There are growing concerns that the European Commission is either unwilling or unable to support a robust carbon market – risking low and volatile carbon prices, or at worse the complete collapse of the market.
Last week, the carbon market went into a nosedive following the publication of a proposed energy efficiency directive that threatens to dampen demand for EU allowances (EUAs) – and therefore carbon prices. The directive was the latest in a series of bearish signals for the market, which contributed to, at its worst, a low of €11.71 ($16.87) on Monday from above €17 in early May.
On Monday, Jos Delbeke, director-general of the Commission’s Climate Action directorate, put out a statement asserting that the carbon market “continues to take the central role” in a “cost-effective mix of instruments that reinforce each other”.
He also sought to reassure that “other instruments still need to go through the co-decision process and get implemented on the ground before they will start to have an effect on emissions, which takes easily several years.”
But there are increasing signals from DG Transport and Energy (DG Tren) – the source of the energy efficiency directive – that the EU Emissions Trading System (ETS) should be subordinated to other policy instruments. Modelling around the proposed directive found it would depress carbon prices (although a footnote suggesting that the price of carbon could collapse to zero was discounted by the report authors).
When asked what role the directorate saw for the ETS, a DG Tren spokeswoman noted that it is “limited to some industrial installations … [and] does not cover the existing cost-effective [energy] saving potential in the EU by far.
“By proposing energy efficiency obligations, we are putting forward a market-based instrument which can trigger savings in the sectors outside the ETS scope.”
‘Unwillingness to stick to policy’
“There is an unwillingness across the European Commission generally to stick with the existing climate policy,” said Henry Derwent, the Geneva-based president of the International Emissions Trading Association. “We have to be clear where that leads.”
He said the proposal from DG Climate to ‘set aside’ EUAs to compensate for reduced demand caused by the directive is “an odd way to proceed”.
“What next? We’re supposed to be able to predict when things happen and make sensible long-term investment decisions,” he added.
“Once the EU has adopted a cap-and-trade mechanism as its main policy tool then indeed it is important that other regulatory interventions in the form of overlapping directives are avoided,” said Imtiaz Ahmad, an executive director at investment bank Morgan Stanley in London. This is necessary to give “investors in greenhouse gas abatement technology … confidence that the cap-and-trade system will function in a robust manner with the price setting the incentive signal.”
The spat over the Energy Efficiency Directive follows Poland’s veto of the EU’s 2050 Low-Carbon Roadmap over fears that it could lead to a tightening of the EU’s 2020 emissions targets which has, for some observers, illustrated how difficult it is proving for the EU to deliver a carbon price that is high enough to support investment in low-carbon technologies.
“The European Commission finds it very hard to tighten the [emissions] cap … instead, individual member states are doing unilateral things,” said Sam Fankhauser, co-director of the Grantham Research Institute at the London School of Economics. He cites the UK’s carbon tax, which will increase the cost of meeting EU ETS targets in the UK, while marginally reducing overall demand for EUAs and thus carbon prices in the rest of the EU.
“I don’t think the EU … wants to destroy the EU ETS. Inadvertently, they could weaken it more than they have in mind,” he added.
Some observers, however, believe the Energy Efficiency Directive is evidence that climate objectives are losing ground to energy security considerations. Meanwhile, companies such as Shell have spoken out against the EU’s overlapping policy measures.