Lack of Long-Term Carbon Pricing Places EU ETS and Climate Change Efforts at Risk
European climate change policies have thus far failed to deliver the planned reduction in carbon dioxide emissions. The free market European Union Emission Trading Scheme bears the brunt of the blame for this failure, having been unsuccessful in delivering a credible and long-term carbon price. Read more about Carbon Capture and Storage (CCS) – Current Situation and Future Potential
The scientific evidence for climate change is increasingly abundant and irrefutable, yet policy responses have failed to divert emissions from their path of rapid growth. The biggest, most relevant disconnect between science and policy comes in the form of the EU Emission Trading Scheme (EU ETS), Europe’s flagship policy instrument in the fight against climate change.
The scheme was originally designed to create and underpin an international carbon price, albeit indirectly, through a free market mechanism. In practice, its unconstrained pricing format has led to highly volatile and inefficient carbon prices, which have done little to reassure the investment community or accurately represent the true social cost of carbon.
Eventually, over-allocation of free carbon credits led to increased electricity prices, sub-optimal carbon abatement and allowed the largest polluters to make windfall profits. Simply put, the scheme has thus far failed the credibility test and has cast a shadow over the wider European climate change policy, causing widespread political collateral damage.
Carbon Capture and Storage (CCS) - Current Situation and Future Potential
Introducing high and low pricing caps to the existing EU ETS scheme would have had many economic, political and practical advantages other than delivering a sustainable carbon price. Nevertheless, in December 2008, the EU chose to extend the scheme and deepen its sphere of activity.
Price caps would have had the benefit of eliminating spikes and wild volatility in the price of carbon, not to mention the political repercussions associated with both. A carbon scheme with a floor and ceiling has the benefit of providing the investment community with much-needed sustainable and credible pricing signals over the required investment horizons, while changing consumer attitudes for the long term.
Price caps also have the benefit of doing away with the uncertainty surrounding the allocated quantity of new carbon emission allowances and the associated price level ambiguity. The low watermark would act as a baseline for carbon-efficient technologies, while the high watermark would tackle problems surrounding carbon leakage and public perceptions. In tandem, they would ensure that carbon pricing does not deviate too far from the true social cost of carbon.
The EU ETS has many discernible conceptual and operational flaws, yet the fact that it is operational and well established provides a framework for the wider international community to tackle climate change. The scheme’s success over Phase II, Phase III and beyond is currently far from assured, particularly as it evolves to include new countries. Indeed, the scheme would be more credible, efficient and robust if redesigned in such a way as to insure that the price did not collapse or breach acceptable levels.
In their current embryonic state, it is unlikely that carbon markets elsewhere in the world will help to overcome these problems. Europe would be wise to introduce high and low price caps now or risk further damaging the scheme’s fragile credibility by rushing through price stabilizing measures after the fait accompli.
Read more about Carbon Capture and Storage (CCS) – Current Situation and Future Potential
