Hats off to a new EU carbon cap

The European Union has begun the process of agreeing a new carbon cap for 2030, with early signs that it could reinvigorate the emissions market and simplify low-carbon policy.

The outcome will depend on horse-trading with sceptical carbon-intensive countries such as Poland and the eventual parcelling of the cap between industry sectors.

The target preferred by the European Commission would cut greenhouse gas emissions by 40 per cent from 1990 levels. That figure was first mooted in an appendix to its energy roadmap last year and was mentioned again in a draft document seen by Reuters this week.

It could probably aim higher, given that the European financial crisis has reduced industrial output and emissions dramatically and helped to create a surplus of more than two billion tonnes of carbon allowances under the EU's cap-and-trade scheme.

An ambitious 2030 cap could be used an alternative or complementary approach to reforming the emissions market, though it is not on a list of reform options.

The Commission wants to cancel surplus allowances in the emissions trading scheme, but it faces opposition from high-carbon member states. However, a 2030 carbon cap could give polluters 15 years to prepare for fewer allowances but have a similar net effect.

A 2030 emissions target could also simplify low-carbon policy by replacing renewable energy subsidies that have distorted wholesale power markets, inflated residential electricity bills and made some landowners rich with payments for installing wind and solar power.

Market balance

For the sake of a simpler comparative analysis, a 2030 emissions target can be considered as an alternative rather than complement to cancelling carbon allowances.

The EU is about two years from finalising a 2030 target, including a decision on how to divide this between the factories and power plants within the ETS and the rest of the economy, known as the traded and non-traded sectors.

The 27 EU member states produced 5,583 million tonnes of greenhouse gas emissions in 1990, so a 20 percent cut implies emissions of 4,466 million tonnes of carbon dioxide equivalent in 2020.

A 40 per cent cut by 2030 implies emissions of 3,350 million tonnes, a 25 per cent reduction on the 2020 target.

Applied to the ETS, that is still not quite ambitious enough. This would wipe out the present two billion tonnes of surplus allowances in about 2029, assuming a constant rate of emissions cuts of half a per cent annually.

In the past, however, the EU has put the burden of emissions cuts on the ETS.

For example, its 2020 target was split between a 10 per cent emissions cut in the non-traded sector and 21 per cent cut in the traded sector (compared with 2005 emissions).

Shifting the burden for the traded sector in 2030 would cut the ETS cap by a third instead of a quarter – perhaps still not quite enough.

Given the huge surplus of carbon allowances, it could be argued that the ETS should take an even bigger share of emissions cuts.

A cut in the ETS cap of about 40 per cent may be needed to put the scheme back on track.

Allowances demand

That would see an enormous shortage of allowances by 2030, which would force polluters to start building reserves now, providing a welcome boost to demand.

The outcome would be roughly equivalent to cancelling 1.5 billion EU allowances now, which is probably the most ambitious scenario under existing near-term reform proposals.

An ambitious 2030 target could therefore be an alternative candidate as a tool for reform if cancelling of allowances fails to win political support, or the two could be used in tandem.

Early signs in the Commission's first consultation on reform are that a 2030 cap is preferred among ETS stakeholders, even though it is not yet included in a formal list of options.

In its March 1 summary of consultation responses, the Commission reported broad commitment to the ETS and recognition that there is a large and growing surplus in the scheme.

It added that some felt the current options concentrate on short-term action and do not offer enough to address the underlying issues and "many regret that the options are not explicitly linked to a clear process on a 2030 framework".

This article was originally published by Reuters. Republished with permission.