Info Service on Climate Change (Feb12/04)
The Financial Times last week, dated February 13, carried the following story on the EU-Emissions Trading Scheme entitled "Emissions trading: Cheap and dirty". We trust you will find this story very interesting.
Emissions trading: Cheap and dirty
By Joshua Chaffin
The linchpin of Europe’s effort to curb global warming is at risk of collapse. Trails and tribulations: the EU plan to include airlines in carbon curbs is just the latest emissions trading controversy
The policy has indeed succeeded in uniting much of the world – against the EU. In an unlikely diplomatic chorus, the US, China, India and Russia have all lambasted Europe’s plan to extend the reach of its emissions trading scheme (ETS) – a complex regulatory system in which companies such as cement and steel manufacturers are supposed to buy tradeable permits in order to pollute. Beijing last week barred its airlines from the system. Next week, the US and China will gather with more than 20 other nations in Moscow to plot a counter-strategy, including possible retaliation some fear could lead to a trade war.
Beneath the international uproar lurks an inconvenient truth: the carbon market, the world’s largest, and the linchpin of Europe’s effort to lead the world in the fight against global warming, is in turmoil at home.
Johannes Teyssen, chief executive of Eon, the German energy group that is one of Europe’s largest, stunned an audience in Brussels last week when he pronounced the market broken. “Let’s talk real,” he said. “The ETS is bust, it’s dead.”
Upon its launch seven years ago, the market was supposed to work on a simple premise. Proponents hoped that by putting a price on carbon and forcing companies to pay for their emissions, it would prod Eon and others to pour money into green technologies and greater efficiency.
But, as a result of a subsequent recession and poor management, the market is saturated – and could be for years to come – with permits that give companies the right to emit carbon without penalty. That has led to a prolonged slump in the carbon price. At roughly €7 per tonne, compared with a peak of nearly €30 in July 2008, it is a fraction of what policymakers and analysts had forecast it would have reached by now – and well below the levels necessary to justify the desired investments.
“I don’t know a single person in the world that would invest a dime based on ETS signals,” Mr Teyssen declared. The case of cement: How clinker’s clunking victory hobbled a cleaner approach. What is the difference between cement and clinker? To a handful of companies in the European Union’s emissions trading scheme, it means millions of euros and a long-term competitive advantage.
The fight among those companies provides a snapshot of the behind-the-scenes corporate lobbying battles that are largely obscured from public view but have altered the carbon market.
Clinker is cement’s essential building block. The simple chemical reaction when limestone and clay are converted to clinker is responsible for much of the final product’s emissions.
Two years ago, when the European Commission launched an exercise to award carbon permits to industries based on their pollution profiles, the continent’s cement industry argued that companies’ allocations should be based on their clinker production.
By that measure, its members would have all been treated much the same. But one company dissented.
In the 1990s, Switzerland’s Holcim had begun pioneering ways to replace clinker with less polluting materials. These days, its cement contains roughly 10 percentage points less clinker than the European average. Holcim, which has plants across Europe, argued that the industry should be graded not on clinker but on cement.
That approach would have recognised its greater efficiency but set a higher bar for the entire industry. As the Swiss company pressed its case, the industry plunged into a brutal lobbying battle. At one point, a Holcim executive abruptly resigned from the board of the cement industry’s European trade group. At stake were the permits, each of which gives a company the right to emit a tonne of carbon dioxide and can be sold to others or banked for the future.
When the Commission published its draft proposal in October 2010, Holcim executives were heartened to see that clinker substitution had at least been recognised. But rivals including France’s Lafarge and Cemex of Mexico mobilised governments that had factories and jobs at stake. Two months later, when member states amended the plan, Holcim’s concession was erased.
Bruno Vanderborght, environment chief at Holcim, has lamented that it was “penalised” for making the sort of environmental investments the carbon market was supposed to reward.
But the company’s chief Brussels lobbyist at the time, Roland-Jan Meijer, who has since gone to work in the solar industry, is more pragmatic. “If a national industry is successful in convincing their top political levels that this is going to have an impact on their business – that there will be layoffs and plant closures – then their word will be taken as gospel,” he says.
The market has suffered other indignities in its brief history, from value added tax frauds worth billions of euros to the cybertheft of millions of permits from companies’ electronic accounts. But, because it calls into question the fundamental workings of the market itself, the price slide may be its most serious affliction.
“The carbon price is far lower than we estimated it to be when we adopted the whole system,” says Martin Lidegaard, climate and energy minister for Denmark, current holder of the EU’s rotating presidency. “I think it’s fair to say that the situation is not sustainable in the long term.”
Now, a debate is brewing in Brussels about how to fix the market – one that is dividing corporate Europe. On one side stand Mr Teyssen and a coalition of companies that have invested in low-carbon technology, which are lobbying for the European Commission, the EU’s executive arm, to intervene immediately to prop up prices.
One of them is Shell, which has bet big on carbon capture, one of the most ambitious green technologies on the drawing board. Rather than spewing emissions into the atmosphere, companies would capture and bury them. Those plans were hatched under an assumption that carbon prices would reach more than €30.
“There’s no doubt that the investment case for carbon capture and storage is worse if the carbon price is lower, and we may see fewer projects go forward in the future because of it,” says Graeme Sweeney, Shell’s executive vice-president in charge of carbon, who has called for the introduction of a minimum price to give investors greater certainty.
The Commission is considering a plan to set aside millions of permits to help stabilise prices. “To preserve this truly European and cost-effective policy tool, we have to consider and we are considering how to strengthen the ETS,” says Connie Hedegaard, climate commissioner.
But steelmakers and other heavy industries are dead set against intervention. If the system was created to introduce market incentives into environmental policy, they argue, meddling with prices undermines its raison d’être. One industrial lobbyist denounces it as moving the goalposts in the middle of a match.
Even analysts who worry about climate change are wary of intervention. “Low prices are not indicative of a broken market any more than high prices,” says Trevor Sikorski, director of carbon markets at Barclays Capital, pointing to the dramatic swing in oil prices in the past decade.
Europe, getting the market right is central to its loft aspiration of
“decarbonising” its economy by the middle of the century. The ETS is
also being closely studied by China and other nations toying with their
own carbon markets, which might one day be bound together to form a
global trading system.
An EU-China summit starting on Tuesday will offer a vivid snapshot of the bloc’s changed circumstances: EU leaders will arrive in Beijing hat in hand, hoping to persuade China to contribute a portion of its vast foreign reserves to help halt the crisis – a mission no doubt made more awkward by last week’s confrontation over the carbon market.
Well before the crisis, the EU – lacking a common military or a coherent foreign policy – seized on climate policy as one area in which it could lead the world and project “soft power”. The carbon market is the machinery that underpins that promise.
It is a mechanism borrowed from the US, which introduced a cap-and-trade approach to contain the industrial pollution fouling lakes and rivers in the 1990s. The appeal was its seeming simplicity: all policymakers had to do was place a cap on the bloc’s annual emissions, then stand back and let companies find the most cost-effective way to reduce them. They could invest in cleaner technology or opt to buy permits on the secondary market from more efficient rivals. Companies embraced the idea because they believed it would be less intrusive than other forms of regulation.
However, the EU’s experience reveals the problem with relying on policymakers to make the long-term projections that underlie such a complex and sprawling market – particularly in the midst of wrenching economic changes and relentless pressure from corporate lobbyists.
“The ETS is a joke,” says Per Lekander, a UBS analyst who estimates that the market is saturated with 35-48 per cent more permits than are needed to meet this year’s compliance requirements. It will remain awash in excess permits at least until 2025, he predicts. “The theory is good –it’s just when it gets exposed to political reality” that it goes wrong.
The first brush with reality came at the market’s inception. In an effort to overcome business opposition, the European Commission, the EU’s executive arm, set a generous cap and allowed national governments to lavish favoured industries with free permits. In some sectors, such as electricity, companies subsequently reaped millions of euros in windfall profits by passing on the market price of the permits to customers even when they themselves paid nothing for them.
Successive reforms have sought to clamp down on free permits. From 2013, more than half will be sold at auction, rising to 100 per cent for the power sector. Brussels, not the member states, will be running the show.
those reforms have been undermined by a historic recession that has
damped industrial activity – and carbon emissions – across the continent.
It has also sharpened the arguments of businesses threatening job losses
to persuade politicians to soften rules. “Corporate lobbying has been
tremendously effective,” says Chris Davies, a British Liberal Democrat
who sits on the European parliament’s environment committee. “Politicians
are very nervous about doing anything that could close an industry or
To Bas Eickhout, a Dutch member of the European Parliament’s Green group, its fundamental flaw springs from a confused birth in which politicians failed to agree on its purpose. “Did we design it just to have an efficient tool to set a carbon price or to spur innovation?” he asks. “That’s the fundamental political debate.”
Not surprisingly, in a bloc composed of so many nations with competing priorities, that question went unanswered. In December, Mr Eickhout and other members of the parliament’s environment committee threw their weight behind the second interpretation when they approved a non-binding resolution to remove more than 1.3bn permits in the hope of making them scarcer and pushing up prices. The industry committee votes on a similar measure this month.
“In order to save this scheme, they have to go in and cancel a lot of the surplus,” Mr Lekander says approvingly. Some have suggested a price floor; others, a “carbon central bank” that could regularly intervene to influence prices.
Meanwhile, Mr Lidegaard is hoping to use a softer touch. He believes securing a political commitment to long-term emissions reductions will support prices. So far, the bloc has committed to reduce emissions 20 per cent from 1990 levels by 2020. Agreeing deeper cuts for succeeding decades could send business the price signals it needs – although Poland and other coal-reliant members have dug in against such efforts.
A gust of economic recovery might lift the market. If all else fails, a clause in the scheme’s bylaws mandates cutting the number of permits by 1.74 per cent each year in perpetuity, which should eventually squeeze out some of the excess – though political opponents might take aim at this mechanism in a broader debate over targets for beyond 2020.
For Barclays’ Mr Sikorski, that risk poses what may be the best argument against tinkering with the carbon market. “That’s the downside of intervention,” he observes. “If you get intervention on one side, you can expect intervention on the other.”