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Emissions trading dispute

July 28, 2012

EU Climate Commissioner Connie Hedegaard would like to make CO2 allowances scarcer and thus more expensive. But why are pollution rights so cheap to purchase?

Wind turbine in front of smokestack
Image: picture alliance/dpa

The EU emissions trading scheme has been in existence since 2003. The idea is that industries burning lots of oil, gas or coal must pay for every ton of carbon dioxide introduced into the atmosphere. At the same time, companies that switch to renewable energy or reduce power consumption can sell their unused emissions rights.

Initially, the allowances were distributed free of charge to 11,000 companies within the European Union. Companies that successfully implemented the savings were able to sell their surplus emissions certificates. But businesses emitting more CO2 than their quota were required to purchase additional allowances. The certificates were issued by EU member states. In Germany, the state-owned KfW development bank was responsible.

Price rollercoaster

Since certificate trading began, the cost of pollution rights has undergone large price swings. Initially set at around 10 euros per ton of CO2, it rose in 2006 to 30 euros. Since then, prices have sunk. One ton of CO2 now costs just six euros. EU Climate Commissioner Conny Hedegaard says that is too cheap. She wants to cut back on the availability of certificates, making them more expensive, and thus increasing the incentive to cut pollution.

But the European Commission doesn't agree. Energy Commissioner Günther Öttinger and Industry Commissioner Antonio Tajani reject the proposal. A spokesperson for the German Economic Ministry also reacted negatively to the attack. One thing is certain: without the support of EU member governments, the directive cannot be effective.

Bull sculpture in front of Frankfurt Stock Exchange
Critics charge the EU of backing away from a market solutionImage: AP

The main reason for the low prices is a drop in pollution emissions, but there are others: "One is the economic crisis, where we have shrinking economies in Southern Europe," said Gernot Klepper of the Institute for the World Economy in Kiel. "The other [reason] is the right to pollute can be bought abroad." Overseas, the price is still lower than that in the EU. What's more, countries like Canada are no longer signatories to the Kyoto Protocol and no longer purchase emissions rights. Now the supply is greater. "As a result the price in Europe is dropping even more, no matter whether the emission reduction is made or not," Klepper said.

Market forces or government intervention

The decline in price for pollution rights comes at a crucial time. A fundamental reconstruction of the trading system will take place in 2013, when an EU-wide cap on all CO2 emissions will be introduced. From then on, certificates will no longer be issued by country, but will be auctioned. It is this form of allocation that EU Commissioner Hedegaard wants to suspend indefinitely. She wants to the make pollution certificates scarcer on the market, making pollution rights become expensive.

"The European goal is to reduce emissions by 2020 by about 30 percent and by 2050 by around 50 percent," Klepper said. "If you want to make this reduction, you have to invest today. But these investments for companies are unattractive when the price for emissions rights is so low." Companies want to invest, when they are able to profit too. Raising the cost of certificates will allow the European Commission to earn more money to fund climate protection projects.

Hidden taxes

An aluminium smelting plant
Uncertainty about energy costs can cause industry to relocateImage: picture-alliance/dpa

Exactly that is what angers Martin Kneer, spokesperson for the energy-intensive industries in Germany, including chemicals, construction, and steel. Initially the EU deliberately chose a market mechanism and not a tax. Now they have suspended it again, using "flimsy arguments," he said. Hedegaard's plan woud be "an increase in climate change targets through the back door." Moreover, this would be an inappropriate intervention in the market that conceals a tax revenue model, Kneer said.

The intention is "to increase the certificate price again, and using the proceeds to fund other activities elsewhere," he said. Industries need predictability, Kneer said. Constantly changing rules would be a barrier to investment and in some cases a reason to shift production to other countries, he said

Kneer said that politicians had overestimated the ability of European and German industry to bear such costs. Furthermore, in his view the climate policy is incoherent: "The mix of regulations from Brussels and Germany don't fit together. The goals are contradictory and we have enough to deal with the challenges of the energy policy."

Added to this are the challenges of weak economic growth and the euro crisis: "We should not be fiddling with this again, right before emissions trading is set to begin. We expect that the certificates will become more expensive anyway from 2013 onwards due to the new rules," he said.

Contradictory climate policy?

In light of the current low prices, Klepper questions the effectiveness of the carbon trading scheme. Although it is clear CO2 emissions would be much higher today if there were no trading scheme, he said, certain energy-saving projects need CO2 to be at a specific price to be cost-effective - and now that is too low.

Klepper raises the question: "Is emissions trading able to give the right signals so that by 2050 we will be able to stop using fossil fuels?" Certificate trading is still more fair and effective than the over-subsidization of individual renewable energy sources, he said, adding that this is even truer if both happen simultaneously.

"Economically, it makes no sense to subsidize alternative forms of energy if fossil fuels can no longer emit any more than a certain amount. That means you have duel regulations, which is really pointless," Klepper said. Instead of massively subsidizing solar panels and wind turbines via the price of electricity, as is done in Germany, he suggests that the money would be better spent on research and development of new technology.

Author: Fabian Schmidt / jlw
Editor: Simon Bone