Sandbag has today [released analysis](/site_media/pdfs/reports/Rescuing_EU_ETS.pdf “”) showing how Europe’s carbon caps have turned into a carbon trap. This analysis is launched ahead of the European Commission’s communiqué expected this week, which will analysis the options for moving beyond a 20% emissions reduction target. Leaked versions of the communiqué have been widely circulated and indicate that the EU acknowledges there are problems with the systems and the oversupply of permits, recommending removing 1.4bn tonnes from the scheme from 2013-20. Sandbag analysis shows that that this number is too low, for caps to become effective 2.3bn tonnes need to be removed.
The EU ETS is facing a number of problems which may leave it redundant. To prevent this from happening and rescue the EU ETS Sandbag have highlighted four fundamental problems with the current system that must be addressed to salvage the scheme.
Problem 1: Inappropriate targets
The traded sector, which accounts for just under half of the greenhouse gasses in the European economy, currently aim to cut emissions 21% against 2005 levels by 2020 as part of a wider programme to achieve economy reductions of 20% against 1990 levels by 2020. With a drop in emissions of 11.6% in 2009 across the EU, the target of 20% suddenly does not look to difficult. Ambitious targets are critical in tackling climate change as well as giving Europe a head start in the global green economy which is estimated to be worth some $2.3trillion by 2020.
Sandbag recommends the EU move to the proposed 30% midterm emissions target reduction which would reflect in a 34% target for the traded sector. This would save an estimated 1.4bn tonnes of CO2.
Problem 2: Sectoral ovrallocation
The ETS is currently oversupplied by 233 million allowances, however, this net position disguises asymmetries in the effort required by different sectors under the cap. Where the power sector carries most of the burden, heavy industry and a significant number of manufacturing plants are currently failing to shoulder any of the load. 70% of participants in the scheme were given more allowances than needed to cover their emissions (have a look for yourself using our new and improved [emissions map]( “”) of the EU). Successful lobbying by industry has meant they have been able to secure generous allocation which does not reflect their actual emissions.
Sandbag recommends deriving Phase III caps from historical emissions rather than from Phase II allocations which are distorted by overallocations. Sandbag has calculated the Phase III cap against recent historical emissions, drawing a baseline from generous estimate of average 2005-2009 emissions delivers a Phase III budget some 2.3 billion smaller than the current proposal
Problem 3: Carbon lock-in
Emissions have dropped across Europe, however, this has almost exclusively been the result of recession rather than shrewd policy. Perversely though, the current design of the ETS prevents us from capturing any environmental benefit of this downturn. Rather this carbon saving is allowed – under the ETS Directive – to be banked and saved for a rainy day. This means that the 233 million tonnes of spare permits left over from 2009 will be used to allow future emissions to take place, emissions it seems are now predetermined.
Sandbag recommends that a strategic carbon reserve be established, which would hold back a quantity of permits in case of a sudden drop in demand. A reserve could protect the scheme from excessive surplus in the event of a repeat recession, with an annual share of the reserve released into the market after each year which passes without incident. A reserve would also allow the scheme to respond more quickly to new scientific assessments of climate risk.
Problem 4: Unused offsets and New Entrants reserve
A further 1.4 billion credits are likely to be introduced into the scheme, this figure is made up of unused permits from the New Entrants Reserve which are likely to be released into the market at the end of Phase II, as well as some 830 million unused Phase II offset credits and a further 375 million offsets are expected to be available in Phase III. Together with the Phase II surplus, a 1.5 billion permit carryover could allow emissions to grow unabated until 2017.
Sandbag recommends an EU wide agreement to control the quantity and quality of offsets, this is to prevent offsets entering the EU which have originated from projects with no or limited sustainable development benefits for the host country. It is also recommended that unused NER permits are cancelled; France, Ireland and Malta have already declared their intention to cancel unused NER permits at the end of Phase II. An EU agreement to cancel unused NER permits would prevent an estimated 192 million permits becoming available in Phase III.
The ETS is vulnerable to being rendered irrelevant if it is unable to adapt to the dynamic system in which it operates. Tightening the cap remains of paramount importance, for saving carbon, spurring green investment and helping Europe to move toward a green economy in a more cost effective way.