The growing importance of the EU Emissions Trading System

Derided for a decade for its ineffectiveness, this European emissions trading mechanism is now taking on a new significance writes Philippe Escande in an article on Le Monde website.


Climate: ‘The EU emissions trading system is now proving relevant’

It can take a lot of patience, experimentation and tenacity to see a good idea prevail when dealing with simultaneous emergencies. The 20-year-old idea of emissions trading was that it was necessary to put a cost on new pollution to fight climate change: in other words, tax carbon.

Averse to taxes, Europe invented a complex system of emissions trading in 2005. Scoffed at for a decade for its inefficiency and derisory cost, the mechanism is now proving relevant. On Tuesday, February 21, the price exceeded the €100 per tonne threshold, five times more than three years ago, completely changing the game.

As a small example provided by the Financial Times, if a glass manufacturer pays €50 per megawatt-hour (MWh) for its gas, it must add €20 as a quota for CO2 emissions. At this level, investing in carbon capture or hydrogen becomes attractive for both industrialists and investors.

Power of the price incentive

It was the combination of a recovery in industrial activity and a tightening of the rules decided by the EU that caused the price to soar. The emissions caps of the companies concerned, nearly 12,000 installations in Europe (power plants, steel industry, etc.), have been calculated to be 60% lower than their 2005 level. This is in line with the European objective of reducing net emissions by 55% by 2030. In the opinion of market analysts, the price is expected to rise further. One of them quoted by Bloomberg sees it exceeding €150 by the end of 2023.

This approach mixes regulation, with the setting of caps, and market law, with an increasing price for those who exceed the limits and must therefore buy additional allowances. It shows the power of the price incentive, especially if it is sustained over time. But it raises another problem that politicians are having trouble solving: How to make this planned increase in the price of energy compatible with the purchasing power of households and the competitiveness of the economy?

It is also inconsistent to put in place such ambitious and indispensable policies and simultaneously subsidize the consumption of gasoline or diesel. The quandary is reminiscent of the objective of protecting farmers and small businesses from the predatory practices of the big supermarkets while asking the latter to lower their prices to mitigate inflation. The price of things is the reflection of the value we give them.

External link

2 thoughts on “The growing importance of the EU Emissions Trading System

  1. The arguments put forward in Le Monde supporting the EU ETS are flawed at a number of levels. In the early days, there was a free distribution of EUAs. The first sector actually paying for EUAs was the power sector. The idea was that the EU ETS would, in the first instance de-carb this sector. It never happened and DG Environment admitted to me (2009 – I have the meeting notes) that it would never happen because of renewables – which used a different mechanism – Feed-in-tariffs. In effect, subsidies for renewables undermined the ETS raison d’etre. 2016 – ETS reform and at the Commission organised meeting, Vattenfall stating that in the power sector ETS had made no impact on de-carb. Fast forward to 2018 and with the decline in the cost of electricity from renewables, the EU ETS looked less and less realistic as a de-carb mechanism. Note that at this point, sector such as chemicals – still had free allocation. Pathetic and desperate stuff.

    We now have a situation in Spain, where it is far cheaper to produce H2 from solar (and then use it to make ammonia for fertiliser) than it is to use SMR hydrogen, regardless of the EU ETS and its current price. It was the growth of renewables and fall in the price of renewable electricity that has made de-carbonisation of energy-dependent systems possible. But this growth would never have occurred had there not been, at the start, a subsidy mechanism to kick-start the process.

    ETS supporters attempting to re-write history – nothing very new there, the only problem being that I and others have memories and well preserved contemporaneous notes – who said what when – which demolishes the ETS narrative. As for households and purchasing power: renewables deliver for them now by far the lowest cost form of electricity – via roof-top PV arrays. The problem is that there has been a total failure on the part of regulated monopolies (i.e. network operators) to make their networks fit for purpose with respect to this development. Regulatory failure writ large – which nicely brings us back to that other regulatory failure: ETS flagship (pricing carbon) vs Renewables (supporting RES growth).

    1. This will really help other readers, Mike. Thanks so much for this. I was worried that an article such as this would not suffice.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.