Is it time to abandon emissions trading?

Yesterday the European Parliament voted down a European Commission proposal to postpone the auction of 900 million permits for the European Union Emissions Trading Scheme (EU ETS) from 2013-2015 until 2019-2020 (called “backloading”). The proposal was predictably opposed by Poland and other eastern European countries, and unfortunately also met resistance from conservative forces within some western European governments. After the vote, the EU carbon price fell to a new depth of €2.63/tonne (AU$3.33/tonne), far too low to drive any emissions cuts.

Even if backloading had gone ahead, it would have been merely a temporary measure to slightly boost the EU carbon price. It would not have fixed the fundamental structural problems with the ETS, which include a 2020 target which has already been met (20% below 1990); a surplus of 2 billion permits which could last until 2045; free permits for certain industries; international offsets; and no floor price to continue driving decarbonisation through the present recession. The failure of the EU ETS is contributing to a resurgence of coal-fired power in Europe.

The European Commission will continue to push for backloading, as well as more substantial changes to the EU ETS. One of their proposals has been raising the 2020 target to 30% below 1990. But even the European Commission no longer seems to be talking about raising the 2020 target, despite the fact that the present target means no emissions cuts for eight years! It now instead proposes a 2030 target of 40% below 1990, which would still allow the surplus to continue until 2029.

All this raises serious questions about whether emissions trading is a worthwhile path for climate policy-makers to continue down. Some environmental groups, including Friends of the Earth, argue the EU ETS cannot be fixed and should instead be scrapped in favour of more direct policies like feed-in tariffs. Their argument has never been more convincing.

It is telling that among the advocates of backloading are businesses who support the EU ETS as an alternative to a potentially more stringent mix of national measures (just as in Australia businesses support a federal ETS as an alternative to potentially more stringent mix of federal and state measures). That is already happening to an extent – Germany has feed-in tariffs, the UK has a carbon floor price, and Scandinavian countries have various taxes on fossil fuel consumption – but more EU member countries might introduce new climate policies if the ETS was no longer there to distract them.

Implications for Australia

Australia’s present policy is a fixed carbon price of $23/tonne, scheduled to turn into an internationally-linked ETS in mid-2015. Like the EU ETS, it is full of holes. Yet the Labor government is obsessed with emissions trading as its central climate policy; if it wasn’t for the Greens, Australia would already have an ETS. Having introduced the carbon price, Labor thinks its job is done, and arranging to link the Australian ETS with international ones seems to have become its climate policy focus. A link with the EU ETS has already been agreed, and the Australian carbon price is expected to be determined by the European one.

Labor talks about international linking as though it advances climate action. In reality, carbon trading and offsets were never intended to cut emissions. It is the “cap” part of “cap-and-trade” that limits emissions, while the “trade” part supposedly minimizes the cost by ensuring emissions cuts are made where they are cheapest – which seems unlikely to produce good outcomes considering the cost is (or is at least supposed to be) largely paid by polluters. A source of emissions cuts may appear cheap because it is dodgy.

Whether the Australian ETS can be fixed remains to be seen. Last week I outlined some of its major flaws and how they could be fixed. Unfortunately, the sabotaging influence of the fossil fuel lobby makes it very difficult to do so, and an ETS that is anything less than perfect can actively prevent action. So I also proposed a simple alternative to avert the worst if a perfect policy still cannot be achieved: just extend the fixed price period. Unlike an ETS, a fixed carbon price places no limit on emissions cuts, cannot crash due to recession or bad policy design, cannot be compromised by external offsets, and can complement other policies like renewable energy subsidies.

I’ve long been skeptical about emissions trading, but I’ve supported an ETS out of pragmatism and limited myself to arguing against its pitfalls. But as carbon prices crash everywhere except in Australia, it’s now looking like it might be better to abandon the whole idea and continue with the fixed price.

1 comment

  1. The EU will soon be alone with its green leftist obsession. Industry is moving out and understandably so

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