Climate: an urgent need to save the European carbon market!

The climate, ousted by the economic crisis for a while, is now back on the forefront of the world’s stage, with the next COP21 in the radar. For the first time, the G20 has spoken, last week, in favor of a “resolute and effective” action for climate. On November 12, China and the United States announced their joint ambition to adopt a plan for reducing their GHG emissions. Last but not least, the European Union adopted last month its strategy for the energy and climate policy for 2030. But, some questions are still unsolved and, for Europe, the main problem is that its main instrument to promote the development of low-carbon technologies – the famous carbon market – is still in bad shape… and it becomes urgent to reform it deeply.

On November 16 in Brisbane (Australia), the G20 stood up, for the first time, in favor of a “resolute and effective” action for climate. The joint final statement of the meeting refers clearly to the commitment of the 20 most developed countries, to promote strong and effective actions to address climate change, and calls for a global agreement on climate change at the Conference of the Parties in Paris in 2015. Furthermore, the US and China have reached an “historic” agreement, where Beijing agreed to cap its emissions in 2030, and to rise the share of renewable energy in its energy production up to 20% by 2030, versus less than 10% in 2013. At the same time, the United States, whose GHG emission’s curve is already decreasing (primarily thanks to the shale gas revolution), committed to reducing their CO2 emissions from 26% to 28% by 2030, compared to 2005 levels. However, while most of the European countries are already engaged in the climate transition, the Chinese and American ambitions are still limited: the agreement signed by the two countries is certainly unprecedented, but it still doesn’t present any binding target, and relies on the economic realities of each country. In fact, despite the foreseen improvements of the carbon intensity of its economy during the next years, China, which refuses to affect its short-term growth, should reach each year until 2030, a new record for C02 emissions. On the other hand, the United States choose the year 2005 as the ” reference year” for the calculation of its emission reduction effort, recording the highest emissions level ever seen in the US (around 7.200 Mtoe CO2). Compared to 1990’s level (the internationally accepted base year), US ambitions are quite modest, representing a reduction of only -13.8% of CO2 emissions by 2025… Moreover, to be ratified, the agreement must pass the vote of the Congress, where the Republican party, which has already strongly criticized these ambitions, controls the majority.

The European carbon market doesn’t give the right signals…

In Brussels, the European Parliament is finally discussing the future of the EU carbon market (ETS), and has published, last week, its proposals for the implementation of the “Market Stability Reserve” (MSR). This tool should enable the ETS market to deliver a stable and strong CO2 price and will be crucial for the success of the ETS to promote investments in low-carbon technologies. According to UFE, the ETS, despite all its tribulations, is still the best solution to promote the reduction of carbon emissions of industries, and it’s fully part of a Low-Carbon Strategy. But, to work properly, the
CO2 price should be strong enough to incentivize the triggering of low carbon investments ( more or less 50€/tCO2).
On the contrary, the ETS experienced two successive collapses, among others significant collateral impacts like the downward trend of the wholesale prices in the energy market… The CO2 price now stagnates around 7€/tCO2, hence the decision to reform the EU ETS.
As a first step, 900 million of allowances have been withdrawn from the ETS (backloading), to restore the prices of CO2. Now, the EU bets on the establishment of this market stability reserve to put more flexibility on the market, and facilitate its adaption to unforeseen changes in global energy markets. Combined with the reintroduction of the backloaded allowances in the reserve, the MSR should help to decrease the structural surplus of CO2 quotas on the carbon market, and increase, automatically, the carbon price.
But, the entry into force of the reserve is not expected before 2021…and, the calendar remains fundamental for this kind of policy. In fact, if this mechanism is not implemented before 2020, its efficiency would be considerably reduced, as European industries will still benefit from low carbon prices, delaying their investments in low-carbon technologies.
UFE strongly advocates for the ETS as an efficient tool to promote the reduction of GHG industrial emissions and facilitate the transition to a low-carbon economy, in the most competitive way. The ETS also presents another important benefit: it gives a “unified” carbon price signal to the whole European Union, which is fundamental.