This blog is lengthy, but totally worth reading to the bottom!
Greenhouse gas emissions in the European Union are falling faster than anyone expected, and the EU Emissions Trading Scheme continues to teach the world about how a carbon market really works. There are rumblings that it could even be time to tighten the cap and launch the continent towards a schedule of even deeper GHG reductions.
In 2009, GHGs from large emitters in Europe’s heavy industry and power sector fell by 11%, following on from a 6% reduction in 2008. Over 10,000 heavy industrial emitters and electricity generators are covered by the Emissions Trading Scheme (ETS), a central piece of policy architecture enabling continent-wide reductions. The cut is partly attributed to a fall in industrial output and commercial activity due to the recession, but is also a result of industry’s investments in carbon-saving equipment and improved efficiency. Industry’s emissions fell by 18% while the power sector’s fell by only 8%. That left industry with about 30% more permits than it needed, representing nearly €2.4 billion (C$3.2 billion) at recent carbon market prices, but left the power sector’s emissions higher than allowed.
These greenhouse gas figures leave Europe with a range of options. They are already more than half way to their goal of a 20% cut in emissions by 2020, and still have a full decade to go.
Some are suggesting that Europe tighten its caps to minimize continuous over-allocation and avoid slumping carbon prices. Moving from a 20% cut to something like a 30% cut by 2020 would achieve this. Tougher targets could also represent a “concessionary” carrot up the sleeve of European negotiators as they press for more aggressive global action at December’s UN Climate Change Conference.
Critics point out that tightening caps following a recession could slow Europe’s return to growth. It could also be used as fodder for industrialists to press for quid pro quo treatment by demanding looser caps during economic boom times. However, proponents of cap tightening suggest that it will catalyze greener expansion when economic growth returns, putting Europe in an even more competitive global position. Additionally, cap tightening will continue to incent green investments and continued efficiency improvements. As it stands, the financial incentive to develop and invest in more advanced GHG controls is dwindling with a glut of permits in the market. Tightening the cap will keep the cost of permits high enough to encourage continued green R&D, commercialization, and investment. Tighter caps might even give further credence to those seeking protectionist trade policies through import tariffs on goods from countries with less stringent GHG rules. The wider the carbon disparity between Europe’s products and, say, China’s, the more reasonable a border adjustment on carbon-intense goods appears. Moreover, proponents assert that the whole point of the EU ETS is to achieve an environmental outcome, specifically GHG reductions, and tightening the cap would accelerate that agenda.
The European experience continues to offer insights to other regions looking at implementing a cap-and-trade system. Firstly, despite protestations from industry, it seems that achieving GHG reductions from this sector might be easier and less expensive than initially forecast, as is evidenced by a significant and continuous over-allocation of permits. It should be noted that Europe has put substantial time and resources into complementary policies and programs that facilitate low carbon industrial technology transition, and that the recession accounts for a portion of decreased emissions. Nevertheless, significant industrial reductions are possible.
Conversely, the power sector has struggled to keep pace with scheduled emissions reductions although the sector’s emissions continue to fall. Lessons could be drawn from countries like Germany, Denmark, Spain and the UK. Their policies and programs have shown continental leadership through large increases in renewable power generation, but differences in each country’s approach offer evaluative lessons to other countries on efficacy and cost.
By Jeff Beyer, .(JavaScript must be enabled to view this email address)
