European Union Emissions Trading System

This article is part of the Climate project of Spinwatch.

The EU Emissions Trading System (EU ETS) is the world's largest emissions trading scheme. It's first phase was launched in 2005, under the carbon trading rules of the Kyoto protocol, and the second phase began in 2008 (and will last until 2012).

Critiques

Over allocating

The first phase of the EU ETS was particularly critiqued as being almost totally ineffective and unambitious, as the allowed allocations to emit were above the actual level of 2005 emissions, and resulted in some European countries increasing emissions by up to 28% between 2005 and 2007. Overall by 2008 the first phase has resulted in a 1.9% emissions increase in EU member states, according to the EU itself.

Overall the Kyoto protocol gives the European Union formal and tradable rights to emit 92 per cent of their 1990 levels in 2012. Some other countries were able to negotiate exemptions- for example Japan and Canada get 94 per cent, Russia 100 per cent, Norway 101 per cent and Iceland 110 per cent.

Free credits for biggest polluters

In an attempt to placate industry and get it on board, or to rephrase this, due to the lobbying power of energy intensive industry in the UK- free carbon allocations have been handed out to some of the most polluting sectors of industry, who arguably should be under most pressure to deeply cut their emissions. The effect of this is not only to undermine the purpose of a carbon 'cap', but also to disadvantage smaller businesses who must work to achieve targets without these freebies.

Larry Lohman claims:

Under the EU Emissions Trading System, the UK government alone hands out free, transferable global carbon dump assets worth around €4 billion yearly (at June 2006 prices) to approximately a thousand installations responsible for around 46 per cent of the country’s emissions. Saleable rights to emit 145.3 million tonnes of carbon dioxide per year were given out to power generators, 23.3 million tonnes to iron and steel manufacturers, and so forth.

Windfall Profits for energy companies

Despite receiving free allocations for carbon emissions, energy companies have been able to pass much of the costs of compliance with the cap and trade system on to their customers in price rises.

As Garth Edwards of Shell admits, the ‘opportunity cost of allowances is incorporated into the power price in countries with liberalised energy markets.... The largely free allocation of allowances means that power generators receive a windfall profit since their compliance costs are far less than their revenue increase’81 (from increased consumer prices).

Essentially this means that 'Costs of buying extra pollution permits are being passed on to consumers without any incentives for systemic change being created, generating new profits for utilities and other corporations.'

According to Lohmann:

• The big six UK electricity generators are getting around $ 1.2 billion per year in windfall profits from the EU ETS – even more than the GBP 500 million per year the UK Parliament’s Environmental Audit Committee had earlier estimated. None of this ‘valuable income on their balance sheets’ need be spent on a structural transition away from fossil fuels. ‘A combination of free allocation to power stations and full pass-through of marginal costs to consumers has led to a massive increase in the electricity industry’s profitability,’ consultants IPA Energy noted recently.
• In the UK, oil companies BP, Esso and Shell have made millions of pounds by selling off surplus free EU ETS allowances, while National Health Service hospitals have had to pay tens of thousands of pounds to buy extra allowances.
• In Germany, where power prices rose from €30 to €47 per megawatt-hour from 2005 to 2006, heavily-polluting power companies are being accused of profiteering off carbon trading. Major utility

RWE is alone said to have made €1.8 billion in windfall profits in one year by adding the current market value of the EU allowances it had received for free to its customers’ bills.

• In Belgium, France and the Netherlands, some 40 to 70 per cent of the cost of freely-allocated EU ETS allowances is passed through to large and small consumers. Contrary to the stated objective of emissions trading, the system is stimulating investments in carbon dioxide-intensive power plants, according to the Energy Research Centre of the Netherlands.

Others have argued that this criticism is partly misleading as some of the price rises have in fact been due to external factors in the energy market such as price of oil, coal and gas.

Price volatility

The unambitious cap and the existence of surplus allowances for emissions led to the price of carbon crashing by half, then reducing to zero during 2006 and fluctuating considerably since. This volatility has prevented significant investment in the already faulty carbon markets, and affects the potential for trading and offsetting. Hence the pressure of carbon trading firms and companies who seek to profit from the scheme (which now include oil giants and other energy intensive industries), for a strong cap on emissions which would help fix carbon price.

However, it is also noted that a carbon market will be inherently volatile due to its relationship with energy prices, weather and political factors. In addition, companies who are pressuring for a firm cap are also pushing for more free allowances under the second phase, which will further increase market instability.

EU ETS open to fraud

Europol has identified that up to 90% of carbon emissions trading in some countries could be result of tax fraud, costing governments more than 5 billion euro.