The EU must weigh the effects of other policies on the ETS to avoid costly duplication, business group IETA said on Monday, after finding some of its energy-related measures could conflict with the bloc’s carbon market and cut allowance demand by an additional 1.1 billion tonnes by 2020.

IETA found that despite being designed to operate alongside the EU ETS, the 28-nation bloc’s Renewable Energy Directive, Energy Efficiency Directive and the Eco-design Directive could cut EUA demand more than what was originally foreseen.

Since those policies were introduced, EU lawmakers have only agreed to temporarily remove 900 million excess EUAs from the market via backloading, with less than half of those still to be withheld from government auctions.

“The EU ETS is the instrument of choice of EU regulators and businesses to reduce GHG emissions. To ensure efficient regulation, it is important to avoid policies that conflict with each other’s objectives,” IETA said in a report.

The lobby group said emission reductions made outside of the ETS were far more expensive for European governments, citing as an example German CO2 abatement costs through wind power estimated at between €56.60 and €168/tonne. That is exponentially higher than EUA prices, which have ranged from below €3 before backloading was agreed to current levels of €7.70.

But IETA admitted other policies may be necessary to ensure wider objectives such as energy security or reducing local pollutants.

It called for regulators to check such potential overlaps transparently, both before policies are introduced and every five years afterwards.

MSR SOLUTION?

Europe’s top climate official Jos Delbeke said last month that the MSR would manage the carbon price impact of complementary policies, but IETA doubted the measure is sufficient and could even relegate the ETS to a backstop role.

“The MSR will not solve the problem of overlapping policies, but it can go a long way to address the current consequences … However, there is a risk that the MSR could lead to the EU ETS becoming a residual instrument by adjusting itself in the face of other climate policies, which means that a less cost-effective approach will be adopted.”

IETA’s full position paper, Overlapping Policies with the EU ETS, includes a breakdown of the effects of several policies on the market, including national measures.

By Ben Garside – ben@carbon-pulse.com

Not yet signed up to CP Daily? Subscribe to our free newsletter here