European Union Emission Trading Scheme - Views On The EU ETS

Views On The EU ETS

Different people and organizations have responded differently to the EU ETS. Mr Anne Theo Seinen, of the EC's Directorate-General for the Environment, described Phase I as a "learning phase", where, for example, the infrastructure and institutions for the ETS were set up (UK Parliament, 2009). In his view, the carbon price in Phase I had resulted in some abatement. Seinen also commented that the EU ETS needed to be supported by other policies for technology and renewable energy. According to CCC (2008, p. 155), technology policy is necessary to overcome market failures associated with delivering low-carbon technologies, e.g., by supporting research and development.

The World Wildlife Fund (2009) commented that there was no indication that the EU ETS had influenced longer-term investment decisions. In their view, the Phase III scheme brought about significant improvements, but still suffered from major weaknesses. Jones et al. (2008, p. 24) suggested that the EU ETS needed further reform to achieve its potential.

Criticisms

The EU ETS has been criticized for several failings, including: over-allocation, windfall profits, price volatility, and in general for failing to meet its goals. Proponents argue, however, that Phase I of the EU ETS (2005–2007) was a "learning phase" designed primarily to establish baselines and create the infrastructure for a carbon market, not to achieve significant reductions.

In addition, the EU ETS has been criticized as having caused a disruptive spike in energy prices. Defenders of the scheme say that this spike did not correlate with the price of permits, and in fact the largest price increase occurred at a time (Mar–Dec 2007) when the cost of permits was negligible.

Over-allocation

There was an oversupply of emissions allowances for EU ETS Phase I. This drove the carbon price down to zero in 2007 (CCC, 2008, p. 140). This oversupply reflects the difficulty in predicting future emissions which is necessary in setting a cap (Carbon Trust, 2009). Given poor data about emissions baselines, inherent uncertainty of emissions forecasts, and the very modest reduction goals of the Phase I cap (1–2% across the EU), it was entirely expected that the cap might be set too high.

This problem naturally diminishes as the cap tightens. The EU's Phase II cap is more than 6% below 2005 levels, much stronger than Phase I, and readily distinguishable from business-as-usual emissions levels.

Over-allocation does not imply that no abatement occurred. Even with over-allocation, there was theoretically a price on carbon, (except for installations that received hundreds of thousands of free allowances. For some installations, the price had a some effect on emitters' behavior. Verified emissions in 2005 were 3–4% below projected emissions, and analysis suggests that at least part of that reduction was due to the EU ETS.

In September 2012 Thomson Reuters Point Carbon calculated that the first Kyoto Protocol commitment period had been oversupplied by about 13 billion tonnes (13.1 Gt) of CO2 and that the second commitment period (2013-1020) was likely to start with a surplus of Assigned Amount Units (AAUs).

Windfall profits

According to Newbery (2009), the price of EUAs was passed fully in the final price of electricity. The free allocation of permits was cashed in at the EUA price by fossil generators, resulting in a "massive windfall gain". Newbery (2009) wrote that " is no case for repeating such a willful misuse of the value of a common property resource that should be owned by the country". In the view of 4CMR (2009), all permits in the EU ETS should be auctioned. This would avoid possible windfall profits in all sectors.

Price volatility

The price of emissions permits tripled in the first six months of Phase I, collapsed by half in a one-week period in 2006, and declined to zero over the next twelve months. Such movements and the implied volatility raise questions about the viability of this trading system to provide stable incentives to emitters.

This criticism has face validity. In future phases, measures such as banking of allowances and price floors may be used to mitigate volatility. However, it's important to note that considerable volatility is expected of this type of market, and the volatility seen is quite in line with that of energy commodities generally. Nonetheless, producers and consumers in those markets respond rationally and effectively to price signals.

Newbery (2009) commented that the EU ETS was not delivering the stable carbon price necessary for long-term, low-carbon investment decisions. He suggested that efforts should be made to stabilize carbon price, e.g., by having a price ceiling and a price floor.

Crime

In 2009 Europol informed that 90% market volume of emissions traded in some countries could be result of tax fraud, more specifically missing trader fraud, costing governments more than 5 billion euro. German prosecutors confirmed in March 2011 that value-added-tax fraud in the trade of carbon-dioxide emissions has deprived the German state of about €850 million ($1.19 billion). In December 2011 a German court sentenced six people to jail terms of between three years and seven years and 10 months in a trial involving evasion of taxes on carbon permits. A French court sentenced five people to one to five years in jail, and to pay massive fines for evading tax through carbon trading. In the UK a first trial over VAT fraud in the carbon market is put on track to start in February 2012.

Cyber fraudsters have also attacked the EU ETS with a "phishing" scam which cost one company €1.5 million. In response to this, the EU has revised the ETS rules to combat crime.