EU must address overlapping policies to escape ETS’s “residual role” -EFET

Published 19:17 on January 19, 2016  /  Last updated at 10:13 on January 20, 2016  /  EMEA, EU ETS  /  No Comments

Post-2020 EU ETS reforms risk being ineffective unless regulators make drastic adjustments to address the impact of overlapping policies, argue the European Federation of Energy Traders (EFET).

Post-2020 EU ETS reforms risk being ineffective unless regulators make drastic adjustments to address the impact of overlapping policies, argue the European Federation of Energy Traders (EFET).

In a position paper published late Monday, the body claims that overlapping policies are a more critical matter for the EU ETS than the risk of carbon leakage that is currently dominating the policy debate.

They added that unless these issues are resolved, the market will maintain its current “residual role” in the decarbonisation of the 28-nation bloc’s economy.

“If the EU ETS is to regain a central role, it is crucial that the EU Commission ensure consistency between the EU ETS as a cap-and-trade system on one hand, and other climate policies (such as renewable energy, energy efficiency) on the other,” the group said.

Overlapping policies have been widely blamed for contributing to the collapse of EUA prices from above €30 in 2008 to below €3 in 2013, causing a 2 billion-permit surplus and forcing lawmakers to enact two supply curbing measures in Backloading and the MSR.

EFET’s paper is one of the most comprehensive responses to so far emerge from stakeholder groups to the European Commission’s post-2020 ETS reform proposal. The submissions are aimed at influencing EU lawmakers, who can make changes to the existing proposal as part of a legislative process expected to take at least a year.

EU member states have agreed that the ETS is the most cost-effective way to drive down the bloc’s emissions, but they have struggled to resist setting national policies amid differing abatement costs and varying levels of political and public pressures.

EFET has long supported a stronger ETS, believing it will help its primary objective of promoting pan-European energy trading via open, transparent and liquid wholesale markets.

‘UNDERSTATING’ RISK

The European Commission expects its proposal for post-2020 ETS reforms to push carbon prices up to €25 on average over the next decade, towards a level that today would be capable of driving emission cuts by incentivising big-emitting utilities to switch from burning coal to cleaner gas.

EFET said the proposal’s impact assessment risks not adequately addressing the overlapping policies through its assumption that Europe’s share of renewables and energy-saving measures will undershoot headline 2030 targets.

“This difference in the assessment’s assumptions would cause further carbon reductions outside the EU ETS in the 2021-2030 period than what the Impact Assessment foresaw. If not avoided, this continuous non-price related downward pressure on the EU ETS demand-side will prevent any market-based energy transition from taking place and will not allow the EU ETS to become ‘central to the EU decarbonising efforts’, as pledged by all [EU leaders at the Oct. 2014 European Council].”

While it is lawmakers that are now focused on the proposal, EFET focused on the Commission and urged the EU executive take at least three “no-regret” actions:

  1. In the coming months, re-evaluate the impact of overlapping policies on emissions savings. Then define in the current proposal rules to adjust the ETS cap in line with this impact, possibly in 2019 when the Commission is due to provide its first aggregate assessment of its wider Energy Union goals.
  2. Strengthen the governance framework of the Energy Union to ensure the ETS is “central”. “The framework should prioritise the removal of conflicting signals arising from a weak carbon price on the one hand, and uncoordinated national [renewables/energy efficiency] support schemes on the other,” EFET said.
  3. Increase the MSR’s maximum annual withholding of EUAs to 33% of surplus, up from the currently agreed 12%. EFET said this could be done under the already-agreed MSR review process, which is due within three years of the reserve’s 2019 start. “It may be that further instances of overlapping policies (specifically at the national level) may be somewhat unavoidable. We therefore believe that the ETS should be designed in order to withstand such potential ‘supply shocks’,” EFET added.

In addition, the association recommended the Commission consider creating guidelines for how any potentially overlapping policies could be installed, cutting future ETS trading phases to be five years in length, and setting ETS emissions caps on a “rolling” basis.

FACTFILE

  • In a July 2015 study, emissions trading lobby group IETA found that the impact of the EU Energy Efficiency and Renewable Energy Directives alone will lead to an additional reduction in EUA demand of more than 700 million tonnes of CO2 by 2020.
  • The EU’s 2020 renewables goal was factored into ETS modelling, but member states are outpacing that target on average, while the effect of the Energy Efficiency Directive was only partly considered when setting the ETS goals up to 2020.
  • In its position paper, EFET cited the EU’s decision to allow around 1.7 billion UN carbon credits to be used by emitters in the ETS up to 2020 as an additional overlapping policy.

By Ben Garside – ben@carbon-pulse.com

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