Back in 2009, along with tens of thousands of others, I joined the Climate March as it snaked through Central London demonstrating support for a strong global deal on climate change at the Copenhagen Summit. What was surprising to me on that march was the level of antipathy directed towards the European Union’s Emission Trading Scheme (ETS). Protestors from many of the UK’s leading environmental groups were decked out in top hats and tails parodying Conservative politicians and ‘fat cat’ bankers who they believed were exploiting the markets to make money while doing little to reduce carbon emissions. Ironically, on the 16th April this year the European Parliament voted against a proposal to shore-up the European carbon markets and the blame was being squarely levelled at the bowler-hatted Tories that the protestors were lampooning.
The economic down-turn, along with improved energy efficiency, has meant that the carbon markets have been operating with a surplus of carbon allowances for the past few years. The European Commission’s proposal was to ‘backload’ the carbon markets, in essence taking 900m tonnes of carbon allowances out of the 2013-15 carbon trading period, and reallocating them to the 2019-2020 period. By removing these allowances from the current period, the idea was to tighten the market and push the price of carbon up to a meaningful level.
In the end the measure was narrowly defeated by 334 votes to 315 with those opposed arguing that boosting the carbon price at this time would have a detrimental effect on a European economy that is still struggling to emerge from recession.
The immediate impact of the vote was a collapse in the carbon price by nearly 50% in a day from just under €5/tonne to €2.63/tonne. Ironically, many of the EU’s largest power generators and users of energy have been impacted by the fall in price. Power utilities such as Verbund and Fortum have been sitting on free allocations of carbon allowances and even big users of energy such as cement companies Lafarge and HeidelbergCement are used to getting nearly 5% of their earnings (EBIT) from CO2 sales. Fortum’s share price was down over 7% on the news.
So what happens now? We can be confident that the carbon price will stay low for at least the next three years. In large part this is due to the ineffectiveness of the EU ETS, but it is also the result of a weak economy as well as energy efficiency measures and growing volumes of renewables on power grids throughout Europe. Longer term structural reforms will still go ahead and in the medium-term, combined with a growing economy, these should mean carbon prices rise to more meaningful levels from 2016 onwards.
In addition, the countries that had been in favour of backloading, notably the Netherlands, Belgium, France, Denmark and Sweden may well choose to follow the UK in setting their own carbon mechanisms, not least because these countries had anticipated significant revenues from the auctions of carbon allowances that will now not materialise. In parallel, the European Commission will likely re-emphasise energy efficiency measures as a less contentious way of underpinning carbon reductions across the region.
There will also be repercussions outside of Europe. The decision in the European Parliament actually runs counter to the global trend with emission trading schemes being developed (and in some cases already launched) in California, Quebec, Australia, seven Chinese cities and provinces, South Korea and even Kazakhstan. Nonetheless, the EU scheme is by far the largest and the message that will be sent by the vote is that even the EU Parliament is becoming more conservative on environmental issues in the current economic climate.
It is also interesting to juxtapose these recent developments in Europe with the US position which, with strong statements in Obama’s State of the Union address and his draft 2014 budget as well as a Secretary of State who has prioritised tackling climate change, increasingly seems to have ambitions to usurp the EU’s leadership on the climate agenda.