There was some very good news for the environment and for supporters of emissions trading in Europe this week. The move to a higher 30% emissions reduction target is, according to the Commission, looking much more affordable and, importantly, the German Environment Minister, Norbert Roettgen, has said he backs it. Such a move would trigger tighter caps under the trading scheme helping to re-balance supply and demand, leading to less emissions and higher prices.
One of the first actions Commissioner Connie Hedegaard took on taking office was to ask for a report into the implications of a move to a higher climate change reduction target. The official report is not expected to be made public until late May but leaked copies of the consultation draft are already circulating. The EU’s number crunching appears to conclude that it would now cost only around €11 bn more to meet a 30% target than the original estimated cost of hitting 20%. The cost difference has reduced drastically as a result of the recession. The Commission originally predicted carbon would trade at around €30 tonne in this trading phase, however, the large surpluses of emissions accruing to industry under the recession have contributed to permits trading at around half this value.
When emissions data for 2009 was published at the start of April it revealed emissions had fallen by 11%, compared to the year before, which followed a fall in the previous year of 6%. The net result: emissions are now below the caps for the first time. Next week Sandbag will launch a new and improved interactive map of all the installations in the EU scheme, illustrating the huge number of installations currently sitting on caps that are comfortably above their emissions. The only way to re-create incentives for investment in abatement in these plant is to shorten the supply of permits. To do this Europe can and must move to a higher target.
Since the failure of Copenhagen, a number of countries have been vocal advocates of the EU adopting the higher target unilaterally, decoupling the decision from the fraught international negotiations. France and the UK have led the way but Germany, until now, has remained quiet. But on Wednesday Environment Minister Norbert Roettgen indicated his support for the policy, making it much more likely it will be adopted. The main blockers remain Italy and Poland but it remains to be seen how strong a resistance they can muster if all the other major countries are in favour. Since Connie’s arrival, the Commission, who had previously been cited as being against the move, have adopted a neutral stance and are busy preparing a scenario for how the higher target could be achieved if it were adopted.
The logic of a higher target and tighter caps is inescapable for those who support the principle of carbon pricing via emissions trading. Rather than creating regulatory uncertainty through discussions about price floors or limits to banking, a tighter cap would be the most efficient way to increase the value of investments in abatement technologies. There is more than enough slack in the system to reduce allocations and still not require drastic cuts from industry. The power sector has always been required to shoulder the effort to meet reductions and is almost certainly set to continue to do so. According to leaked information contained within the Commission’s report, all it would take is for 1.4 bn tonnes of permits to be set aside in a reserve and the ETS could comfortably take us to our higher target. This is important, as Yvo de Boer correctly said, it would be a piece of cake for the EU to meet its current unilateral target – if we want to keep pace with other countries who are embarking on large investments in low carbon solutions we need to up our game. The signs this week indicate that this is more likely than we had thought and this is very welcome news for the environment and for the carbon market.