WWF Climate & Energy Blog

Do’s and don’ts from the EU Emission Trading System

By Sam Van den plas, Climate Policy Officer at WWF European Policy Office

Over more than a decade, WWF has been strongly engaged to ensure that the European Union puts a proper price on carbon pollution. The market-based climate policy instrument covering about half of the EU’s carbon pollution is the EU Emissions Trading System, and it has been operating since 2005. So, what have we learned the past 10 years?
1. Carbon markets have a public benefit aim, and have to be managed as such. It’s crucial to keep in mind this legislation was created with the explicit aim to reduce greenhouse gas emissions to levels “scientifically necessary to avoid dangerous climate change”. However, both the original 2003 legislation and the 2009 reforms left significant inadequacies that are blindingly obvious for any observer; nevertheless, many have encouraged policymakers to stand back and ‘let the market run the market’, as though this was the end unto itself. This attitude has complicated and delayed several rounds of ETS reform, of which the latest modest step in the right direction to establish a Market Stability Reserve was labelled by Marcin Korolec, Polish State Secretary for Climate Policy, as “blind artificial push for high CO2 price” and a defeat for “predictability and market”.

2. Give a hand, lose an arm. The EU ETS rules cater a host of exemptions to the carbon price signal. Virtually all energy-intensive industries (e.g. steel, cement, and chemicals) receive free pollution permits. In addition, electro-intensive industries can be compensated by EU member states for their increased electricity costs. Finally, in about 10 EU countries the power sector may also be granted an exemption to the general principle of auctioning of ETS pollution permits. The result currently represents a net transfer of wealth of roughly €10 billion annually from taxpayers to the EU’s largest polluters. These untargeted and ineffective exemptions will need to be drastically reduced after 2020, yet irresponsible industry stakeholders continue to seek safeguards for their own short-term economic profit to the detriment of society-wide benefits.

3. Make it matter in the real world. Architects of the EU ETS in the European Commission have been reluctant to take a broader view of the measures needed to tackle emissions from the sectors the ETS covers. In their view, and contrary to both experience and research, the ETS’ problems will sort themselves out given enough patience. They are like guides on a hiking trail full of switchbacks who keep saying we’ll reach the summit if we manage to get around the next bend, only to find that there’s yet another ascent. They are reluctant to recognise that their favoured policy needs both effective reforms and reinforcement from flanking measures like targeted taxation or an emissions performance standard (EPS). Recently the World Bank confirmed that carbon pricing is “not enough on its own without complementary policies”. Agreeing the 2030 policy package provides an excellent opportunity for consideration of such options.

The future will tell if the EU ETS can become more than the paper tiger it currently is. The recently agreed ETS Market Stability Reserve will function as a purgatory for the surplus of credits on the market and ultimately needs to serve to get rid permanently of the billions of tonnes of excess pollution permits sloshing around. Finally, carbon pricing in the EU has great potential to contribute financially to further climate policies both domestically and internationally. The time is ripe for large- scale smart earmarking of ETS auctioning revenues in order to create a virtuous cycle where pollution pricing actively funds additional emission reductions. This would actively mainstream climate policy into industrial and development policy to build a cleaner, more innovative and fairer future for all.

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