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A short reflection on the back-loading fiasco

By Benedict De Meulemeester

By Benedict De Meulemeester on 18/04/2013

Emission rights prices have dropped below 3 euro per ton in a reaction to the failure to adopt a proposal to prop up the ETS-markets in the EU Parliament on Tuesday. The ETS wizards were working on a so-called ‘back-loading’ mechanism. This would mean that emission rights would have been withdrawn (or rather not-auctioned) in the first years of the 2013 – 2020 trading period and then released later on. I don’t think that would have had a lot of impact on the price. In the end, the only way to really create a price for emission rights is to make sure that the amount of rights available to the market (allocated and auctioned) is lower than the actual emissions. Delaying the auctioning of emission rights prices within the trading period is quite senseless, as the mechanism has ample possibilities for using your allocated rights in different years.

Most importantly, the emission rights that companies get allocated for free come in double portions. At the moment that you have to hand in the emission rights equal to your emissions in the previous year, you have a double portion of rights on your account. You have the rights allocated in that previous year and those in that year. So, if the back-loading would have started to push up prices, holders of double portions would have had an incentive to start selling those rights, bringing down prices again. When the initial proposal to back-load 1,3 million rights was watered down to 900 million, it became even more clear that this wouldn’t make much more than a dent in the graph of emission rights prices. So, the vote of Tuesday was not much more than a symbolic attempt to do something about the failure to create a real price for greenhouse gas emissions with ETS.

(Nevertheless, traders got enthusiastic again, trading the EUA price above 5 euros last week. Enthusiastic or desperate to see a failing market repaired?)

The importance of Tuesday’s vote should therefore be searched in its symbolic value. It was a close call, but it was a “no”. That makes clear that there is no willingness at all among EU policymakers to repair the ETS-system. The European Council refuses to do it, as several countries, Poland foremost, are loudly protesting against higher emission rights prices or reduced allocations (to their own industries). Inside an important Member State, Germany, there is no agreement among Cabinet Members to do it. And now the Parliament is also refusing. The European Commission wants to do it, but the fact that they are stopped by the European Parliament now, is a strong proof that the EU is a democracy.

Is this lack of political willingness a sign that Europe’s politicians have a lack of interest for the environment? I don’t think so. Europe is going through an awful economic crisis. I am in Barcelona at this moment. I was walking through the streets last night, and I remarked how rapidly the number of homeless people in this country has grown. Moreover, the homeless seem to be better dressed than in other countries. That’s because they are recent victims of the crisis that still had a normal life like you and me a few months ago. Increasing prices for emission rights would mean that the cost of running an energy-intensive industrial company in Europe would go up. So, we would see more of those heavy industries shut down, adding the workers to the mass of unemployed people. Electricity prices would go up, increasing the cost of doing business and of life.

If you look at what is going on in Europe, the no-vote for back-loading looks like a good decision from an economical point of view. Can we really afford the luxury of a cost-increasing higher ETS price at this moment? 39 companies said yes with an advertisement in the Financial Times. A lot of them were electricity producers. Maybe they should publish how much windfall profits they’ve made in the last decade on ETS. That would put their publicity campaign in a different light. Areva, the builder of nuclear power plants was there. Of course, they would like to see a higher price for emitting carbon, as that would increase the chances of nuclear power plants being built. Not a single energy-intensive industry was among them. If anything, the publicity in the Financial Times shows the winners and losers of ETS.

I’m not hesitating to cheer the no-vote for back-loading because I’m still searching for indications that ETS has delivered a substantial contribution to reduce carbon emissions. It has created a lot of complexity, a lot of extra costs and windfall profits for certain businesses. But it hasn’t been capable of delivering a solid financial signal to investors in carbon reductions. That doesn’t mean that Europe is not having a climate policy, on the contrary. We are reducing our emissions, and one of the reasons is that European countries are frontrunners in pushing companies and citizens to reduce their carbon footprint.

The whole ETS circus has nothing to do with that. Europe’s carbon reductions are driven by more traditional and more local policy measures. Some examples are: subsidies for renewable energy (adding taxes to power bills which drive consumption reductions), insulation norms, product norms, e.g. for cars or lighting bulbs, technology choice obligations in the framework of environmental permits. Maybe not the most efficient ways of stimulating carbon reduction, but definitely more effective. I agree that in theory emission trading should be more efficient, but in practice it has proven to be impossible to make it effective. I call upon Europe’s climate policymakers to stop wasting time (and energy) on symbolic issues like back-loading. Our economy and the climate cannot afford that. Emission trading would have been great, and it’s a pity we haven’t been capable to make it work. But in these economic times, we have to be realistic and focus on the continuation of Europe’s (traditional) climate policy while trying to reduce their cost for the economy and society as a whole.

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