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Why does the EU carbon market vote matter?

By John Parnell

On Tuesday the European Parliament’s 748 MEPs will vote on whether to withhold more than 900m carbon credits from the next phase of its emissions trading scheme (ETS).

RTCC runs through the who, what, when, why of the proposals that could reinvigorate the European carbon market, the bloc’s most important emissions reduction tool.

What is it and why now?

Backloading would reduce the supply of ETS credits and increase the price that high emitting sectors must pay to emit more than their share of greenhouse gases.

It will also correct the distortion suffered by the market as a result of two outside factors. First, the economic downturn that reduced industrial output meaning businesses emitted less of their predetermined allowances.

Secondly, the absence of increased emission reduction targets by other developed countries meant the EU stuck to its fairly unambitious goal of reducing its own emissions by 20% by 2020. Efforts by others would have encouraged the EU to up this goal to 30%, meaning less emissions allowances would have been allocated in the first place.

By the end of 2011 there was a surplus of 955m credits.

These problems can’t be reversed and the effect of too much supply and not enough demand has been a free falling carbon price from the dizzy heights of €30 a ton to between €4 and €5 in recent weeks.

A yes vote would shift the plans up the chain of decision making in Brussels to the European Council where a qualified majority among the 27 member governments would be required in a vote weighted in favour of the largest nations.

Last month European Climate Commissioner Connie Hedegaard said it made no sense to discuss making larger structural changes to the carbon market if backloading was voted down.

“There is no point talking about what we’ll do for the patient in the long term if it is going to die in the short term,” she said as an event to launch a Green Paper on Europe’s climate and energy framework for 2030.

Carbon trading affects the price you pay for your energy, the effectiveness of efforts to fight climate change and the ongoing development of a low carbon economy. Given the size of the contribution that the Green Economy has made in countries like the UK, there is plenty at stake.

Who is against the plan?

Opposition to the reforms has come from several sources. There are those who dislike all forms of carbon markets as a whole, arguing that they simply shuffle emissions around the globe.

Others are concerned about the effect a strong carbon market could have on their economies at a time of financial upheaval, such as Germany’s junior coalition partners, the Free Democratic Party.

Then there are government’s such as Poland, whose economies are inextricably linked to heavy industry and coal fired electricity.

Poland’s Environment Minister Marcin Korolec has framed his opposition in terms of the free market. He says there should be no meddling. With Poland relying on coal for more than 90% of its electricity, a low carbon price also suits the country economically. It leaves big polluters with a smaller bill.

Emissions from sectors covered by the ETS are falling, so the market is delivering argues Korolec, who will preside over the UN climate change talks in Warsaw later this year.

Who is in favour?

Business has lobbied on the ETS’s behalf.

Shell, Unilever, EDF, Swiss Re and IKEA have joined the more predictable support from the renewable energy sector.

The European Wind Energy Association’s (EWEA) members described the short term fix as a must to ensure the carbon market’s survival.

“We…urge you to support backloading as a short-term measure to ensure the continuation of the EU ETS market,” they wrote in an open letter to MEPs.

A strong ETS is viewed as an important long term signal for investments in low carbon technology. Supporters say it represents the best route for certainty in Europe at least, encouraging low carbon investment.

Ministers from Germany, UK, France, Italy, Sweden and Denmark added some political muscle to the debate urging MEP’s to back the proposals too.

Sarah Deblock, EU Policy Director at the International Emissions Trading Association (IETA) told RTCC it is important that the carbon market gets a strong endorsement.

“If it goes through it would be very helpful for the market to have this political guidance that the MEPs are keen to address the challenges and maintain the ETS remains the key climate policy at the EU level,” she said.

“A yes vote sends the signal that there would be an EU wide instrument, as opposed to national measures which we are seeing develop. It makes more sense to have a strong ETS than taxes at the national level for instance. We see this as a worrying trend,” she says giving the UK carbon floor price as an example.

“Backloading is the only proposal on the table to address the oversupply in the short term,” she adds.

The list of companies supporting backloading is extensive and a little surprising too

What effect will it have overseas?

The European carbon market has also formed the basis of schemes further afield in China, Australia and South Korea. Implications could reach beyond the 27 member states.

South Korea’s deputy environment minister told Reuters PointCarbon a no vote could lead to a cut in ambition of their own scheme.

A spokesperson for Australia’s climate change minister Greg Combet told RTCC that they remained committed to a two way link up between their own system and Europe’s in 2018.

Most environmental NGOs back the proposals but some would like to see more radical changes of the ETS to make it more flexible in the future.

With Europe seemingly united on the need for ambitious climate action, some have been surprised that the vote is so close.

It was initially a matter of tinkering with the existing system. Now it has become a litmus test for climate ambition among the 27 member states.

IETA has been keeping a headcount of MEPs’ voting intentions. It’s last count before the weekend had 339 in favour, 321 opposed and 88 yet to confirm.

Laura Dzelzyte, director of the advisory firm CF Partners and a former advisor to Lithuania’s Environment Minister at the UN climate talks told RTCC the issue had become over-sized.

“I think it’s unfortunate that what should have been a technical question, turned into political scaremongering. There has been some damage done in terms of communicating what ‘backloading’ is trying to achieve,” she told RTCC.

“Instead of saying that it will ‘rescue the EU ETS’ by raising prices, I think the more accurate way to describe this exercise is allowing flexibility of the instrument to bring it in-line with the factual and economic context.

Dzelzyte says the reforms “will not shoot prices through the roof”, but would help to bring the balance between supply and demand closer to reality in a post-recession climate.

“What should have been a question about improving a policy instrument design became a vote for or against raising the carbon price and so raising energy prices in the EU. This formulation attracted a wrong sort of debate and could be voted down for the wrong reasons,” she warns.

What happens if there is a no vote?

If MEPs vote ‘No’ it will be a bitter blow to the European Commission which has pressed the issue hard and feels the ETS has a central role in European climate policy.

Dzelzyte does not fear for the EU’s climate intentions should the ETS fail to get the shot in the arm it so badly needs.

“Even if we have a ‘no’ vote on Tuesday, the EU will stay committed to greenhouse gas emissions reductions and choose an appropriate and acceptable instruments to continue,” she says.

“No policy tool or its design should be a sacred cow, particularly in the development stage. It has to serve the purpose it is intended for. If a policy instrument fails to achieve what it’s meant to, it has to be adjusted or alternatives found.”

Voting no could open the EU up to criticism at the international climate negotiations, where it is already targeted by some for being unambitious.

Dzelzyte believes the real lesson is for other nations who are designing their own ETS and the importance to engineer in a degree of flexibility.

What next if there is a yes vote?

A yes vote will mean the decision being bumped to the European Council where a vote weighted in favour of the larger EU members would take place.

The potential of an abstention by Germany would reduce the threshold for the necessary qualified majority opening the door to Poland and its allies.

Should it pass, more changes to the EU ETS could be expected in the future as it looks to integrate more flexibility.

The potential strengthening of the EU climate targets to 40% by 2030 could also help to boost the ETS in the future.

What will happen?

Dzelzyte isn’t keen to guess what will happen with no clear swing of momentum in the air in Brussels.

“I think the mood is muddled. Some MEPs know where they stand and thus lobby their positions but many are torn in between as there are strong arguments for and against.”

The largest party in the Euro Parliament, the European People’s Party (EPP) has said the majority of its members will be voting against but the IETA straw polls suggest it is all to play for.

“Backloading might sneak through eventually but it won’t happen before 2014,” Kash Burchett, senior European energy analyst with IHS Energy told RTCC in February.

“We might have to wait for a new tranche of MEPs to have another go after the 2014 election, that means no action till 2015. Until then we are going to be looking at some pretty flat carbon prices,” he said.

Some members, the UK for example, think backloading should be looking to withhold closer to 1.2bn permits from the market, a figure Burchett supports given that the current proposal of 900m is “unambitious” in his view.

Even once this round of the debate is done with, it is likely to be just the first in a line of proposed amendments as supporters look for short term fix to those flat prices.

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