Comment on the shortening of EUA supply in the EU ETS
by Christopher Brandt, Climate Concept Foundation
Since a few months, the EU Comission is considering to reduce the allocation of EU Allowances (EUAs) – carbon credits made available to installations covered – in its climate policy flagship instrument, the European Emissions Trading Scheme (EU ETS). EUA prices have fallen significantly due to the economic crisis. A backdrop in industrial production has reduced energy demand which in turn curbed emissions. On first sight, this seems good news. Reduced emissions are good news for the environment. However, little has been invested in reducing the emissions intensity of European industries, because the incentive to do so has become insignificant due to the low carbon prices. So far, the EU ETS has not really delivered on what it set out to achieve.
The market for carbon certificates suitable for EU ETS compliance is oversupplied by far and prices are therefore set to remain low for the forseeable future. In order to revitalize the scheme, the EU Commission is deliberating an EUA supply reduction or, at least, shift the timing of the allocations to the later years of the EU ETS’ third market phase spanning the years 2013 to 2020.
Operators of industrial emission sources covered by the scheme oppose this “hampering with the market” declaring that such a move would harm the investment climate. They fear that if rules are changed retroactively their investments could become unprofitable.
The question whether this would be a surprising change of the rules can, however, also be regarded from a diffent perspective. Trading in EUAs has never been exclusively reserved to emitting industries covered by the EU ETS. For instance, the German Federal Environment Agency (Umweltbundesamt) recommends using compliance certificates – like EUAs – for voluntary carbon offsetting (rather than verified emission reductions commonly used for this purpose).
Legally, if organizations or individuals can acquire EUAs in spite of not being included in the scheme, it should be possible that some entity shortens the EUAs available by purchasing them without intending to use them for covering EU ETS relevant emissions.
Shortening EUA supply should also not compromize trust in the functionality of the carbon markets. This argument mainly applies in case the regulator adds EUAs and thus initiates a EUA value decrease. Shortening the market, however, will lead to EUA price increases making the assets held by operators more valuable. This would at least be economically advantageous to operators that have more certificates than needed for covering their prospective emissions.
Those who are short in spite of the economic downturn will miss out. However, they benefited from the reduced EUA demand beforehand being able to sell off surplus certificates in spite of not investing in new technology for reducing their emission intensity accordingly. Albeit the cap for each installation is set as an absolute target, the aim of the EU ETS has always been to trigger investment in emission reduction technology (and thus reduce emissions intensity of production).
As this has not happened to the degree initially planned for, so why should operators have justified reservations against an artificial shortening of the market, if this shortening just sets out to achieve the degree of modernization initially aimed for?