Creating a global carbon market to save Europes emissions trading scheme
The EU’s emissions trading scheme (ETS) must grow to survive, according to policy and industry experts who met at thinktank Chatham House this morning. After a very bad week for the EU’s flagship climate policy, the focus has shifted to radical reform – including the possibility of creating a global carbon market.
Symbolic failure
The ETS is totemic in the world of carbon markets. It was the first large-scale scheme and is still the biggest – covering around 11,000 installations – and has served as the blueprint for subsequent schemes.
But it has been left it “in tatters” after the European Parliament rejected a measure intended to boost the carbon price, according to reports. MEPs on Tuesday voted against a plan to withhold 900 million permits from the market, which is suffering from huge oversupply. The blow sent the carbon price tumbling towards â?¬3 a tonne. The Economist said Europe’s failure to back the scheme showed a lack of confidence in the carbon market which would “reverberate round the world”.
But experts at today’s briefing say despite the setback and the ETS’s importance, it’s “not over” for carbon markets yet.
Autonomous development
One analyst pointed out that the “tombstone of the ETS has been paraded for several years” but that hasn’t stopped carbon markets developing around the world.
While Tuesday’s vote certainly was a “momentous decision”, he said the crisis was unlikely to spread beyond the EU ETS. This is because while the European carbon market had to learn by doing, other schemes learned from its mistakes.
For instance California’s carbon market made sure oversupply was impossible from the outset by asking companies to report their carbon emissions in advance of the first permit auction. That way, regulators knew how many permits to put into the system.
Meanwhile, Australia’s scheme has begun as a carbon tax, allowing the government to set a high price from the outset. This means the carbon price should start at an effective level when the scheme becomes a cap-and-trade market in 2015.
Australia’s scheme is set to link up to the EU ETS in 2015. One expert described the integration of the two schemes as a “prelude to a global market”.
And this could ultimately be the solution for the ETS, said the experts. Greater linkages between markets would make them more robust and harder to repeal – and a better design could be implemented from the outset.
Market confidence
But there are still a number of obstacles to overcome if a global carbon market is to become a reality. It’s going to be a big job to persuade businesses and the public that emissions trading schemes are worthwhile amid reports that the EU ETS is dead.
Other schemes are encountering problems too – Japan and South Korea both agreed to create carbon markets, but these have been delayed due to political objections.
The business lobby is also still blocking progress, said one expert. He argued it was currently too easy for companies to claim participating in regional schemes put them at an economic disadvantage. But a global market would undercut this argument, as all companies would have the same emissions costs.
Markets rely on confidence to function well. Concerns were voiced that support for the newer schemes could be undermined by the EU ETS’s perceived failure. So emphasising the benefits of taking part in cap and trade – from better air quality to increased energy security – is going to be important for the ETS to stay afloat and potentially lay the foundations for a global carbon market.