EU has 12 months to save ETS

31st October 2014

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Iain Forsyth

Climate think-tank Sandbag predicts the EU emissions trading system (ETS) could be so over-supplied with allowances by 2020 that it will cease to be an effective tool to drive the decarbonisation of Europe's economy.

It says the European commission has 12 months to fix the system otherwise it will be time to scrap it and find a climate policy that works.

In its sixth annual report on the ETS, Sandbag says that the surplus is rising by 12.5 tonnes every second and that, if the commission fails to stem the rise, the surfeit will grow from 2.1 billion tonnes in 2013 to 4.5 billion by 2020.

The huge surpluses in the system have significantly weakened the incentive for ETS participants to invest in abatement measures, warns Sandbag. The commission is attempting to rein in the surplus by temporarily withholding the sale of 900,000 credits until 2019 in a move known as “backloading”.

However, Sandbag says it is already clear that this will fail to protect the ETS from the effects of structural oversupply. It acknowledges that the planned market stability reserve (MSR), which removes allowances from auction when the surplus is high and returns them when it is low, is a more sustainable solution to oversupply.

As the MSR does not start until 2021, Sandbag forecasts that the ETS market will be flooded in the interim with backloaded and other unused allowances. Sandbag also reports that 10 companies have, over the past six years, accrued nearly 22% of the entire ETS surplus – despite being responsible for barely 10% of emissions.

The top 10 includes three steel companies and five cement firms. The report says changes to the free allocation of allowances from 2013 have prevented the 10 companies expanding their surpluses further, and will lead to the surfeit owned by steel companies becoming exhausted by the late 2020s.

The surpluses owned by cement companies, however, will continue to rise, Sandbag forecasts. The surplus owned by Lafarge, for example, is expected to keep increasing until at least 2029.

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