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EU Emissions Trading System (EU ETS): Rationale, outcomes and ethics

EU Emissions Trading System (EU ETS): Rationale, outcomes and ethics. ETS: What is it? ETS: Why should it work? ETS: Is it working? ETS: Is it ethical? Reforming the ETS. 1. EU ETS: What is it?. Vehicle for realising EU’s Kyoto commitments (-8% CO 2 on 1990 levels by end 2012)

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EU Emissions Trading System (EU ETS): Rationale, outcomes and ethics

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  1. EU Emissions Trading System (EU ETS): Rationale, outcomes and ethics • ETS: What is it? • ETS: Why should it work? • ETS: Is it working? • ETS: Is it ethical? • Reforming the ETS

  2. 1. EU ETS: What is it? Vehicle for realising EU’s Kyoto commitments (-8% CO2 on 1990 levels by end 2012) Phases: I (2005-2007); II (2008-2012); III (2013-) Users: EU, EU members (NAPs), and designated installations Midstream variant of permit trading: • 11,500 installations representing 50% of EU CO2 emissions • Energy intense EU installations (eg 20MW+ output) eg oil refineries; iron, steel and cement plants; glass and paper factories; UK universities • 24 countries: EU 27 minus Bulgaria, Malta, Romania • Aviation (11% of EU’s total emissions), agriculture (10%) and Household/SMEs (17%) exempt Allocation: currently free-of-charge and based on historical emissions (‘Grandfathering’) Internal banking, borrowing and trading of EUAs; external purchase of permits via CDM / JI Fines for non-compliance of €40 (Phase I) and €100 (Phase II)

  3. EU ETS: Why should it work? • Least cost mitigation through incentives • Alternative to (i) command-and-control and (ii) carbon taxes • Solves capability / responsibility conundrum • Reduced enforcement costs • Avoids unpopularity of taxes, targets and other direct regulation • Cheapest reductions first (price effects) • Reduced compliance costs • Positive experience from use in other environmental commons problems: (i) CFCs; (ii) acid rain (iii) fishing • Part of a multi-strand approach (eg exempted sectors) • Estimated reduction in mitigation costs per annum (in 2004 €) from €6.8billion → €2.9billion

  4. EU ETS: Is it working? • Size of market: €28 billion traded in 2007 (1.6 billion tonnes of CO2 = 70% of global carbon market). 2008 market ≈ €38 • Initial outcomes • Resulted in circa 20m tonne CO2 reduction on BaU baseline since 2007 • But EU 25 emissions up 1.9% (UK + 5.8%) 2005-2007 • Kyoto 39 emissions up 2.3% 2000-2006 • Efficacy depends on permit shortfall but NAPs in Phases I + II distort market by allocating excess permits thereby (i) creating multibillion € windfalls for energy companies and (ii) suppressing EUA price. • Volatility: the price of EUAs has moved wildly (and mostly downwards): €30 → €16 since July 2008 (see graph) which… • Discourages investment in new energy technologies (CCD) • Makes it harder for business to plan or implement energy strategy • Key sectors excluded (aviation; other transport; agriculture) and complementary regulation has failed • Demand destruction post-banking crisis (Mittal eg) has depressed EUA prices and thereby pollution cost

  5. EU ETS: Is it ethical? • Distributive equity: • Overall costs; Net donors; Net recipients • Fit with adaptation measures • Procedural justice • Corrosion of environmental responsibility 5. Inappropriate commodification • Unanticipated outcomes • Environmental ethos; of other values

  6. Reforming the EU ETS: • Fully Upstream or Downstream • Extend the scheme to all relevant polluters • Auctions not free allocation: recycle revebues to renewables and adaptation • Naming and shaming • Hoarding and purchase limits

  7. Historical Volatility of EUA price

  8. Recent Volatility of EUA price

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