Rhein on Energy and Climate

Putting a price tag on C02 emissions has been rightly hailed as a major advance in fighting climate change.

The EU has been the trend setter in organising C02 emission trading. It is proud of the European Emission Trading System (ETS). Thanks to these efforts, a European Commodity Exchange fixes spot and future prices for C02 emission rights, just as it does for electricity.

A market is nothing but an instrument for the optimal allocation of scarce commodities. The scarcer a commodity the higher the price, whether a gram of gold or a ton of C02.

Since we know that C02 emissions are the major villain behind climate change, governments have been trying to put a lid on them. That is the essence of the Kyoto Protocol (1997), by which some 40 countries have agreed to reduce their C02 emissions by 5 percent from 1990-2012, just a token measure.
In order to implement its reduction target of 8 percent, the EU has allocated to a few thousand energy-intensive companies (power, steel, chemicals, cement, pulp) emission quotas. The allocations are free of charge, but companies could trade them.

In March 2007, the EU has decided a much tougher reduction of C02 emissions (20 percent between 2012 and 2020).
In the future, companies will no longer get free emissions quotas. The Commission has proposed (January 27, 2008) that companies buy or sell their emission rights by way of auctions. An auction constitutes the most transparent and rational way of allocating scarce goods. The Commission proposal was widely applauded, until companies discovered that the C02 price might go up beyond past levels (fluctuating wildly between € 1 and 30 per ton).

For those companies in direct global competition (cement, chemicals, fertiliser, and pulp) the EU is ready to defer a decision on the auction until major competing countries will also have committed to substantial reduction targets. (“Carbon leakage”).

Most recently, pressure is also coming from Polish and German power companies, which have not done enough to invest in C02-free technologies, nuclear, wind, solar or carbon sequestration. or buying electricity from other member states.
Poland, still dependent on domestic coal for more than 95 percent of its power supply, will have no choice but to close down many of its inefficient coal-fuelled power plants. It has failed to prepare for alternatives like wind, biomass or nuclear and to exploit its huge potential for enhancing energy efficiency in its housing and industrial sectors. It should urgently redirect its substantial regional funds to investments in energy efficiency and renewable energies.

The power sector has until 2013-15 to prepare for alternatives, including buying more “green electricity” from other EU member countries. But it cannot continue doing business as usual.

It is essential for the EU to resist the pressure for a further softening of its climate package. Its reputation as the international trendsetter in the fight against climate change is at stake.

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