EU Emissions Trading System (EU ETS): Rationale, outcomes and ethics

1. ETS: What is it?

2. ETS: Why should it work?

3. ETS: Is it working?

4. ETS: Is it ethical?

5. Reforming the ETS

1. EU ETS: What is it?

Vehicle for realising EU’s Kyoto commitments (-8% CO2 on 1990 levels by end 2012)

Phases: I (2005-2007); II (2008-2012); III (2013-)

Users: EU, EU members (NAPs), and designated installations

Midstream variant of permit trading:

• 11,500 installations representing 50% of EU CO2 emissions

• Energy intense EU installations (eg 20MW+ output) eg oil refineries; iron, steel and cement plants; glass and paper factories; UK universities

• 24 countries: EU 27 minus Bulgaria, Malta, Romania

• Aviation (11% of EU’s total emissions), agriculture (10%) and Household/SMEs (17%) exempt

Allocation: currently free-of-charge and based on historical emissions (‘Grandfathering’)

Internal banking, borrowing and trading of EUAs; external purchase of permits via CDM / JI

Fines for non-compliance of €40 (Phase I) and €100 (Phase II)

EU ETS: Why should it work?• Least cost mitigation through incentives

• Alternative to (i) command-and-control and (ii) carbon taxes– Solves capability / responsibility conundrum

– Reduced enforcement costs

– Avoids unpopularity of taxes, targets and other direct regulation

– Cheapest reductions first (price effects)

– Reduced compliance costs

• Positive experience from use in other environmental commons problems: (i) CFCs; (ii) acid rain (iii) fishing

• Part of a multi-strand approach (eg exempted sectors)

• Estimated reduction in mitigation costs per annum (in 2004 €) from €6.8billion → €2.9billion

EU ETS: Is it working?• Size of market: €28 billion traded in 2007 (1.6 billion tonnes of CO2 =

70% of global carbon market). 2008 market ≈ €38

• Initial outcomes– Resulted in circa 20m tonne CO2 reduction on BaU baseline since 2007– But EU 25 emissions up 1.9% (UK + 5.8%) 2005-2007 – Kyoto 39 emissions up 2.3% 2000-2006

• Efficacy depends on permit shortfall but NAPs in Phases I + II distort market by allocating excess permits thereby (i) creating multibillion € windfalls for energy companies and (ii) suppressing EUA price.

• Volatility: the price of EUAs has moved wildly (and mostly downwards): €30 → €16 since July 2008 (see graph) which…

– Discourages investment in new energy technologies (CCD)– Makes it harder for business to plan or implement energy strategy

• Key sectors excluded (aviation; other transport; agriculture) and complementary regulation has failed

• Demand destruction post-banking crisis (Mittal eg) has depressed EUA prices and thereby pollution cost

EU ETS: Is it ethical?1. Distributive equity:

Overall costs; Net donors; Net recipients

2. Fit with adaptation measures

3. Procedural justice

4. Corrosion of environmental responsibility

5. Inappropriate commodification

6. Unanticipated outcomes Environmental ethos; of other values

Reforming the EU ETS:

• Fully Upstream or Downstream

• Extend the scheme to all relevant polluters

• Auctions not free allocation: recycle

revebues to renewables and adaptation

• Naming and shaming

• Hoarding and purchase limits

Historical Volatility of EUA price

Recent Volatility of EUA price