Carbon trading: Below junk status | The Economist 29.04.

13 08:38

Schumpeter
Business and management

Carbon trading
Below junk status
Apr 16th 2013, 17:39 by J.P.

EUROPE’S flagship environmental policy has just been holed below the water line. On April 16th
the European Parliament voted by 334 to 315 to reject proposals which (its supporters claimed)
were needed to save the emissions-trading system (ETS) from collapse. Carbon prices promptly
fell 40% (see chart). Some environmentalists fear that the whole edifice of European climate
policy could start to crumble.

The ETS has long been troubled. The scheme is the

world’s biggest carbon market, trading allowances
to produce carbon which cover about half the
European Union’s total carbon emissions. Partly
because of weak industrial demand and partly
because the EU gave away too many allowances to
pollute in the first place, there is massive
oversupply in the carbon-emissions market. Prices
fell from €20 a tonne in 2011 to just €5 a tonne in
February 2013. The European Commission, the
EU’s executive arm, therefore hatched a plan to
take about 900m tonnes of carbon allowances off
the market now and reintroduce them in about five
years time when, it was hoped, demand would be
stronger (“backloading” in the jargon). This was the proposal the European Parliament turned
down.

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Carbon trading: Below junk status | The Economist 29.04.13 08:38

The rejection was a surprise. The parliament’s environment committee had looked at the plan in
February and approved it by a surprisingly wide margin of 38 votes to 25.

As expected, most members of the largest political alliance, the centre-right European People’s
Party, voted against the proposal. This was needed, they argued, to protect consumers from
higher energy bills. What came as a surprise is the fact that all but four British conservative
members of the European Parliament also voted against the plan. In doing so they defied their
own government, which has introduced a carbon floor price in Britain that could soon be higher
than the European carbon price. And the European Socialists, which had been expected mostly to
back the proposals, instead split, with 44 in favour of the plan and 31 against.

In theory the proposal is not quite dead. In a fit of back-pedalling after the vote, the MEPs
decided to send the issue back to the environment committee. From there it could come back to
the full parliament again. Or the European Commission could come up with a bunch of new
proposals. The EU sometimes works by creating a crisis and then stumbling through it—witness
the euro crisis, passim. The trouble is that neither the parliamentary committee nor the
commission can do anything much unless significant numbers of MEPs change their minds. The
parliamentary vote was exceptionally well attended—a measure of its importance—and there
were few wavering MEPs.

The real question now is whether the scuppering of the ETS will lead to the dismantling of the
EU’s climate policies more generally. European greens and supporters of the ETS hope that it
will not. They point out that a combination of special influences was at work in the parliamentary
vote which may not be repeated (such as Angela Merkel’s refusal to take a position on ETS
reform for domestic reasons). Many European environmental policies are set at national level
(subsidies for renewable energy, for example) and a vote on the ETS should not change national
opinions.

Against that, the ETS is the only EU-wide environmental instrument and sets a carbon price that
affects companies across the board. Large European companies, in particular energy-intensive
ones such as chemicals makers, mounted a fierce lobbying campaign against the ETS, and some
of them would also like to see a reduction in European subsidies for renewables. National
renewable-energy subsidies are under pressure anyway, for budgetary reasons. And as several

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Carbon trading: Below junk status | The Economist 29.04.13 08:38

observers of the parliamentary debate argue, the ETS vote sends a political signal that Europeans
do not care much about their flagship environmental policy—a signal that might influence
national policies, too.

Which path Europe will go down is likely to be decided if and when supporters of the ETS
attempt a more thorough reform of the system, by closing its many exemptions and reducing
excess capacity permanently. As Jesse Scott of EURELECTRIC, a lobby group of power
generators, puts it: backloading was “damn silly” but “it was also the only way of testing the
waters for the necessary structural measures.”

The problem is that even if these measures were agreed upon, they would take years to
implement—such is the speed of EU decision-making. And until then, ETS carbon allowances
remain below the level of junk bonds.

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