The EU’s climate policy – swimming against the tide

by Kennedy Graham

I have argued earlier that the EU is leading the world on climate record and policy.  It is.  The EU-27’s emissions dropped 16% from 5.6 Gt. in 1990 to 4.7 Gt. in 2010, where ours rose 22%.  Its targets are better than others, and its policies are serious and rational.

Yet everything is relative.  No country or region is doing enough to avoid dangerous, and perhaps catastrophic, change.  We are all worse than the EU.  But the EU is not perfect.  So what are its problems?

In 1991 the Commission proposed an EC-wide CO2/energy tax.  Spain and the UK vetoed.  The EU was a reluctant convert to the trading mechanism in the post-Kyoto negotiations.  The US and Norway led the charge.  The EU agreed.  The US walked away, leaving the EU to continue.  The EU, true to its word unlike the US, developed its ETS.

It is a flawed and tormented beast.  The question is, can it be made to work or not? And if not, what to do?  The answers hold more than passing significance for New Zealand.  For we, too, have made a passing attempt at trying, with our tiny and quixotic, self-defying, national ETS.

Discounting for size, there is some comparability between the EU and New Zealand on mitigation policy. The EU’s emissions dwarf New Zealand’s by a factor of fifty. About 45%, about 1.8 billion tonnes, is covered by its ETS, much the same proportion as New Zealand’s ETS coverage.  The remainder is left to member states’ national mitigation policies.  So how has it handled its ETS, and what might be relevant to New Zealand?

The EU introduced its pilot run for the ETS, phase 1, in 2005-07 – ‘learning by doing’.  Its ETS was (and largely remains) confined to big energy power plants and intensive industry.  Small installations can be excluded if equally-effective fiscal or other measures apply.  It became the first, and by far the largest, carbon market.  Mistake 1: The number of allowances, based on estimated need, proved to be excessive.  Mistake 2: There was free gifting of units to qualifying corporations which made the over-supply worse. Result: The carbon price plummeted from €30 to zero, and stayed there.

Not a real success.  Learning by doing – with the planet at stake.   At least the excess credits died with the pilot scheme.

Phase 2 was designed to cover Kyoto’s first commitment period, 2008-12, in which the EU had accepted a legal obligation to cut 8% off 1990 levels.  The number of allowances was reduced (by 6.5%). But the GFC and economic downturn reduced emissions and demand for ETS units.  The surplus of unused allowances and credits kept the European carbon price low.  And free electricity allowances had allowed billions of Euros in windfall profits. The EU came in under the 8% Kyoto target, but more through economic stagnation than insightful policy. When Kyoto’s CP-1 closed in December 2012, the excess units totalled about 1.5 billion; only the prospect of carry-over held the carbon price above zero.

Phase 3, designed to cover Kyoto’s 2nd commitment period (2013-20) opened with the EU in ‘structural reform’ mode.

–     There is to be ‘back-loading’: the shelving (temporary deferral) of 0.9 billion units from the market to reduce the current over-supply of some 2 billion units and bring the carbon price up.  They talk big numbers in the European Union: the allowances (credits, units) for Phase 3 are about 6 billion.

–     There is a new baseline of 2005, which gets rid of the ‘hot air’ from the 1990s recession in the post-communist member states.

–     There is an EU-wide cap, reducing annually by 1.74% — one ‘regional bubble’, without the hybrid regional-national targets. This means a cut of 21% off 2005 in the sector emissions covered (leaving a tough climb for non-ETS emissions for the total 2020 unconditional target of 20% off 1990).

–     There is to be more auctioning and less gifting.  The manufacturing industry, which currently receives 80% of free credits, will have this reduced annually to 30% in 2020. Power generators must purchase 100% from 2013. There will be a total phase-out of gifting by 2027.

–     A structure is put in place to handle ‘carbon leakage’, with an official list of 170 sectors and sub-sectors deemed, on the basis of ‘clearly-defined criteria’, to be most exposed to risk, which receive further free gifting in 2013-14.  This in fact covers a ‘very high share’ of industrial emissions.

–     Aviation (internal within the EU) which was introduced in January ’12 will have 85% gifted and 15% auctioned over the whole phase 3.  A separate cap will result in a 5% cut off the 2005 baseline level.

–     The EU’s attempt to apply a carbon tax to external flights received active opposition from the global visionaries beyond, not least the leader of New Zealand. It has been deferred, though not dropped.

Unlike the NZ scheme, there are strict compliance penalties.  If a business fails to surrender sufficient allowances to cover its emissions, it must purchase the shortfall, is ‘named and shamed’, and pays a fine of €100 (NZ$150) per tonne.

The EU’s ETS, in reform mode as 2014 opens, covers 45% of its total GHG emissions involving 11,500 heavy energy-using installations in power generation and manufacturing industry.  The other 55%, with transport, light industry and waste, are left to member states’ national policies.  In most cases, agriculture and forestry are separate again – seen, unlike New Zealand, largely as of tertiary significance. .

The EU’s self-analysis is not confined to internal reform.

–     They do not allow forestry into the system (RMUs) whereas New Zealand piles on RMUs as if its fiscal life depends on it.

–     They limit among themselves their trading in EURs (units acquired through assisting fellow EU member states) whereas New Zealand companies are free to acquire unlimited numbers and indeed purchased 91% of last year’s total units surrendered.

–     They keep out the ‘hot air’ from Eastern European non-member states.

On the basis of these complex regional-national arrangements, the EU and its member states adopt far-reaching targets.

–     They cut their 8% off 1990 in Kyoto 1 (2008-12), while New Zealand squeaked by on the strength of forestry, with increased gross emissions.

–     They adopted a further unconditional 20% cut for 2020 and accepted a second legal obligation under Kyoto, while New Zealand adopted 5% and stayed as far away from Kyoto-2 as possible.

–     They have an 80-95% target for 2050 while New Zealand’s is 50%.

–     And the debate is on for a 40% cut for 2030, while New Zealand stays silent and still, in the jungle, until it has no option but to specify a figure, minimal and with no debate, then makes a dash for cover.

So while the EU’s climate policy is not perfect, it reflects a conscious and genuine attempt to engage with the challenge.  But are the reforms enough to meet the climate imperative?  Probably not.  A respected analyst has proposed four far-reaching measures:[1]

  1. Tighten the 2020 target to 30% unconditional or 35% pure (without CERs);
  2. Back-loading of 2 billion units (not the 0.9 b. agreed);
  3. A 2025 target that ensures that surplus credits are temporary and quickly consumed in the 2020s;
  4. A floor price of €30.

Greenpeace International goes further: the EU should adopt a 2030 target of 55% off 1990.  And it should be achieved through alternative measures: the ETS, it concludes, has become a barrier to progress in climate policy.

The EU is not about to dispense with its ETS.  There are those who argue it should.  They contend that there should only be an economy-wide carbon (equivalent) tax in place.  They say the ETS, by definition of trading, caters to greed.  Others counter-argue that the private market caters preternaturally to greed, and that it is a continual challenge of public policy in every context to wrong-foot such tendencies and make the market work.

And as the argument intensifies, climate policy, which is an issue on the 21st-century vertical sustainability axis, concedes to the 20th-century’s left-right debate between market freedom and state intervention, and suffers accordingly.

So does the next generation.

[1] ‘The EU ETS System: Climate Policy Miracle or Disaster?’, Jörgen Henningsen (CONCITO; June 2012)

12/18/2013 – 00:00


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