A two billion surplus of carbon allowances under the EU emissions trading system (ETS) threatens to depress low-carbon investment for at least a decade, and undermines the bloc's claim to be a global leader on climate change, according to a new position paper from Decc.
The report, UK Vision for phase IV of the EU ETS, says existing proposals to reform the ETS do not go far enough to correct the persistent oversupply of allowances and calls on the European commission to cancel an “ambitious volume” of allowances.
"The UK is asking for bold and comprehensive reforms to restore the ability of the EU ETS to drive cost-effective emission reduction and low-carbon investment," said the energy secretary, Ed Davey.
The ETS is the largest cap-and-trade scheme in the world and regulates about half of the EU’s CO2 emissions. But over-allocation of carbon allowances has led to a carbon price collapse, from around €30 per tonne in 2008 to around €6 now. The collapse in prices has made it cheaper for polluting industries to buy allowances instead of investing in low-carbon technologies, undermining the transition to a low-carbon economy which the scheme was set up to support.
Under its “backloading” arrangement, the commission has temporarily withdrawn 900 million carbon allowances from the current phase of the ETS, which it claims will restore the short-term balance in the European carbon market. But these allowances will be reintroduced in 2019-20 and the total allowances available in phase III will remain unchanged.
European commissioner for climate action, Connie Hedegaard, said in December 2013 when backloading was agreed that the measure would help stabilise the carbon market in the coming years, although she conceded that that the commission also had to tackle "more structural challenges".
Future proposals for reforming the system for phase IV, which starts in 2021, includes the introduction of a “market stability reserve” (MSR), which aims to address the structural imbalance between supply and demand. Under MSR, 12% of allowances will be removed if the surplus is larger than 833 million allowances, but would return 100 million allowances to the market if the surplus falls below 400 million.
The Decc report welcomes the MSR proposal, but says it will not correct the problem of oversupply in the system. The UK government has already cancelled 36 million surplus allowances from the UK allocation and wants the EU to take a similar approach. “The UK continues to call for cancellation of an ambitious volume of allowances to reduce the current surplus and help restore the balance between supply and demand,” states the Decc report.
The government’s proposal has been welcomed by carbon market think tank, Sandbag. Head of policy, Damien Morris, said: “A wide range of stakeholders share the government’s view. An increase in environmental ambition is urgently needed, and cancellation is the obvious way to achieve this.”
