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

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Presentation transcript:

EU Emissions Trading System (EU ETS): Rationale, outcomes and ethics ETS: What is it? ETS: Why should it work? ETS: Is it working? ETS: Is it ethical? 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? Distributive equity: Overall costs; Net donors; Net recipients Fit with adaptation measures Procedural justice Corrosion of environmental responsibility 5. Inappropriate commodification 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