Press Release: Three-pronged intervention in the EU Emissions Trading System needed to incentivise energy investments
Research network Climate Strategies launches new report on options to strengthen the EU ETS.
BRUSSELS, Monday, 26 March 2012: Withdrawing hundreds of millions of carbon allowances from the EU Emissions Trading System (EU ETS) is necessary to prevent the carbon price falling even further, but on its own will not provide the long-term credibility and robustness required for European investment, says a new report by Climate Strategies. A more comprehensive approach could contribute not only to climate objectives, but also to European fiscal stability and macroeconomic goals.
’Set-aside’ of carbon allowances could help to recalibrate the system for the impact of recession and help to restore the carbon price, but would not improve long term predictability. An energy and climate strategy for 2030 is needed for the long-term stability of overall climate policy, but will not strengthen the EU ETS quickly enough.
The most effective policy response should be a combination of set-aside, a 2030 strategy in line with the EU’s 2050 goal, and a rising reserve price on auctions which set minimum prices below which allowances would not be sold. This would provide a stronger platform for investment and more stable and predictable revenues.
The study launched today in Brussels, assesses options for strengthening the EU ETS. Energy sector investment is crucial for enhancing European prospects for economic stabilisation, investment and recovery. The EU ETS was expected to provide a rising carbon price to cost-effectively reduce carbon emissions and incentivise low-carbon investments. The scheduled move to auctioning from next year, was also expected to raise between €150-200bn in public revenues between 2013 and 2020. This revenue was earmarked for a combination of public finance with energy and climate-related-expenditures.
However, the carbon price has recently fallen to less than €10 per tonne of CO2. This is well below the €25-€40/tCO2 projected at the time the original EU law was amended and extended to 2020. The low carbon price has undermined the ability of the ETS to drive emission reductions and investment. It has also led to an expected loss to national governments of around €100bn due to reduced auction revenues.
The report argues that while the set-aside of EU ETS emission allowances is important to address their oversupply up to 2020, it does not adequately address the problems of investor uncertainty and confidence. A combination of measures is required to “recalibrate” the EU ETS, restore investor confidence in its robustness, and start providing clarity on future investment frameworks.
Introducing rising Reserve Price Auctions would establish a price floor that caps downside risks for investors and can stabilise auction revenue expectations in the face of deep uncertainties. Floor prices are a feature in the US East Coast, Californian and Australian cap-and-trade systems, leaving the EU ETS alone in not having such a mechanism.
Furthermore, major energy-related investments need a vision and framework beyond 2020. Negotiations towards 2030 commitments are urgently required but should not simply focus on 2030 targets or the ETS cap trajectory. Roadmaps are required not just for energy, but for all the main sectors covered by the ETS, integrating the impact of complementary measures, investment trends, carbon leakage concerns, infrastructure and innovation needs.
Professor Michael Grubb, author of the report and Chair of Climate Strategies said: “Industry responds to short-term price signals more than long-term political commitments, and at the moment the two point in opposite directions. This serves neither Europe’s environmental nor economic interests. The crisis is not just about price, but credibility. It requires remedies that are strategic, as well as tactical; and complementary, not piecemeal”.
Commenting on the report, Helen Bray of Shell said:
“The Climate Strategies study cuts to the core of the issues facing the ETS. I am encouraged by its support for recalibration, along with an auction reserve price and a greenhouse gas emissions reduction target into the 2020s. We agree with the report’s finding that over specifying the energy mix could lead to conflicting policy goals. We need to simplify what we have and restore the ETS back to its role as the primary driver to reduce emissions in Europe.”
Ends.
About Climate Strategies
Climate Strategies is an international organisation that convenes networks of leading academic experts around specific climate change policy challenges. From this it offers rigorous, independent research to governments and the full range of stakeholders, in Europe and beyond. We provide a bridge between research and international policy challenges. Our aim is to help government decision makers manage the complexities both of assessing the options, and of securing stakeholder and public consensus around them. Our reports and publications have a record of major impact with policy-makers and business.
