Expectations were high in Brussels climate policy circles that the Danes would use their Presidency of the EU to push for ambitious goals when it comes to renewable energy. After all, Denmark is known to be one of the biggest backers of the green agenda.
But the eurozone crisis has scuppered such hopes. Green growth has dropped down the EU’s priority list.
And the topic that has triggered most debate in the past few months was not even part of Copenhagen’s programme. Reform of the EU Emissions Trading System (ETS) is back on the agenda given the crisis in the market for carbon.
The ETS is the EU’s flagship climate policy tool. It was the EU’s maiden voyage to the new promised land of sustainability. It put a price on CO2 emissions for the first time, affecting businesses all across Europe, especially energy-intensive industries.
There is a problem however.
EU policy-makers had envisaged a metric tonne of carbon would cost up to €30 by now. The market reality is very different. The current price is around €6-8.
Because the price is so low, the incentive for businesses to invest in low-carbon technologies just isn’t there. The ETS was envisaged as a key tool to stimulate green growth and was one of the pillars of the EU’s post-Kyoto climate policy. Yet it is at risk of sinking in open waters.
The economic downturn and an oversupply of EU emission allowances are the main reasons for the low price. Market analysts are pessimistic when it comes to any potential price recovery, unless there is a political intervention or, at the very least, a strong political signal given to the markets.
Some analysts even predict a complete market crash if a number of big players begin to dump their allowances on the market before the next phase of the EU ETS in 2013. This could bring the carbon price down to next to nothing.
There is a risk though in intervening. It would set a dangerous precedent. It would prove the critics right and suggest that the market mechanism is not working.
What is undeniable though is that the markets are paying attention to what is happening in Brussels. Even committee votes in the European Parliament have been known to result in unusually high price fluctuations.
So what can Europe’s politicians and officials do now?
A permanently low carbon price would be unacceptable for most EU countries. Germany or the UK might consider creating their own carbon pricing schemes, including a national ETS or a carbon tax. Any breakdown of the EU-wide ETS would severely damage the EU’s role as a global leader in climate policy as many authorities, including China, Australia and the state of California, look to the EU for guidance in setting up their own cap-and-trade systems. That’s not to mention the more recent fight the European Commission picked with China, the US and several other countries over the inclusion of foreign airlines in the EU ETS. Brussels’ position vis-à-vis other countries would be severely weakened if the ETS were to be seen to be not delivering.
Industry concerns have reached EU policy-makers and an increasing number of them seem to have realised the importance of the ETS for Europe’s green future. MEPs have already twice this year called on the European Commission to address the oversupply of carbon allowances.
However, the big political groups in the European Parliament, such as the majority centre-right conservative grouping, are divided internally. This has led to fierce political debates within the group and the language in parliamentary reports on the topic has been watered down to find a compromise solution.
At the level of the capitals, the situation is even more delicate. Some EU countries – mostly those whose economies still heavily rely on fossil fuels – are strongly opposed to the slightest mention of changes to the status quo of the ETS.
Whatever solution the EU power brokers come up with, the current crisis of confidence in the EU ETS will remain.
A couple of weeks ago, following a meeting of EU Energy and Climate Ministers, EU Climate Change Commissioner Connie Hedegaard, herself from Denmark, announced that the Commission would seriously consider putting forward a legislative proposal on the EU ETS before the end of 2012.
If the EU cannot make the ETS work, it will have little chance of achieving its short- and long-term CO2 emission reduction targets. So the stakes are high.
EU decision-makers must make up their mind. They face a stark choice. Either they make the current system watertight so the ETS can become the model to follow for an ambitious global climate change policy.
Or they jump ship, let the ETS crash into the looming iceberg and start looking for other vehicles to promote green growth in the EU - preferably unsinkable ones.