The EU pollution rights trading system frozen

Connie Hedegaard, Member of the EC in charge of Climate Action, gave a press conference following the 2011 compliance round-up on emissions trading. (EC Audiovisual Services)

The recent collapse of the European Union emissions trading system (EU-ETS) revealed the flimsy grounds on which the EU has built its policy against the climate change. The idea was to make polluting expensive but not much so. How thin were the foundations of this system started to clearly emerge, when the economic crisis knocked at Eurozone’s door. The slight fall of industrial production quickly created a surplus of rights to pollute and as a result their “price” took a deep dive. Towards the winter of 2012-2013, when, theoretically, the rights to pollute should become dearer due of the additional energy needed to warm up our cold Continent, their prices collapsed.

In view of that, EU Commissioner for Climate Action, Connie Hedegaard, couldn’t stand silent and had to do something to save whatever could be saves of the EU-ETS. On 24 January 2013, she issued a memo commenting on developments in the European carbon market. At this point, it must be noted that carbon prices are tightly bonded with the price of the “rights to pollute”, because this energy source is the most polluting. If the ETS prices fall, carbon prices follow suit.

The memo said: “On a day where the carbon price at some point went below €3 it must be clear to all that when the Commission warned that the ETS price could drop dramatically it was not a false warning but a real possibility”. As if it was not the system that proved false, leaving huge margins for the polluting energy industry to play with. Another proof that the ETS was falsely conceived from the beginning is that almost all the major plans for more energy production investments are currently based on polluting fuels, mainly carbon.

What is the EU-ETS

But let’s elaborate a bit more on this EU-ETS.  This is an artificially created market of rights to pollute,  constituting the basic tool of European Union’s policy to counter climate change. At the time of its conception around 2008, it was advertised as a key for reducing industrial greenhouse gas emissions cost-effectively. It is the first – and still by far the biggest – international system for trading greenhouse gas emission allowances, the EU-ETS covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines. However, the large margins to pollute initially accorded to the EU energy industry currently destroyed the system. The slightest reduction of production, cause by the present economic crisis, led to the collapse of polluting rights prices.

Unfortunately, as every major economic plan spanning a long way into the future, the ET-ETS was based on a series of assumption which turned out to be wrong. In the heart of those assumptions was the usual error that the prevailing conditions of the past, will continue to more or less shape the future. Planners being more mathematicians than political economists, tend to commit this kind or error. This kind of model building however, suits the politicians who want to be seen as caring for the future without even paying attention to the present.

The good days

On 23 January 2008 the then Member of the European Commission, responsible for the environment, Stavros Dimas, presented this grandiose EU-ETS project to save the planet. His basic remarks were as follows:

“On current trends, climate change will almost certainly be endangering the lives of millions of people and causing serious disruption to our economies within the lifetimes of many in this room today. Europe and the rest of the world have to act fast, and act boldly, if we are to prevent this catastrophe…Today’s package underlines the European Union’s determination to continue leading global action by example. It shows our partners around the world that making the deep reductions in greenhouse gas emissions that are necessary is fully compatible with continued economic growth and prosperity…

The Emissions Trading System, which we are proposing to strengthen and expand, is essential to achieving these cuts cost-effectively. The package will also cut the European Union’s oil and gas imports, increasing our energy independence and saving billions of euros each year “.

Time of truth

Everything turned to be wrong. Europe’s dependence on imported fossil fuels increases as it does the extraction and burning of carbon. The total collapse of the EU-ETS this winter however, urged the European Parliament to intervene. The Parliamentary Environment committee backed emissions trading fixing. This simply means that the trading and the market ideology is completely abandoned and we return to the good old arbitrary rules setting by the political authorities.

In more detail, yesterday Tuesday, the European Parliaments’ Environment Committee MEPs voted a freeze of the auction of pollution allowances. In order to make this more saleable they added that this is imperative to help boost green investments. Not a word for the structural faults of a system that only helped some politicians to re-elect during the past five years.

In short the MEPs decided the following amendment of the EU-ETS, which clearly put a tomb stone to the free trading system: {“In an approved amendment tabled by the S&D, ALDE, Greens/EFA and GUE/NGL groups, MEPs say the Commission “may, in exceptional circumstances” adapt the timing of auctions, provided an impact assessment shows the sectors concerned will not face “significant risk” of companies relocating outside the EU…”The Commission shall make no more than one such adaptation”, the text adds}.

There it goes this much-advertised EU-ETS that was conceived to save the entire world from the “greenhouse effect”.