Dear ENVI Committee,
Next week you have to make an important decision on the future of the EU ETS. The Commission has proposed that 900 million allowances due to be auctioned at the beginning of this phase of the ETS be held back and returned to the market before the end of 2020. The objective is to remove a good portion of the allowance surplus that currently exists in the trading system and is putting extreme downward pressure on the resulting price of CO2 emissions. This isn’t a full solution to the problems that confront the trading system, but it is the only politically possible route forward that has been identified. It will provide the necessary breathing room for a more structural approach which must come over the next two years and which will cover the period through to 2030 and beyond.
The ETS was designed and implemented as the principal pricing mechanism to guide investment in power generation and industrial facilities across the EU such that long term CO2 reduction goals could be met at the lowest cost to society. Quite simply, it isn’t performing that role today. While Europe should be gradually shifting away from unmitigated coal and beginning to implement carbon capture and storage (CCS), coal consumption is on the rise and the CCS Demonstration Programme is on the brink of complete collapse. This is because the CO2 price in Europe today is effectively zero. The few Euros that an emissions allowance can command in the market is a reflection of future value, but even that is a cause for concern. At €4 today, this points to a price expectation in 2030 of €7, hardly an indication of a robust market based approach to managing emissions and introducing new energy technologies.
Many have argued that the market is working and delivering on the 2020 target. For this reason they have further stated that market intervention is not necessary. Unfortunately this is misguided and poorly informed thinking. While there is no doubt that annual compliance is functioning under the ETS and therefore the system will also force compliance in 2020, there is very clear evidence that longer term investment is not being guided by the ETS. Rather, investment is either not happening at all or is being driven by other factors and policies, some at EU level but many at Member State level as well. This is not leading the EU down a path of lowest cost emissions reduction, but is instead driving up energy costs in the EU. The very low price of CO2 in the EU does not represent low cost emission reduction opportunities being implemented, rather it is a very real symptom of a high energy cost pathway. This is important as it is not, or has ever been, the cost of CO2 that is impacting the competitiveness of EU industry. Even at previous levels of up to €30, in combination with the free allocation provisions for trade exposed industries, the CO2 price is a relatively benign factor.
The vote on backloading needs to be a “yes” vote. This signals the intention of the European Parliament to begin the process of restoration of the most cost effective approach to meeting Europe’s energy needs and reducing emissions over time. A “yes” vote won’t immediately restore the ETS to good health, but it is a start. Much work remains to be done. But following the advice of those who counsel for a “no” vote would mark the start of a very different pathway for meeting Europe’s energy needs – one that is less certain, more expensive and probably with much higher emissions over time.
Chief Climate Adviser, Royal Dutch Shell
Chairman, International Emissions Trading Association
As you have pointed out here previously, ongoing EU renewable energy programs and incentives are a major reason why the carbon allowance value is so low. Governments take money from individuals and corporations, spend it on renewables initiatives and then want to raise the cost of emissions allowances to take even more money from the same individuals and corporations.
The approach you advocate here is a “band-aid”, which would do nothing to solve the underlying problem. Two wrongs would not make a right in this case either. There is not much good to say about approaches which are simple, straightforward and wrong.
The current EU ETS price should be compared with the approx $100 per tonne of CO2 mean estimate of the damage caused by a tonne of CO2 going into the atmosphere today, as shown here http://www.jbs.cam.ac.uk/research/working_papers/2011/wp1105.pdf.
If the EU ETS can’t be fixed, we really need to argue for a strong and steadily increasing CO2 tax at something like this level.
Chris, I’m afraid that you are using some pretty ludicrous assumptions in your work. I guess that you want to base your work on IPCC “approved science”. But, you should make some “sense” check as well. Burning all fossil fuels would take us to atmosphere concentration of 584ppm assuming that the carbon uptake of land and ocean remains the same. I guess that you assume that this uptake will be actually decreasing. You can certainly assume whatever you want but it should be based on the real world. In the real world this decreasing carbon cycle wasn’t observed. Quite opposite. Also you are getting some ridiculous estimation for temperature increase – never been observed in the real world. The rest of assumptions are obviously literally on the thin ice.
After about 150 years of global warming (some of it coincident with CO2 increase) the experience is that this warming had actually economic benefits rather than costs. Now, for some reason you assume that this real world observation completely reverses in your model.
However, I can see one useful outcome of you work. If your model with your (out of real world) assumptions estimates CO2 cost of $100/t max it means that we can safely rule out any other scenarios assuming even higher CO2 costs as completely unfeasible 🙂
Obviously, it is just a model – sort of computer game. And there are different sort for games. There are arcades for kids and super realistic games for adults. It is your decision only which way you want to go. But, I guess you can still get the grant you need and run some few realistic scenarios with less ridiculous set of assumptions at the same time. Can you?
One thing is for sure. EU needs a lot of money to keep afloat. The only way the EU beurocrats seem to know is to collect more money via tax. Carbon tax is a perfect opportunity to pretend the tax for a noble and good reason is collected. I know that there are some guys who would like to get some share through ETS bypassing EU coffers. While it is a good plan I don’t think that it will work this time. It is too obvious and countries became too suspitious after the “green energy” mandates sucess/fiasco (the outcome depends on wheteher you are on money recieving or money loosing side). I understand why you send an “open letter”. But, in this case the “back channel” communication will have a bigger impact. The vote is a good opportunity to see how these channels work.
BTW Chris, if you ever want to have your model published in a decent quality journal you should perhaps perform hind casting for you model. It would definitely help to put your assumptions into the right context.