Crisis in the ETS comes to a head

October 11, 2012 | 00:00

Crisis in the ETS comes to a head

The EU Emission Trading Scheme (ETS) is in crisis and Climate Commissioner Connie Hedegaard and her Director-General Jos Delbeke are in an impossible position. They must reassure EU member states there are no plans to permanently remove carbon allowances from the market - this would equate to tightening the overall emissions cap, a highly sensitive issue. Yet they must also tell market players that yes, the big allowance surplus will be cut down to size so please do go ahead and make those low-carbon investments. The ETS-crisis is coming to a head in Brussels as the carbon price stubbornly stays below €10 a tonne and pressure intensifies for policymakers to intervene. Sonja van Renssen reports from Brussels.

Director-general for climate change Jos Delbeke (c)

The European Commission estimates that today's one billion allowance surplus in the EU Emission Trading Scheme (ETS) will double by the end of next year. Its priority is to get the carbon price back up to double digit figures. Plan A is to delay the sale of a number of EU allowances into the market from next year - the "backloading" proposal (or the 'quick fix'). Plan B, which comes after, is structural reforms to the ETS. Since announcing these plans in July, the Commission has insisted it wants to implement plan A by the end of the year. In other words, before the next trading period of the ETS starts in January 2013 (running to 2020).

But there is still no proposal on the table for exactly how many allowances should be delayed. The Commission will make a concrete proposal within "weeks", director-general for climate change Jos Delbeke told a conference organised by European electricity trade association Eurelectric and the Cypriot EU presidency on 5 October. It will be accompanied by an impact assessment - a request from many member states - and ideas on longer term structural reforms to the scheme - another request from member states worried about opening Pandora’s Box by agreeing to backloading.

Legal confirmation?

Much of the ETS debate so far this autumn has centred not on what volume of allowances to backload but on an accompanying clarification of the ETS directive that yes, the Commission has the right to change the timetable for allowance sales. Until the Commission issued its backloading proposals on 25 July, it had insisted there was no legal doubt it could do this. But on that day it issued a clarifying amendment - and opened a can of worms.

Even supporters of the backload concept such as Italian energy giant Enel say they are uncomfortable with

"Subsidies have the potential to destroy the ETS at the expense of tax payers"
the wording of the amendment. It's just one sentence, confirming that the Commission has the right to "adapt the [auctioning] timetable for each [trading] period so as to ensure an orderly functioning of the market". But herein member states and other stakeholders see the possibility of untold future market interventions and enormous uncertainty.

Delbeke says the Commission decided to propose the amendment not because it was uncertain of its rights but to "evacuate" the possibility of any future court cases. He says the whole issue has been unnecessarily "dramatized". Stakeholders such as Sanjeev Kumar from think tank E3G point out that the Commission already intervened in the market when it organised early allowance sales (selling 2013 allowances in 2011-12) to help utilities plan ahead.

The problem is however, that some member states - and their energy-intensive industries - are worried that those delayed allowances may never make it onto the market. By the time they're due, close to 2020, the Commission may have issued proposals to cancel them altogether. Of course these proposals would have to have been agreed by member states and the European Parliament to take effect and here it becomes apparent that there is no coherent EU position on what to do about the ETS.

Brussels divided

Take the Parliament. This institution usually increases the ambition of Commission proposals and indeed it led a call for intervention in the EU carbon market to boost the flagging carbon price. But it emerged last week that this very same Parliament plans to debate the backload amendment well into next year.

The MEP in charge of the file is German Socialist Matthias Groote, chair of the environment committee. He plans a hearing for 12 November, followed by a presentation of his views on 17 December, a debate on 23-24 January and a committee vote on 19 February. The date for a full plenary vote is still undecided. How is the Commission going to conclude its backload by year-end?

In practice, the parliament is divided, with some political groups such as the Greens suggesting a simple rubber-stamping of the proposal would do and a substantial number of MEPs from all political groups convinced that the amendment can and should be agreed by December. Watch this space.

Of course the actual backload could be agreed even in the absence of agreement on the amendment clarifying the right of the Commission to backload in the first place (sorry if this is getting complicated!). The decision over what volume to hold back will be made through a parallel technical process, led by member states with the parliament holding a veto, which could be completed by the end of 2012 regardless. Without the clarifying amendment in place however, any backload decision would be beset by uncertainty.

Member states, critical both to both processes, are also divided. Many say they need more information from the Commission on its long-term plans for structural ETS reform before giving it a mandate to make any changes to the scheme.

In the EU Council of Ministers, the UK and Denmark have reportedly been the most vocal supporters of the backload, with France also in favour, the Czech Republic moderately so, and Germany and Austria expected to be. But support hinges on an impact assessment, more information on long-term reform (the UK would like to hear that the delayed allowances will be permanently deleted, for example) and/or stricter wording of the clarifying amendment. Certainly the first two are on their way, according to Delbeke.

Other countries such as Spain had still to adopt a position at the end of September. The Netherlands was initially sceptical but has since had a change of government. Still others, such as Poland and Slovakia, oppose the backloading idea altogether.

Questioning backloading

Certain analysts meanwhile are echoing the call for urgent publication of the structural reform proposals. Delaying the sale of allowances into the market only with a view to reintroducing them later will do nothing to boost low-carbon investment, Trevor Sikorski from Barclays Capital told a Platts ETS conference in Brussels at the end of September. “All you’ve done [then] is introduce volatility,” he said. Investments are made on the basis of the total number of allowances in the market in the long term, he explained.

Sikorski also said that the Commission was wrong to downplay the significance of the backloading proposal because it does represent a fundamental policy shift: for the first time, the Commission is taking a view on what the price of carbon should be. The Commission, in turn, insists it is not engaging in price management and has no intention of creating anything like a carbon bank.

Another analyst, Fabien Roques from energy consultancy IHS CERA, told the Eurelectric conference on 5

"We are losing precious political capital on something that will do very little"
October that the backloading proposal was getting more attention than it deserved. “We are losing precious political capital on something that will do very little,” he said. Even backloading 1.2 billion allowances – the top end of the range suggested by the Commission – would only get the carbon price up to about €18 per tonne, he estimates. The carbon price needed to induce an electricity producer to switch from coal to gas is currently around €50 a tonne.

Most energy companies today support a backload first and foremost because of the political signal it would send that the EU is ready to stand by its ETS, will follow up with structural reforms and will maintain the carbon market as its flagship climate policy (taking away the case for national initiatives such as the UK’s carbon floor price and the Netherlands’ new coal tax). Italian utility Enel, for example, is openly backing a 1-1.2bn backload.

Bill Kyte, senior advisor on climate change to Eon, explains energy companies’ new-found enthusiasm for the ETS thus: "Before the ETS, climate change was a threat. But actually, we realised it’s one of our biggest opportunities: if we decarbonise, we can spread into other areas and decarbonise them. There are great growth opportunities for electricity here."

At the Platts conference in late September, Delbeke suggested that long-term structural reforms could be implemented with or without opening the ETS directive. One option would be to permanently delete the backloaded allowances through an entirely separate legal proposal. This would still involve full co-decision by EU member states and the European Parliament but it would limit the scope for debate about other possible change to the ETS.

2030 climate energy package

For some, the most obvious topic for a long-term ETS debate is the emissions cap. "The first structural reform we need is clarity on post-2020 targets," says Enel's head of carbon regulation Giovanni Bertolino.

Eurelectric secretary general Hans ten Berge wants nothing less than a new climate and energy package for 2030. He advocates linking together: a 2030 economy-wide greenhouse gas emission reduction target, an adjusted cap for the ETS in 2030, post-2020 renewables policy and the internal energy market. This package would ideally be decided during the current Commission and Parliament mandates i.e. before summer 2014.

Eurelectric's vision is for a carbon market-centred approach to climate and energy policy whereby "all

"Before the ETS, climate change was a threat. But actually we realised it's one of our biggest opportunities"
should be measured in CO2 emissions and ETS value". Any renewables and efficiency goals would be measured in terms of CO2 emission reductions. Renewables subsidies would be phased out, with the carbon market driving those technologies that are mature and revenues from carbon allowance sales funding the development of technologies not yet so far along.

"Subsidies create an implicit carbon price that competes with the external [ETS] carbon price," Ten Berge said. "They have the potential to destroy the ETS at the expense of tax payers." Roques from IHS Cera put it like this: "If we did not have a carbon market but met our [2020] renewables and efficiency targets, we would come very close already to meeting our cap for the ETS."

In a spin on Ten Berge's single package proposal, Olivia Hartridge from Morgan Stanley suggested that base level feed-in tariffs and capacity payments could both be absorbed by the ETS in future, finding expression in a higher carbon price. This would avoid the EU needing to create yet another regulated market, namely one for capacity markets. "We'd need to create a whole new system of subsidies to keep gas on the grid," Hartridge said, "when we should be able to rely on electricity markets."

This 2030 debate is still in its infancy in Brussels and Delbeke made clear at the Eurelectric conference that a new climate and energy package by 2014 is a fantasy. British Liberal MEP Chris Davies put it very plainly: "There is strong resistance to anything related to climate policy at the moment."

Leakage list

Any changes to the ETS will also affect companies outside the energy sector, Chris Beddoes, deputy secretary general at European refineries association Europia, reminded delegates at the Eurelectric conference. Many of these do not want a backload but a fundamental debate over what the ETS is and does. These are industries exposed to international competition and their main demand is a new industrial policy for Europe.

Kumar from E3G made the point however, that if the carbon price stays around its current level, the carbon leakage risk list should be revised. At a price of €6 a tonne, he said, both the cement and refining sectors should no longer qualify for extra free allowances to compensate for the risk of leaving Europe for regions with looser carbon constraints. A WWF representative added that linking of the ETS to other markets - such as Australia - should also be a reason to revisit the carbon leakage list. Europe's carbon leakage risk list currently includes around three-quarters of European manufacturing emissions.

These are all debates just starting up. The priority for many ETS stakeholders at present - and certainly for most energy companies - is to get the backload agreed. They argue you can backload without knowing exactly what will happen in the long-term. For others, including analysts and manufacturing sectors, it's a non-productive pathway either because they don't believe in a political signal or because they fear it's exactly that.


Additional reading

Major articles published by EER on the EU Emission Trading Scheme:

You can also go to Search Files (on top of this page), select Themes, and then select Emission Trading.


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