Archive for the ‘Emissions Trading’ Category


Carbon pricing and COP21

As we get closer to COP21 there will be plenty of articles and opinion pieces put forward describing the process, speculating on the outcome and generally trying to help readers understand what exactly is going on. One such piece appeared in the Financial Times recently, written by Pilita Clark. It’s a good summary and has some thoughtful insights but requires some clarification around what the six oil and gas industry CEOs actually argued for in their letter to the UNFCCC.

Pilita Clark rightly points out that a Paris accord, if reached, will be based on many widely differing national contributions, rather than a single agreed policy such as a global carbon price. But the article further qualifies this conclusion with reference back to the letter that the CEOs of Shell, BP, ENI, BG, Statoil and Total wrote to the Executive Secretary of the UNFCCC and the French Presidency, with the following remark;

“. . . the European oil and gas companies that have called for a global carbon pricing framework ahead of the Paris meeting have done so safe in the knowledge this would never emerge from the talks.”

In fact the letter didn’t call for a global carbon price or pricing framework for the very same reason that Pilita Clark gave; this isn’t on the agenda and would never be agreed by the negotiators assembled in Paris.

Rather, the main agenda item for Paris is the negotiation of a framework within which the Intended Nationally Determined Contributions (INDC) will sit. This will probably include provisions for measurement, reporting, verification, peer review and financial assistance for implementation.   An important tool for nations to meet their mitigation goals will be through  carbon pricing mechanisms, which are referenced in a few Parties’ INDCs but not often enough.   The framework agreed in Paris could also include another important provision; the notion of cooperative implementation through the transfer of the obligation under the INDC to another party. This would allow emission reductions to be made at lowest cost globally, which in turn could assist the process of review and agreement on greater ambition.

The International Emissions Trading Association (IETA) have been advocating for such a provision for over a year, with a proposal that would require such transfers to be reconciled in terms of carbon units of some description. The transfer of units would lead to price discovery and therefore the emergence of a carbon market at international level. IETA proposed the following short text insertion within the expected Paris agreement:

Cooperation between Parties in realizing their Contributions

Parties may voluntarily cooperate in achieving their mitigation contributions.

  • A unified international transfer system is hereby established.
  • A Party though private and/or public entities may transfer portions of its nationally determined contribution to one or more other Parties through carbon units of its choice.
  • Transfers and receipts of units shall be recorded in equivalent carbon reduction terms.

IETA have also proposed alternative formulations of the same idea as various Parties (national governments) have put forward their own versions of the concept. Like almost every piece of language proposed so far, this has been incorporated to some extent in the 55 pages of text about to be negotiated, along with its multitude of bracketed options and alternative language possibilities. What survives remains to be seen?

In their letter, the CEOs alluded to this idea, when they called for the following;

Therefore, we call on governments, including at the UNFCCC negotiations in Paris and beyond – to: 

  • introduce carbon pricing systems where they do not yet exist at the national or regional levels
  • create an international framework that could eventually connect national systems. 

National carbon pricing systems make complete sense, such as the ETS in Europe and the proposed carbon tax in South Africa. The framework that could connect them would allow for the speedy and transparent transfer of a national obligation across a border through emissions trading, which is exactly what happens today between Norway and the EU, between countries within the EU and arguably even between the USA and Canada through the California – Quebec ETS linkage. But this needs to be a much more widespread activity in order to quickly leverage the full potential for emission reduction that exists at any point in time.

This isn’t an empty call for a global carbon price, but a reinforcement of the call that IETA has been making for some time and a plea to the UNFCCC, the French Presidency of the COP and the respective Parties to see such a measure included in the Paris agreement. It’s a simple practical step that is needed to catalyse the development of a global carbon market.

Final steps towards Paris?

The last ten days have seen a rush by nations to publish their Intended Nationally Determined Contributions (INDCs), with the much anticipated INDC from India amongst those submitted. On Monday October 5th, the Co-Chairs of the ADP also released a proposal for a first draft of a new climate change agreement for Paris. So it has been a very busy few days, but are we any closer to a deal and could that deal have sufficient ambition to bend the emissions curve?

The India INDC is telling as an indicator of where the developing world really is, versus where the rapidly emerging economies such as China now find themselves. In the case of the latter group, there is thinking towards an emissions peak with China indicating that this will be around 2030 and continuing signals from the academic and research community in that country indicating that it may well be earlier. One such article appeared recently in the Guardian. But for the much poorer developing countries the story remains very different.

The submissions from India is 38 pages long, but of this some 28 pages is supporting evidence and context, explaining the reality of Indian emissions, the need to grow the economy to take hundreds of millions out of poverty and the expected use of fossil fuels to power industry, including areas such as metal smelting, petrochemicals and refining. With a focus on efficiency in particular, India expects to achieve a 33 to 35 percent reduction in CO2 intensity of the economy, but in reality that means a rise in energy related emissions to around 4 billion tonnes or more by 2030, up from some 2+ billion tonnes per annum at present (1.954 Gt in 2012, IEA). This could be tempered by a further element of their contribution which aims to increase forest sinks by some 3 billion tonnes of CO2 in total through to 2030.

There has been considerable speculation as to the renewable energy component of India’s INDC, with a hope that this would show enormous progress in solar deployment in particular. The INDC took the somewhat unusual route of talking in capacity additions, rather than generation (and therefore emissions). India aims to achieve 40% cumulative electric power capacity from non-fossil fuel based resources by 2030. This is significant, but less than it might appear. In a very simple example where 100 GW of generating capacity is comprised of 40 GW solar PV and 60 GW coal, the generation mix might be around 14% renewables and 86% coal. This is assuming a 20% capacity factor for the solar PV (maximum is 50% with day-night) and 80% capacity factor for the coal.

India has also put a considerable price tag on their INDC, with a mitigation effort of some US$ 834 billion through to 2030. In a previous post I looked at the costs assumed in the Kenyan INDC, which came to some $25 billion, but for a population of ~60 million (average through to 2030). With a projected population of some 1.5 billion by 2030, the finance side is in the same ballpark as the Kenyan INDC, albeit on the higher side.

Finally, the last few days have seen new draft text appear – shortened dramatically from some 80 pages to a manageable 20. But references to government led carbon markets, carbon pricing systems or even the use of transfer mechanisms between parties are largely missing. Article 34 of the Draft Decision does hint at the need to rescue the CDM from the Kyoto Protocol by referring to the need to build on Article 12 of the Protocol, but it will be of little use if there isn’t substantial demand for credits in developing and rapidly emerging economies. Simply creating a new crediting mechanism or even bringing the CDM into the Paris agreement won’t on its own direct the finance to the likes of Kenya and India. That demand and related finance flow will only come if the developed and emerging economies are building emissions trading systems (such as in China) and have the ability and confidence to transfer units related to it across their borders. So a great deal of work remains to be done.



FASTER carbon pricing mechanisms

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Last week New York hosted amongst other events, the Papal visit, the UN General Assembly where some 150 world leaders gathered and Climate Week. Arguably this had the makings of a bigger coming together than COP21 itself, although many other issues were also on the agenda, such as the UN Sustainable Development Goals. Nevertheless, the climate issue progressed and the subject of carbon pricing was widely discussed, both how it might be implemented by governments and how companies could use carbon valuation internally in relation to project implementation and risk management.

A highpoint of the Climate Week events was the release by the World Bank of its FASTER principles on implementation of carbon pricing mechanisms . This is work to support the overall push by that organisation for greater uptake of explicit carbon pricing mechanisms at national level as governments consider how they might implement their INDCs.

FASTER is an acronym, with each of the terms further elaborated in a fairly readable 50 page accompanying document. The short version is as follows;

  • F – Fairness
  • A – Alignment of Policies
  • S – Stability and Predictability
  • T – Transparency
  • E – Efficiency and Cost-Effectiveness
  • R – Reliability and Environmental Integrity

I have a slight feeling that the acronym was thought up before the words, but each of the subject areas covered is relevant to the design of a carbon pricing mechanism by governments, such as a cap-and-trade system.

Importantly, the principles recognise many of the key issues that early cap-and-trade and taxation systems have confronted, such as dealing with competitiveness concerns, managing competing policies and complementing the mechanism with sufficient technology push in key areas such as carbon capture and storage and renewables. The latter requires something of a Goldilocks approach in that too little can result in wasted resource allocation, but too much while also being wasteful can end up becoming a competing deployment policy.

In the various workshops held during Climate Week, one aspect of the FASTER principles that did draw comment was the call for a “predictable and rising carbon price”. Predictability should be more about the willingness of government to maintain the mechanism over the long term, rather than a clear sign as to what exactly that price might be. For the most part, commodity markets exist, trade and attract investment on the basis that they are there and that the commodity itself will continue to attract demand for decades to come. We are still some way from a reasonable level of certainty that carbon pricing policies will be in place over many decades, given that they do not enjoy cross-party support in all jurisdictions.

Particularly for the case of a cap-and-trade system, a rising carbon price cannot be guaranteed. Rather, the system requires long term certainty in the level of the cap, after which the market will determine the appropriate price at any given point in time. This might rise as the EU ETS saw in its early days, but equally the widespread deployment of alternative energy sources or carbon capture and storage could see such a system plateau at some price for a very long time. Even within this, capital cycles could lead to the same price volatility as is seen in most commodity markets.

The guarantee of a rising price may not be the case for a tax based system either. Should emissions fall faster than the government anticipates, there could be popular pressure for an easing of the tax. As carbon tax becomes mainstream, we shouldn’t imagine it would be treated any differently to regular income based or sales tax levels, both of which can fluctuate.

The release of the FASTER Principles coincides with my own book on carbon pricing mechanisms, which was launched just prior to Climate Week. I cover many of the same topics, but drawing more on the events that have transpired over the last decade. Both these publications will hopefully be of interest to individuals and businesses in China, the government of which formally announced the implementation of a cap-and-trade system from 2017. This will be an interesting implementation to watch, in that it may well be the first such system that operates on a rising cap, at least for the first few years. Irrespective, the announcement ensured that Climate Week ended on a high note.

Why carbon pricing matters

An underpinning theme of my blog postings over the years has been discussion around government policy frameworks that seek to attach a cost to CO2 emissions – or so called carbon pricing. I have argued for them, commented on their inner workings and highlighted successes and failures along the way. At the start of each year I have published an overview of global progress, which of course has always featured the EU ETS, but now incorporates systems and approaches from countries such Kazakhstan and South Africa.

The importance of placing a cost on anthropogenic emissions of carbon dioxide cannot be understated, yet it took a fairly heroic effort from the World Bank this time last year to even get the subject of carbon pricing onto the agenda of the UN Climate Summit in New York. Despite the efforts in many countries, this important policy instrument still doesn’t get the recognition or attention it deserves. Yet, as I have argued on many occasions, including my e-book published to coincide with the Summit last year, the climate issue probably doesn’t get resolved without it.

So on the anniversary of that Summit, with Climate Week in New York coming around again, I have a second book being launched, devoted entirely to the all-important subject of carbon pricing as a national and global policy instrument.

Why Carbon Pricing MattersWhy Carbon Pricing Matters” looks at how various national pricing mechanisms work, why some of them may not work at all, what is wrong with others and of course seeks to answer the very question it poses in its title; why this policy instrument matters so much. With COP21 in Paris approaching, I have also argued the case for recognition of this instrument at the global level as well; this isn’t just about national policy implementation.

Not surprisingly the EU ETS gets a chapter to itself; there is a great deal of history here and many lessons learned, but some still to be recognized. As an Australian I have also ventured into the murky waters of carbon pricing policy in that country, which changes constantly and always throws up surprises. With a new Prime Minister, another round of debate may well be on the cards; we shall see.

Finally, I have again challenged the business community to think long and hard about this policy instrument – there are so many reasons why it is the best course to follow. Policy to manage carbon dioxide emissions is inevitable, so the choices we make now may impact the economy and environment for generations to come.

The book is available exclusively on Amazon, either for Kindle or iPads, iPhones and other devices with the Kindle App. This year, the book is also available in hard copy, given the number of requests I had for such treatment over the last twelve months. For those that haven’t caught up with my first attempt, it is now also available in hardcopy.

Where are the carbon market provisions?

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With just 100 days to run until COP21 in Paris and a tenth of that available for formal negotiations, the various national delegations met in Bonn last week to try and push forward the 80+ pages of text, replete with hundreds of bracketed options, into something that looks like a climate treaty. By all media outlet accounts progress was slow. Although the process hasn’t reached the point where alarm bells are ringing, the political pressure is mounting with UN Secretary General Ban Ki-Moon set to confront world leaders at the end of September in New York.

A key issue that remains under discussion yet with little to show for months of effort is that of the role of carbon pricing in the Paris agreement. While the decision to implement a carbon price within a national economy will always remain a sovereign one, encouragement from the top is nevertheless important. After all, if a carbon price doesn’t make its way into the global energy system, it’s difficult to see significant curtailment of fossil carbon extraction taking place or equally, widespread deployment of carbon capture and storage to directly manage emissions when fossil fuels are used. This message has been sent loudly from all quarters, including business organisations, multilateral agencies such as the World Bank, NGOs and legions of observers in the academic community. The start of the session in Bonn coincided with an article from the Harvard Kennedy School in Cambridge, Massachusetts which argued that encouraging linkage of heterogeneous national systems should be a key element of the Paris agreement. Professor Rob Stavins and his colleagues aren’t seeking a complex structure, but a simple provision. The article concludes that;

“. . . . the most valuable outcome of Paris regarding linkage might simply be the inclusion in the core agreement of an explicit statement that parties may transfer portions of their INDCs to other parties and that these transferred units may be used by the transferees to implement their INDCs. Such a statement would help provide certainty both to governments and private market participants. This minimalist approach will allow diverse forms of linkage to arise, among what will inevitably be highly heterogeneous INDCs, thereby advancing the dual objectives of cost effectiveness and environmental integrity in the international climate policy regime.”

Such a provision would encourage (carbon) price discovery through market transactions at both inter-governmental and inter-company levels, which in turn could be passed through the energy supply chain, thereby shifting investment decisions. This isn’t a big ask, yet it seems to be a step too far for the national negotiators, even from countries with a long history of market development and support.

This is exactly what the International Emissions Trading Association (IETA) has been advocating for since this time last year and while many of the Parties to the UNFCCC have nodded their heads in agreement, very little has happened. IETA reports from Bonn that the mitigation group under the ADP produced a table that outlines the various issues that fall under the ‘mitigation umbrella’ which Parties want to include in the core Paris Agreement. That table is organised into three columns:

  • A column of issues that are largely agreed by Parties to be in the core Agreement,
  • A column of issues which require ‘further clarity’ on placement in the core Agreement,
  • A column of issues that will be in Decisions at the COP in Paris.

Carbon markets- including their function, governance, accounting, usage eligibility and future work programme all currently fall into the “further clarity” column, where Parties are still debating how to proceed. On the positive side (there is a real need to be upbeat about something) IETA notes that at the start of the mitigation session, some fifteen Parties mentioned the importance of an explicit recognition of market mechanisms in the core of the Agreement. They included the EU, the US, Marshall Islands (on behalf of AOSIS), Columbia, New Zealand, Norway, Tuvalu, Brazil, Australia, Switzerland, South Korea, Japan and Panama. After hearing Parties’ views the co-facilitators proposed to set up a spin off group led by Brazil to look further at joint implementation (i.e. transfers, trading etc.) and market mechanisms (e.g. the CDM is a market mechanism). This probably should have happened a year ago, but like the rest of the agreement it is coming down to the wire.

So the Paris agreement inches forwards and with it the fate of a global carbon market, at least for the near to medium term. The next and presumably last (no others are currently scheduled) negotiating session before Paris is in mid-October.

Do we have a wicked problem to deal with?

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Two recent and separate articles in Foreign Affairs highlight different routes forward for tacking the climate issue. One, by Michael Bloomberg, argues that the mitigation solution increasingly lies with cities (this isn’t just about city resilience) and the other puts the challenge squarely in front of the business community.

These are just two in a salvo of pre-Paris articles that seek to direct the negotiations towards a solution space, including some by me and other colleagues arguing the case for carbon pricing systems. The articles reminded me of a similar article in 2009, the Hartwell Paper, in which a group of UK economists cast the climate issue as a ‘wicked problem’, but still went on to propose a very specific solution (a big technology push funded by carbon taxes). That paper also built its argument on the back of the Kaya Identity, which I have argued simplifies the emissions problem such that it can lead to tangential solutions that may not deliver the necessary stabilization in atmospheric carbon dioxide. Nevertheless, there is still merit in focusing on a specific way forward – at least something useful might then get done.

But the description of the climate problem as ‘wicked’, is one that deserves further thought. The use of the word wicked in this context is different to its generally accepted meaning, but instead pertains to the immense difficulty of the problem itself. Wikipedia gives a good description;

A problem that is difficult or impossible to solve because of incomplete, contradictory, and changing requirements that are often difficult to recognize. The use of the term “wicked” here has come to denote resistance to resolution, rather than evil. Moreover, because of complex inter-dependencies, the effort to solve one aspect of a wicked problem may reveal or create other problems.

It is also important to think about which problem we are actually trying to solve. For example, it may turn out that the issue of climate change is immensely more difficult to solve than the issue of carbon dioxide emissions. There is now good evidence that emissions can be brought down to near zero levels, but this doesn’t necessarily resolve the problem of a changing climate. Although warming of the climate system is being driven by increasing levels of carbon dioxide in the atmosphere, the scale on which anthropogenic activities are now conducted can also impact the climate through different routes. Moving away from fossil fuels to very large scale production of energy through other means is a good illustration of this. In a 2010 report, MIT illustrated how very large scale wind farms could result in some surface warming because the turbulent transfer of heat from the surface to the higher layers is reduced as a result of reduced surface kinetic energy (the wind). This is because that energy is converted to electricity. This is not to argue that we shouldn’t build wind turbines, but rather to highlight that with a population of 7-10 billion people all needing energy for a prosperous lifestyle, society may inadvertently engage in some degree of geoengineering (large-scale manipulation of an environmental process that affects the earth’s climate) simply to supply it.

Even narrowing the broader climate issue to emissions, the problem remains pretty wicked. Inter-dependencies abound, such as when significant volumes of liquid fuels may be supplied by very large scale use of biomass or when efficiency drives an increase in energy use (as it has done for over 100 years), rather than the desired reduction in emissions.

An approach to managing wicked problems (Tim Curtis, University of Northampton) first and foremost involves defining the problem very succinctly. This involves locking down the problem definition or developing a description of a related problem that you can solve, and declaring that to be the problem. Objective metrics by which to measure the solution’s success are also very important. In the field of climate change and the attempts by the Parties to the UNFCCC to resolve it, this is far from the course currently being taken. There is immense pressure to engage in sustainable development, end poverty, improve access to energy, promote renewable technologies, save forests, solve global equity issues and use energy more efficiently. Although these are all important goals, they are not sufficiently succinct and defined to enable a clear pathway to resolution, nor does solving them necessarily lead to restoration of a stable climate. The INDC based approach allows for almost any problem to be solved, so long as it can be loosely linked to the broad categories of mitigation and adaptation. The current global approach may well be adding to the wickedness rather than simplifying or even avoiding it.

The short article referenced above concludes with a very sobering observation;

While it may seem appealing in the short run, attempting to tame a wicked problem will always fail in the long run. The problem will simply reassert itself, perhaps in a different guise, as if nothing had been done; or worse, the tame solution will exacerbate the problem.

In climate change terms, this translates to emissions not falling as a result of current efforts, or even if they do fall a bit this has no measurable impact on the continuing rise in atmospheric carbon dioxide levels.

But that is not to say we should give up, as the counter to this observation is that having defined a clear and related objective to the wicked problem that is being confronted, declare that there are just a few possible solutions and focus on selecting from among them. For me, that comes down to implementing a cost for emitting carbon dioxide through systems such as cap-and-trade or carbon taxation. As such, I am about to release a second book in my Putting the Genie Back series, this one titled Why Carbon Pricing Matters. It will be available from mid-September but can be pre-ordered now.

Why Carbon Pricing Matters

The recent letter on carbon pricing from six oil and gas industry CEOs to Christiana Figueres, Executive Secretary of the UNFCCC and Laurent Fabius, Foreign Minister of France and President of COP 21 sent something of a tremor through the media world, to the extent that the New York Times picked up on it with an editorial on carbon taxation. The editorial transposed the CEO call for a carbon price into a call for a carbon tax (as is currently applied in British Columbia) and then set about building the case for a tax based approach and dismantling the case for mechanisms other than taxation; but their focus was on cap-and-trade (such as in California, Quebec and the EU ETS). The New York Times suggested that cap-and-trade doesn’t work, but apparently didn’t look at the evidence.

In January 2015 the EU ETS was ten years old. There were those who said it wouldn’t last and any number of people over the years who have claimed that it doesn’t work, is broken and hasn’t delivered; including the New York Times. Yet it continues to operate as the bedrock of the EU policy framework to manage carbon dioxide emissions. The simple concept of a finite and declining pool of allowances being allocated, traded and then surrendered as carbon dioxide is emitted has remained. Despite various other issues in its ten year history the ETS has done this consistently and almost faultlessly year in and year out; the mechanics of the system have never been a problem.

Effective carbon price
Comparing approaches and policies is difficult, but in general the various mechanisms can be rated as shown above. The most effective approach to mitigation is a widely applied carbon price across as much of the (global) economy as possible. Lost opportunities and inefficiencies creep in as the scope of approach is limited, such as in a project mechanism or with a baseline and credit approach; neither of which tackle fossil fuel use in its entirety.

The chart clearly shows carbon taxation and cap-and-trade competing for the top spot as the most effective mechanism for delivering a carbon price into the economy and driving lasting emission reductions. Both approaches work, so differentiating them almost comes down to personal preference, which can even be seen in the extensive academic literature on the subject where different camps lean one way or the other. My preference, perhaps influenced by my oil trading background, is to back the cap-and-trade approach. My reasons are as follows;

  • The cap-and-trade approach delivers a specific environmental outcome through the application of the cap across the economy.
  • Both instruments are subject to uncertainty, however the cap-and-trade is less subject to political change; conversely, taxation policy is regularly changed by governments. The New York Times made note of this with its reference to Australia, which has removed a fixed price carbon price that was effectively operating as a tax.
  • The carbon price delivered through a cap-and-trade system can adjust quickly to national circumstances. In the EU it fell in response to the recession and perversely has stayed down in response to other policies (renewable energy goals) currently doing the heavy lifting on mitigation. Why is this perverse; because the other policies shouldn’t be doing this job when a cap-and-trade is in place to do it more efficiently.
  • Acceptance is hard to win for any new cost to business, but particularly when not every competitor will be subject to that cost. The cap-and-trade system has a very simple mechanism, in the form of free allowance allocation, for addressing this problem for energy intensive (and therefore carbon intensive) trade exposed industries. Importantly, this mechanism doesn’t change the environmental outcome or reduce the incentive to manage emissions as the allowances held by a facility still have opportunity value associated with them.
  • Most carbon policies are being formulated at country or regional levels, rather than being driven by global approaches. Cap-and-trade systems are well-suited to international linking, leading to a more harmonized global price, while tax coordination is complex and politically difficult. Linking leads to a level playing field for industry around the world which fosters acceptance.

The economic effectiveness of both a carbon tax and a cap-and-trade system for carbon pricing means that countries and regions of all shapes and sizes have an implementation choice. For large, multi-faceted economies, the cap-and-trade system is ideally suited for teasing out the necessary changes across the economy and delivering a lowest cost outcome. At the same time it offers the many emitters considerable flexibility in implementation. Equally, for some economies or sectors where options for change are limited, the offset provisions that often feature in the design of an emissions trading system can offer a useful lifeline for compliance. Still, in some economies, a direct tax may be the most appropriate approach. Perhaps this is for governance reasons related to trading, or a lack of sufficient market participants to create a liquid market or simply to encourage the uptake of a fuel such as natural gas rather than coal.

The choice between these instruments isn’t as important as the choice of an instrument in the first place, which is why the letter from the CEOs is so important at this time.

Talking about climate change

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From the rarefied atmosphere of the Swiss Alps to a small London theatre, there has been a lot said about climate change over the last couple of weeks.

The World Economic Forum held its annual retreat at Davos, with climate change high on the agenda. Much of the discussion was about building additional momentum towards a UNFCCC led agreement in Paris at the end of this year. Business leaders, politicians and other prominent people from civil society reiterated the need for a strong outcome. World Bank President Jim Yong Kim was more specific and called on leaders to “break out of the small steps of business as usual and provide that structure, first and foremost by putting a price on carbon”. The call for more emphasis on carbon pricing has been a strong World Bank theme for a year now.

While there was good talk emanating from Davos, in Brussels the scene was very different. The EU Parliament ITRE Committee (Industry, Research and Energy) was apparently not listening to the calls from Davos and instead ended up with “no opinion” on the important proposals required to support the carbon price delivered by the EU ETS, through the early implementation of the proposed Market Stability Reserve (MSR). The “no opinion” outcome was the result of not supporting the need to start the MSR early and use the 900 million backloaded allowances as a first fill, but then rejecting an alternative proposal on how the MSR should be taken forward. The only silver lining in this otherwise dim cloud is that the debate is about the proposed structure of the MSR, rather than whether an MSR should be present at all. Nevertheless, it is disappointing that some industry and business groups in Brussels did not seem aligned with the recognition that many of their member CEOs were giving to the carbon pricing discussion in Davos just a few hundred miles away.  The proposals for the MSR now have to go to the important ENVI (Environment) Committee in Parliament as well as to the Member States, where there is cause for optimism that they will adopt a position in favour of a stronger MSR reform.

One business group did give very strong support to the MSR proposals, the UK and EU based Corporate Leaders Group (CLG). This organisation started its life 10 years ago, which means it is also celebrating a landmark birthday along with the EU ETS. The CLG sits under the Cambridge University Institute for Sustainability Leadership, with the Prince of Wales as its patron. This is a group that has been talking about the need for a robust carbon price in the EU for many years and backing that talk up with strong advocacy in Brussels and various Member State capitals. Birthday celebrations were held in London to mark the occasion, with the Prince of Wales in attendance. The CLG was a step ahead of the World Bank with its own Carbon Price Communique back in 2012. While the World Bank effort has garnered greater support than the original CLG effort, it is worthy of recognition that the current push for this important instrument had its roots in the business community.

Despite the important talk in Brussels and Davos, the real talk on climate change came from a small theatre in Sloan Square, London. Climate change might seem like an odd subject for the London theatre scene, but nevertheless there it was. Chris Rapley, former head of the British Antarctic Survey, more recently the head of the Science Museum and now Professor of Climate Science at University College London, staged an engaging one man show to talk about the climate. This wasn’t the Inconvenient Truth with its high profile narrator and 200 odd PowerPoint slides, but more a fireside chat about paleo-history, the atmosphere, trace gases and the global heat balance. Here was a man who had spent the majority of his life studying this issue, from field measurements in Antarctica to computer analysis of satellite observations and his message was very clear; we are in trouble. There was no alarm, no hysteria and no predictions of an apocalypse, but just a softly spoken physicist explaining his job and describing with great clarity what he had learned over the course of some forty years of hard work. The audience was engrossed by the monologue and the gently changing backdrop of graphs and charts that seemed to envelop the speaker.

Chris Rapley 2071

This production is a unique approach to communicating the climate change issue to a new audience. It is small in scale, but it will get people thinking about the subject and hopefully discussing it in less partisan terms. The show, 2071, has now completed a second short run in London but may be destined for some other venues. I would highly recommend it.

Ten years of the EU ETS

This month the EU Emissions Trading System is ten years old – which in itself is quite an achievement as there were those at the start who said it wouldn’t last and any number of people over the years who have claimed that it doesn’t work, is broken and hasn’t delivered. Yet it stays with us, continues to be the bedrock of the EU policy framework to manage CO2 emissions and despite issues along the way, is now likely to receive a significant overhaul in time for 2020 when a new global deal on climate change should kick-in.


The ETS started life as a relatively short draft Directive (EU ETS Draft Directive 2001) back in 2001 and has expanded since then with appendages such as the linkage Directive and the 2008 Energy and Climate package (e.g. NER300) and will likely expand again with the proposed addition of the Market Stability Reserve. But the simple concept of a finite and declining pool of allowances being allocated, traded and then surrendered as CO2 is emitted has remained and despite various other issues over the years the ETS has done this consistently and almost faultlessly year in and year out. The mechanics of the system have never been a problem.

The one issue that has plagued the ETS has been the price – from some arguing it was too high at the start to many now concerned (including me) that the surplus of allowances and consequent low price has stopped all direct investment in emission reduction projects.

10 Years of the EU ETS

With investment as a goal, the heyday of the system was 2007-2008 when Phase II was underway and confidence was rising that a long term carbon price signal had emerged in Europe to guide decarbonisation efforts going forward. There was plenty of evidence that this was really the case. Fuel switching to gas was gathering pace, innovative projects were being considered in many industrial facilities and when the European Parliament agreed the NER300, some 20 CCS projects were initially tabled with the Commission for consideration. After all, at a CO2 price of ~€30 that meant ~€9 billion  of project funding and sufficient support for the operational cost of CCS. But as the price fell to a low of <€4 in April / May 2013, everything evaporated. The ETS became more of a compliance formality than an investment driver.

Last week I participated in a lunchtime seminar on the Future of the ETS held within the European Parliament in Strasbourg. Unlike some lunchtime events I have attended over the years, this one was packed, with standing room only. There is real and genuine interest amongst many MEPs to reform this instrument and return the CO2 price to its rightful position as the key market signal to drive change in the energy system. After all, there are plenty of good reasons to do this, starting with the most important reason of all – it’s the most economically effective way of doing the job.

The seminar focussed primarily on the proposed Market Stability Reserve (MSR), which is an intended pool of allowances that can be drawn on in the event of excessive tightness in the allowance supply / demand balance or added to when a surplus prevails. The conceptual design of this mechanism now seems to be largely agreed, but the operating parameters are still being negotiated between Member States. Most importantly is the question of a “first fill” of allowances and the intended start date of the process. Given the significant surplus that now exists, it makes sense to do the “first fill” with the 900 million allowances withheld from auctioning under the backloading initiative and to start the MSR much earlier than 2021 (i.e. 2017) so that it can continue to absorb the current overhang.

Recalibrating the EU ETS and having it fit for purpose as other countries implement their UNFCCC INDCs (Intended Nationally Determined Contributions) to also reduce emissions will offer the EU a true competitive advantage in a challenging global economy. It will allow the EU to achieve similar or even greater reductions than others, but at lower cost.