remain ill-equipped to cope with drought, flooding, and other climate catastrophes.  Furthermore, Europe and the United States will have no leverage to secure climate commitments from China and other major emitters in the developing world.

Cathleen Kelly directs the German Marshall Fund’s Climate and Energy Program in Washington, D.C.

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The Transatlantic Climate in Copenhagen

COPENHAGEN — As hope dims for a major global climate deal in Copenhagen, participants still could make enough progress to lay a real foundation for a future treaty. But even that will take significant cooperation, particularly between the transatlantic partners.   With only two days left in the negotiations and tensions running high as the talks deadlock around several crunch issues, it’s hard not to speculate on whether Europe will stick with the United States in demanding the transparency needed to evaluate whether major emitters (including China and India) deliver real emissions reductions. The alternative, however — going the way of the past and accommodating push-back from developing countries — would ignite a firestorm of criticism in Congress.

Most countries hope to reach a deal in Copenhagen that provides clarity on several key issues: how much will rich countries cut their emissions over the mid- and long-term? How much will emerging economies slow their emission growth? How much financing will rich countries put on the table to help developing countries slow their emissions and cope with the consequences of climate change? How much transparency will be required to guarantee that major emitters deliver on their emission-reduction commitments? How does one guarantee that the financing from developed countries is invested in credible climate projects that deliver real outcomes?

Prompted by a Senate that has made clear its strong distaste for climate treaties that only require emissions cuts from developed countries, the Obama administration is holding firm on demanding a Copenhagen climate deal that will instill confidence back home that all major emitters, including China and India, will make good on their emission reduction commitments and that the climate financing it is prepared to offer to developing countries is well spent.   If the Copenhagen deal doesn’t provide this confidence to U.S. lawmakers and companies, Congress is unlikely pass legislation that would cap U.S. emissions and provide a source of long-term financing for climate action in developing countries.     Many lawmakers are reluctant to vote for climate legislation without strong assurance that China and other major emitters will deliver emissions cuts similar to those contemplated in the United States, particularly since energy-intensive American industries already hampered by economic recession argue that higher energy costs will simply force them to move their factories and jobs to countries without similar emissions limits.

With the clock ticking in Copenhagen, it’s clear that firming up a deal that will deliver both emissions cuts and transparency will not be easy.   China is weary of providing open access to information about its economy to the international community and is pushing back hard on calls for transparency.   Until Thursday morning, the United States didn’t have much more to offer to break the deadlock.     The U.S. pledge to cut emissions in the range of 17% below 2005 levels by 2020 — an amount on par with the emissions limits currently debated in the U.S. Congress — has disappointed many countries who hope for the United States to cut more.   Nonetheless, without Congressional approval of U.S. climate legislation, there is no political support back home for the U.S. administration to offer deeper emissions cuts.   Until Thursday morning, the United States was also unable to offer long-term financing to support climate actions in poor countries — the offer China and other developing countries have been waiting for to make big concessions in the negotiations.   But the makings of a potential climate deal emerged Thursday when Secretary of State Hillary Rodham Clinton announced that America would help raise $100 billion a year for developing countries by 2020 if emerging economies like China and India agree to binding emissions cuts that would be open for international review and verification.   Without certainty that the U.S. Congress will pass climate legislation, the U.S. administration is unsure that the revenue it expects from selling emissions allowances to companies under a cap-and-trade program will ever materialize. Without this guarantee, the United States has been reluctant to pledge a specific dollar amount to help poor countries cope with climate impacts over the long-term.

In the talks last week, rich countries converged around a proposal to provide $10 billion a year from 2010 €“12 to help developing countries take near-term steps to cut emissions and contend with climate change.   The EU promised $3.6 billion per year through 2012.   The U.S. signaled it could offer roughly $1.2 billion in 2010 and more substantial amounts in 2011 and 2012.   But this $10 billion is only a drop in the bucket relative to the bank bailouts and funds pumped into the global economy to respond to the financial crisis.   It also falls far short of the $100 billion per year that Project Catalyst estimates developing countries will need to finance climate projects.   Nonetheless, rich countries expect that these near-term funds will allow the Copenhagen agreement to provide immediate assistance while buying developed countries more time to come up with more substantial financing over the long-term.

In the scant two days left in the climate talks, the U.S. and Europe will need to work together to shape a deal in Copenhagen that can form the basis of a legally binding treaty, now expected to come together at the climate talks in Mexico City in December 2010.   While Europe has stood strong with the United States in calling for transparency in the lead-up to Copenhagen, the transatlantic partnership broke down at the 1995 climate negotiations in Berlin.   During the final hours of the talks, Europe heeded the demands of developing countries to lock in a mandate for a treaty that required legally binding emission cuts from rich countries and none for major emitters in the developing world.   With many EU members strongly committed to alleviating poverty in the developing world, Europe felt compelled to firmly embrace the principle that developed countries should lead the fight against climate change.

In the United States, the Berlin mandate sounded the death knell for the Kyoto Protocol even before the treaty was finalized.   The U.S. Senate unanimously passed the Byrd-Hagel resolution, rejecting any climate treaty without equal commitments from all major emitters, including India and China.   In Bali in 2007, the United States was isolated in its opposition to a proposal from developing countries to only take actions to slow emissions growth if developing countries paid for them.   To be fair, the U.S. has not always been the best partner to Europe in the climate talks.   During the Bush era, Europe faced eight years of U.S. obstruction in the climate negotiations and inaction on emissions cuts at home.

Despite past transatlantic climate rifts, with only 48 hours before the Copenhagen conference closes, there are strong reasons to believe that the United States and Europe will stay unified. The lack of trust that plagued the U.S. €“EU relationship during the Bush administration evaporated when President Obama took office in January — GMF’s Transatlantic Trends 2009 survey reveals that Europe’s support of the U.S. has quadrupled since the change in U.S. administration.     A study by the International Energy Agency shows that roughly 56 percent of global emissions growth between now and 2030 will come from India and China.   Like the United States, Europe is keenly aware that a climate deal without firm and transparent commitments from China and India will not adequately solve the climate problem and protect the people and welfare of our planet. The transatlantic partnership is critical to getting us there.

Cathleen Kelly directs the German Marshall Fund’s Climate Program

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