Prospects for European Trading Scheme (ETS) in the light of Economic Crisis

  • 26 March 2012
  • Magdalena Woźniewska

European Trading Scheme had been launched in 2005. It is based on the  principle of  the EU "cap and trade" mechanism. The basic idea of the mechanism is that there is a "cap" or limit of the total amount of certain greenhouse gases that can be emitted by the companies described in the European directives. Within such a limit, companies receive emission allowances which they can sell to or buy from one another as needed.

Companies covered by the ETS system need to prove they have used attributed level of the allowances for the GHG emissions. If they exceed the limits, they need to pay heavy fines : 100 Euro per one tone of additional emitted carbon dioxide It is important to remember that the system is built upon the principle that the company exceeding agreed level of emissions need to pay the fine and to buy additional allowances to further  emissions.

If companies covered by the ETS managed to reduce their GHG emissions, they are allowed either to save them for the future needs or sell them to other market players, which  needs to buy additional level of allowances. The objective of the ETS  is to ensure the overall reduction of emissions by 21 % in 2020 in comparison to 2005. The ETS now operates in 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway). It covers CO2 emissions from installations such as power stations, combustion plants, oil refineries and iron and steel works. Since the January 2012 airlines will join the scheme. It will be the expanded to the  heavy industry, emitting the highest level of carbon dioxide such as petrochemicals  and aluminium industries.

Each EU Member States was supposed to publish the National Allocation Plans (NAPs) in which they needed to define the total quantity of greenhouse gas emission allowances that Member States grant to their companies in the first (2005-2007) and the second (2008-2012) trading periods. The EU Member States were also obliged to publish the list of  companies, covered by the EU ETS. On the 1st of January 2013 the ETS will enter in its operating phase : the National Allocation Plans  are to be abolished, and level of allocations are to be established on the community level. All players covered by the ETS will be obliged to buy the allowances for GHG emissions on special auctions, organized by the European Commision.

Half of the revenues from the allowance for the GHG emissions’ auctions shall be assigned to the investment in green technologies, another half will strengthen national budgets of the EU’s Member State.  The ETS is welcomed enthusiastically by countries hoping  to receive high profits from selling the GHG emissions’ allowances. Experts differ as far as  to reach the agreement which country can be the biggest beneficent of the system as there are many variables, which must be taken into consideration.  Poland, for example, may take advantage of the ETS, even though  its economy is heavily coal dependant. Limits for the carbon dioxide emissions were established on the basis of the 1990 level of the emissions and  since  that time Polish economy passed through  transformation process. Due to that the industrial production in Poland decreased  and so did the GHG emissions. As a result Poland  may gain the opportunity to sell the emissions’  allowances to the other ETS players and make a profit  of the system.

The EU ETS is the only system in the world, which implies the cooperation of  governments and private market players in order to reduce the GHG emissions and make and use the profits for green investments. The economic crisis caused the decrease of industrial production in the world and the reduction of the global GHG emissions. As a result the price of one tone of emitted  carbon dioxide is much lower than predicted by the ETS authors. It risks the  system will not work as  assumed :  the level of future revenues from carbon dioxide auctions  may be lower than  the ones predicted in 2005, once the system was created. In such a s case the ETS system fails to meet its objective, which is the reduction of GHG emissions by 21 percent in 2020 in comparison to 2005.

In January 2011, experts predicted that the price  of one tone of carbon dioxide  shall reach 30 Euro in  January 2012.  Due to the economic crisis this prognosis turned out to be wrong  : the price of one tone of carbon dioxide in  November 2011 was worth 6 Euro per tone on average. European Commission should make changes to the whole system in order to adapt the system to the new market reality. According to Commission’s officials the document with the proposals of the ETS’ reform is already prepared. There is an agreement  among experts and analysts agree that  the amendment of the ETS is absolutely crucial if the system is  to work and  contribute to the GHG reduction. 

One of the ETS  objectives is to encourage companies to invest in new energy technologies  such as Carbon Capture and Storage technology, which allows using coal in power generation  without emitting high amount of carbon dioxide  ( so CCS may be called “green” technology).  The power generation from the renewables is also treated as environmentally friendly technology.

Green technologies’ application in the large scale requires the cooperation of energy companies, the governments and international financial institutions. Their application is is costly and the energy companies need the government subsidies as well as special  funding from international financial institutions. Thanks to close cooperation of all stakeholders : energy companies, public administration and financial institutions, the investments in green technologies may be economically viable  for the energy companies and possible to realize.

The EU ETS system, even amended one, cannot be the however  unique mechanism for the EU to fight the climate change. It  should be accompanied with other solutions, aiming at the GHG emissions reduction. The EU efforts to reduce the carbon dioxide emissions shall also be the impulse for other countries of the world to initiate similar projects.  European Union alone is not able  to deal with the  global consequences of the climate change.  In order to  reduce the global level of GHG emissions,  the cooperation of the biggest world emitters is indispensable.  It is important that countries such as United States, Canada, People’s Republic of China, Brazil and Republic of South Africa agree to be a part of a new international agreement aiming at the  global GHG reduction.

The  17th COP Conference that took place in Durban in December 2011 did not bring the answer if the new Kyoto Protocol is to be created. The decision about preparing the new climate agreement shall be taken in the following years. The economic crisis  may  change the global policy towards the climate change. It has already influenced international community’s efforts to reduce the GHG emissions, as fighting the  economic crisis is treated by many governments as more important  than fighting the climate change. Some countries even decided to suspend their international commitments regarding the climate change temporarily, when the crisis started.  The COP 17 brings no new  international climate agreement and there is a risk  there will be no extension of Kyoto Protocol.  In such a  case the EU ETS remains the only binding international agreement aiming at the Green House Gas emissions’ reduction in order to fight climate change.

  • 26 March 2012
  • Magdalena Woźniewska