Smoke alarm: EU shows carbon trading is not cutting emissions

WHEN THE MARKET IS NOT AS PROMISING AS SOME CLASSIC ECONOMIST WAS EXPECTING TO CUT CO2 EMISSIONS!
SAID JEAN-LUC ROUX

Some US states want their own 'cap and trade' scheme but the evidence is proving that permits are so generous they fail to curb industry

David Gow in Brussels
Tuesday April 3, 2007
Guardian

Brussels lambasted the US and Australia yesterday for their inaction in cutting carbon dioxide emissions and stressed Europe's leading role in the battle against global warming. "Only EU leadership can break this impasse on a global agreement [post-Kyoto] to overcome climate change," Stavros Dimas, the EU's environment commissioner, told scientists from the UN's intergovernmental panel on climate change. The body is due to publish a report this week in Brussels on the impact of global warming.
What Mr Dimas knew - but did not tell the scientists, apparently - is that the EU's programme for cutting carbon, its two-year-old emissions trading scheme (ETS), remains in disarray.

The Democrats, who are now the majority party in the US Congress, and California's Republican governor, Arnold Schwarzenegger, are drafting plans for an American version of the carbon "cap-and-trade" scheme.

However, preliminary data on the scheme's performance last year - its second year of operation - showed that 93%, or about 9,000 of the 10,000 heavy industrial plants covered by the EU's trading scheme, emitted less carbon than their quota of free permits. The resulting 1%-1.5% rise in emissions was not as great as in 2005 but the spot price of a tonne of carbon fell by about a quarter to €1 (68p), at one point collapsing to just 92 cents.

Only a handful of countries shored up the market by issuing fewer emissions quotas than industry wanted. These included: Britain - where Drax, Europe's biggest coal-fired power plant, emitted 5m tonnes more than its 15.5m tonnes permit - Denmark, Ireland, Italy and Spain. The trading mechanism is designed to create scarcity, forcing up the price of carbon and prompting industries such as steel and power generation to invest in cleaner, greener technologies, such as renewable, carbon-free energy and, eventually, carbon capture and storage. So far, it is manifestly not working as planned.

Debacle

Mr Dimas and his officials deliberately released the raw data early - without analysis or interpretation - to avoid last year's debacle, when premature release of national statistics brought a disorderly collapse of the market. This year the full, sifted figures will be released on May 15.

The 2005 data showed that industry emitted 66m tonnes less carbon than allowed, prompting allegations that, in Germany alone, the four big power producers had enjoyed windfall profits of up to €8bn by cashing in their excess free carbon permits. In Britain, despite the tighter cap, generators are estimated to have made £1bn.

In 2006, industry emitted about 30m tonnes less than permitted. German emissions rose 0.6% while overall EU emissions went up by 1%-1.5% because of resumed growth in the eurozone.

Mr Dimas's officials readily admit that the first phase of the scheme has been a botched experiment because of the generous over-allocation of permits. But they now insist that the second phase will be much more successful because of tighter controls on quotas. Many EU governments have significantly reduced the number of carbon permits they will grant to polluters. Poland has cut its permit total by 26% and Latvia and Lithuania by half.

Brussels believes that the second phase of the trading scheme is crucial because it coincides with the key stage of the Kyoto protocol from 2008 to 2012. Brussels is pressing the US, other developed countries and emerging economies to agree on a global emissions trading scheme to be introduced after 2012, at UN talks starting in Bali in December. The EU has endorsed a unilateral 20% cut in greenhouse gases by 2020 and wants the developed world to sign up to a 30% cut, with countries such as China and India joining in.

"The whole idea of the second phase is to squeeze allocations, push up the carbon price by creating scarcity and encourage companies to invest in future, green technologies," one of Mr Dimas's aides said, pointing to a forward price for carbon in 2008 at close to €17 a tonne. They are delighted that the squeeze on national carbon caps for this second phase has prompted squealing from several big companies.

Cemex, the Mexican cement producer which owns the UK's RMC, is suing the European commission over the British permit plan while US Steel is similarly taking legal action over the Slovakian allocation plan. Three German companies have also launched legal action in the European court of justice.

Mahi Sideridou, EU climate policy director at Greenpeace, said yesterday's data strengthened Mr Dimas's hand in ruling on the second phase of the trading scheme. "In the first phase the commission didn't have any data and governments could freely submit; now it can compare reality to how many permits are given out," she said, suggesting that the commissioner would be emboldened to revise the scheme in time for the second phase.

Mr Dimas wants to include civil aviation in the ETS by 2011 despite the threat of legal action from the US and others. He insisted that the original EU-15 countries were still on course to meet their Kyoto target of an 8% cut in greenhouse gas emissions by 2012, despite mounting signs that Europe is still falling woefully short of this goal on its policies. California, which said last week it planned to link its own ETS to the EU's with four other western US states, and Washington will undoubtedly need more persuasive evidence.

MORE : http://environment.guardian.co.uk/print/0,,329766627-121568,00.html