Emissions Trading

Tug of War Over Carbon Market Reform

RWE-Kraftwerk Niederaußem
The number of pollution permits needs to go down but big industry needs to stay in Europe, many ministers agree. Source: Oliver Berg/DPA

It’s a tough balancing act.

Heads of E.U. environment ministries are in Brussels discussing changes to its cap-and-trade emissions permit system to ensure that regulation doesn’t push big industry abroad on the one hand, but drives emission cuts to speed up the transition to a green economy on the other.

Seen as the cornerstone of E.U. efforts to tackle climate change, the emissions-trading system is suffering from a gigantic oversupply of pollution permits.

“The far too large surplus of permits must be reduced to create incentives for investment in climate protection,” German Environment Minister Barbara Hendricks told the Rheinische Post newspaper ahead of talks with her E.U. colleagues.

But in the same breadth, the minister warned of even stricter regulations that could spur big industry to relocate to countries with laxer climate protection rules.

“We need our industry to stay in Europe,” she said, adding that climate protection isn’t served when companies leave the region to “produce as much if not more carbon dioxide emissions” in countries with lower environmental standards.

“We need our industry to stay in Europe.”

Barbara Hendricks, Environment Minister

Europe introduced its emissions-trading system in 2005. It is the world’s first major carbon market and remains the biggest today, regulating emissions of about 11,000 industrial and power companies.

Under the system, a cap is fixed and companies buy permits allowing them to emit a certain share of carbon dioxide into the atmosphere. Firms that exceed their individual limit are able to buy unused permits from others that have taken steps to cut their emissions.

In theory, the market-based approach should drive down the total number of permits in circulation, making them more expensive. And when the price of a permit rises, the logic goes, the incentive grows for a company to clean up its act and sell permits it doesn’t need.

That’s the theory. But experts say the reality is a highly oversupplied market that is undermining European efforts to curb global warming. And E.U. nations are divided on ways to correct it.

Barbara Hendricks
German Environment Minister Barbara Hendricks sees plenty of ways to reform the E.U. emissions trading system. Source: Marius Becker/DPA

According to Wendel Trio from the Climate Action Network Europe, the oversupply has led to permit prices hovering at around €5 ($5.3) per ton of carbon dioxide. He argues they need to be raised to at least €40 to drive emission cuts.

A key element of the emissions-trading system reform is the so-called market stability reserve.  The MSR, as it is known by its acronym, is a bank of sorts for temporarily storing surplus allowances after 2019.

In addition to the MSR, the ministers are debating whether to permanently cancel around 800 million pollution permits from the reserve, to give unallocated permits an expiry data and to allow more ambitious E.U. countries to unilaterally cancel oversupplied permits.

Sweden and France are leading the drive to prop up carbon prices by doubling the rate by which the MSR soaks up excess allowances. The two countries are also pushing for a mechanism for canceling surplus permits after five years.

“The MSR has to be strengthened; we support that,” Jochen Flasbarth, German state secretary for the environment, told journalists ahead of Tuesday’s meetings.

Last week, the European Parliament adopted a draft reform of the emissions-trading system. Now the environment ministers need a common position before beginning talks with the parliament and the European Commission.

An agreement on reforming the carbon market would be the first major piece of climate legislation from the European Union since it ratified the Paris agreement on global warming at the end of 2015.

John Blau is a senior editor with Handelsblatt Global. To contact the author: blau@handelsblatt.com

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