Rhein on Energy and Climate

In early April 2012 the C02 prices in the EU have fallen to an unprecedented low of only € 6.0/ton compared to expectations of at least € 20.0. This has raised new questions on the viability of the EU Emission Trading System(ETS). Energy experts are afraid the low prices fail to offer the necessary incentives for more investment in low-carbon energy; the Commission therefore reflects on measures how to boost the prices without damaging energy intensive industries and provoking extra “carbon leakage”.

The decline of carbon prices is due to three major factors:

  • stagnating energy demand;
  • free distribution of emission quotas;
  • improvements in energy efficiency, thanks to technical progress and higher oil prices.

Combined they have led to a massive overhang of unused emission permits that bear upon the market. That is why many experts recommend to take it out of the market through a set-aside operation of about 1 billion emission certificates, the equivalent of 1 billion tons of C02. But such an operation might be no more than a temporary expedient instead of curing more inherent systemic flaws.

It is preferable to reflect more thoroughly about the optimal ways of implementing the “energy revolution” to which the European Council has committed Europe at its special meeting February 4th 2011: What is the most expeditious way of reducing EU greenhouse gas emissions by 80-95 per cent between 1990 and 2050?

  • By the middle of the century European electricity generation must have become a close to zero emitter of C02.

That is technically and economically feasible through a new energy mix composed of wind, solar, biomass, ocean and nuclear sources. Each Member state should retain the freedom to fix its own energy mix on the basis of climate conditions, natural resources and past experience with technologies.

By 2020 the EU is committed to a 20 per cent reduction of its emissions.

That will hardly be enough to reach almost zero emissions by 2050.

The EU must step up the annual rate of reduction of emissions.

By 2030 the EU should have reached a 40 per cent reduction over 1990; before the end of 2012, it should make this objective mandatory in view of offering utilities a sufficient time of for adapting their power generation mix.

  • There is no need to set aside large quantities of unused certificates in view of raising market prices.

Power companies will have to auction all emission certificates after January 1st 2013. This change, combined with the prospect of a much faster reduction of emissions after 2020, will boost the futures prices for electricity and emission certificates, which will reverberate on present prices.

  • The EU will need to tackle those sectors that are not subject to ETS with more vigour. This goes for mobility and buildings, the two biggest emitters after electricity and industry. It should toughen the emission standards for vehicles and recommend Member states adapting excise taxes to higher oil prices, even if this may provoke a temporary uproar.

For buildings it should have the courage of launching substantial renovation programmes as instruments for job creation.

  • These measures are largely independent from the level of C02 prices.

But they would help the EU reducing its overall energy demand in the run-up to 2050, which will be a a conditio sine qua non for implementing its very ambitious long-term reduction goals.


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