Despite the way in which the american-Chinese entente finally concluded the Copenhagen negotiations, the EU has previously shown it has the capacity to set the pace internationally on climate action. If it wishes to continue to do so, it will have to come forward with proposals and commitments on all of the policy aspects mentioned. However, the role of the Council of
the EU is limited with regard to the design of a new international climate agreement, because the Commission negotiates on behalf of the EU. However, on climate financing the Council does have important powers. The Presidencies will have to work towards an agreement in the Council in which the EU takes on ambitious financial commitments which inspire other countries to follow its example.
The successful conclusion of a post-Kyoto agreement requires continued leadership from the European Union. The EU must demonstrate ambition, in particular accepting binding commit-ments when others prove unwilling to do the same. Over the long-term the European Union has the means to encourage the gradually deeper involvement of developing countries. But new commitments alone are insufficient: an effective and credible climate regime needs a strict enforcement mechanism as well. Finally, the European Union has a particular role in guaranteeing that trade and development policies are accommodating to and coherent with climate policy objectives.
ClIMATE ChANGE
Weak Carbon Prices Threaten the EU’s Environmental Leadership
Simon Tilford Chief Economist, CER
T
he EU’s Emissions Trading Scheme (EU ETS) works by capping the output of carbon dioxide and then distributing allowances to emit the gas to large energy users. The tighter the cap, the more expensive it is for firms to produce carbon dioxide. The European Commission is relying on carbon pricing to encourage companies to invest in new green technologies. It also hopes that the ETS will form the basis of a global carbon market. However, carbon prices under the scheme have fallen by two-thirds in just over six months. at December’s UN conference in Copenhagen, the EU wanted to persuade big emerging economies such as China and India to take action to curb their own output of greenhouse gases. This was a tough task, given that Europe’s flagship environmental policy is not working.Firms will only invest in new technology if they are confident that carbon prices will be high enough to justify the cost. In early November 2009, the carbon price stood at €14 per tonne.
although this represents an improvement on the low of €10 reached in February 2009, prices are too low to make such investment worthwhile. Back in July 2008, the carbon price stood at €30, a sufficiently high level to provide a strong market signal. The current state of the carbon market poses a bigger risk to the future of the ETS than the previous collapse of carbon prices. Prices fell to just €1 in 2007 because too many allowances were distrib-uted for the first phase of the ETS (from 2005 to 2007) and firms were not permitted to hold on to surplus permits for use in the subsequent phases (2008-12 and 2013-20). However, the price of carbon for use in phase two remained above €18 per tonne during 2007 (and hence well above current levels), because investors were confident that emissions caps in the latter phases would be tighter. In terms of encouraging investment, it is the future price that matters.
There are cyclical and structural reasons for the current weakness of carbon prices. The cyclical reason is the decline in Europe’s industrial activity, and hence energy use, since the middle of 2008. With the supply of carbon allowances fixed and emissions declining, carbon prices have inevitably fallen. The EU economy was on course to shrink by around 4%
in 2009. The release of carbon dioxide by industries covered by the carbon market could
decline by as much as 10%. Moreover, the economic recovery will be slow to gain momentum, with economic growth (and hence energy consumption) set to remain weak for several years.
In short, the EU economy will not grow anywhere near as fast between 2008 and 2020 as was assumed when the emissions caps were set, and hence emissions will be considerably lower than forecast. Instead of expanding by around 2.5% per annum – as assumed by the European Commission – economic growth is more likely to be around 1.5%. The cumulative impact of this on emissions will be huge.
The ferocity of the economic downturn has also highlighted two structural weaknesses in Europe’s carbon market. First, the EU fixed the supply of carbon allowances until 2020. This was done for good reasons. Investors needed to be convinced that the cap on emissions would be sufficiently tight to ensure consistently high carbon prices, and that the emissions caps would not be altered under pressure from governments. However, the lack of a mechanism to amend the emissions allocations in the light of changed economic circumstances threatens the efficacy of the scheme and its demonstration value internationally.
Second, the method of distributing the allowances is exacerbating the weakness of carbon prices. In phase two of the ETS (2008 to 2012), the vast majority of allowances is allocated for free. In phase three (2013 to 2020) energy generators will have to purchase them through auctions. But auctioning will only be introduced gradually for the other industries covered by the market. The upshot is that very few businesses are actually paying to emit carbon dioxide at present. and it has become apparent that emissions will remain weaker than projected for a number of years, they will be able to put off buying allowances until well into phase three. If all businesses had to pay to emit carbon dioxide now (or at least from 2013), prices would not be as weak as they are at present.
If EU emissions are falling, why does it matter if carbon prices are low? Surely the main thing is that the EU reduces emissions of greenhouse gases? The answer is that it matters why emissions are falling. at present, lower carbon dioxide emissions stem from temporary factors, not structural ones and that weak carbon prices will delay the necessary structur-al changes. a structurstructur-al fstructur-all in emissions (one that will not be reversed once the economy recovers) requires investment in new technologies, such as carbon capture and storage (CCS) and renewable energies. But companies will only make such investments if they are confident carbon prices will recover.
Weak carbon prices also threaten to paralyse the Clean Development Mechanism (CDM).
Under the CDM, European emitters can earn carbon allowances by investing in projects to cut emissions in developing countries. The rationale for this is two-fold: it is often cheaper to reduce greenhouse gases in poor countries than in rich ones, and it leads to the transfer of capital and technology to developing countries. The CDM represents an efficient way of meeting developing country demands that the developed world help finance their de-carbonisation. In the process, it also developing countries a stake in an embryonic global
carbon market. Unfortunately, at their current levels carbon prices are too low for it to be worthwhile for firms to invest in CDM projects.
Carbon prices will need to rise quickly to preserve the credibility of the EU’s ETS. Given the dire economic outlook, the Commission may have to intervene in the market to ensure this happens. One argument against intervention is essentially ideological: that it would interfere with the working of the market. another argument is that intervention would create uncertain-ty: investors would come to fear that the Commission would interfere in the market whenever it was unhappy about the price the market was putting on the price of carbon. Both fears are exaggerated. The carbon market – like many others – is the product of regulation – so altering the frame of that regulation in light of changed circumstances should not be consid-ered problematic.
What could the Commission do? It could, for example, tighten the post-2020 (phase four) emissions cap, which is not yet set in stone. Given that emitters can retain allowances from phases two and three (2008-12 and 2013-20) for use in phase four, reducing the number of allowances available in the post-2020 period would help to prevent further falls in prices now.
But this alone will not be enough to ensure that prices rise rapidly. The Commission should also announce that from 2013 auctions will be subject to minimum prices of €25. Those allow-ances that do not meet the reserve price would then be withdrawn from the market. Such a move would increase carbon prices and reassure firms that prices will remain high enough to warrant investment in low-carbon technologies. Crucially, it would ensure that the EU has climate policies in place to match its rhetoric and help the EU to consolidate its leadership of the international environmental agenda.
ClIMATE ChANGE
The Missing Link:
an Integrated Strategy to Reduce
Greenhouse Gas Emissions from Transport
Arno behrens Research Fellow, CEPS
T
he Energy and Climate Package as adopted in mid-2009 is often referred to as paving the way towards a new industrial revolution, a revolution into a low-carbon and largely fossil fuel free future. While the package addresses two of Europe’s most important challenges, climate change and security of energy supply, the future of transport has not yet included. Transport policy remains a patchwork of different initiatives aimed at different sectors and left to incremental policy change. However, incremental policy change will not be enough for the transition to a low-carbon transport sector. Bold moves will be required, starting with an integrated transport and climate change package, much in the same way as the Energy and Climate Change Package has opened the door to a low-carbon energy future. Transport and mobility are at the heart of European integration. The Treaty of Rome has foreseen a Common Transport Policy, which – amongst others things – helps to promote the competitiveness of European industry as well as social and economic cohesion in Europe. Environmental protection and addressing the risks of climate change are part of this.The transport sector is not only vital for European integration, it also constitutes an important component of the European economy. The sector contributes some 7% of GDP and more than 5% of total employment in the EU. Progressive European (market) integration and, in particu-lar, successive ways of enlargement have led to a substantial increase in transport volumes in recent years. On average, passenger transport (pkm) increased by 1.7% annually since 1995, mainly driven by air and road transport, while freight transport (tkm) increased by 2.7% over the same period – mainly driven by road and sea transport. These developments have led to an increasing recognition of the negative side-effects of mass transport in Europe, including deterioration of infrastructure, land use issues, congestion, air and noise pollution, injuries and deaths, as well as substantial amounts of greenhouse gas (GHG) emissions. The latter is of particular importance in the context of the EU’s global climate leadership. Failure to address GHG emissions in transport would not only jeopardise the achievement of recently
adopted EU emissions reduction targets, it would also hinder the industrial transformation of the transport sector.
While GHG emissions have decreased in all sectors of the European economy since 1990, transport was the only sector that experienced continuous growth in emissions – by some 36%1 in the period between 1990 and 2006. as a result, the European transport sector was responsible for almost a quarter of all EU-GHG emissions in 2006. The fastest growing modes of transport were civil aviation (+89%) and navigation (+51%), while in absolute terms the largest increase was in road transport (+29%). Road transport continues to contribute the bulk (71%) to transport GHG emissions and is responsible for some 17% of total EU-GHG emissions.
These figures clearly show that the transport sector will need to play a major role in the EU’s climate policy. In order to meet the 2°C climate change target, by 2020 emissions from road transport need to decrease in absolute terms while increases in emissions in the aviation and maritime modes need to be halted. In the longer term, i.e. until 2050, emissions from the transport sector need to decrease by up to 80% in order to achieve the global emissions reduction targets. achieving these objectives will require a dramatic shift in the way people travel and in the way we move goods.
Reducing transport emissions will have additional benefits in terms of security of energy supplies. The transport sector today is 97% dependent on hydrocarbon fuels, and mainly on oil. Biofuels and other renewables will not be enough to address vulnerability. The overall EU transport demand is projected to increase to such an extent (18% by 2020 according to the IEa) that the EU target of replacing 10% of transport fuel use with renewable energy sources – although creating an additional security margin – can only moderately reduce European depen-dence on oil. In times of decreasing domestic oil production and increasing awareness about global warming, the transition towards a low-carbon transport system can have the double benefit of decreasing import dependence on oil and decreasing GHG emissions thus helping to achieve Europe’s climate targets. at the same time, it will ensure innovation in transport related industries, thus fostering competitiveness and securing jobs.