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Smoke streams from the chimneys of the E.ON coal-fired power station in Gelsenkirchen, Germany
Smoke streams from the chimneys of the E.ON coal-fired power station in Gelsenkirchen, Germany. Photograph: Martin Meissner/AP
Smoke streams from the chimneys of the E.ON coal-fired power station in Gelsenkirchen, Germany. Photograph: Martin Meissner/AP

European carbon market reform set for 2019

This article is more than 9 years old

MEPs vote to strengthen emissions trading scheme by taking 1.6bn surplus credits off the market to boost carbon prices, but critics call for steps to be taken earlier

Reforms to strengthen the EU’s flagship policy for cutting carbon, the emissions trading scheme (ETS), will start at the end of 2018 following a vote by MEPs on Tuesday.

The carbon market is supposed to drive Europe’s transition to cleaner sources of energy, but a cocktail of recession, free allocations to polluters and over-achievement on green energy targets have created a flood of 2bn allowances. That has led to a carbon price of around €7 (£5) per tonne, too low to encourage power companies to switch from polluting fuels such as as coal.

Under the new compromise proposal, around 1.6bn surplus allowances will be taken off the market and put into a market reserve, two years ahead of the commission’s preferred timetable.

“We still believe that this reform should come sooner rather than later,” the Labour MEP Seb Dance told the Guardian. “However, the compromise deal does represent a significant improvement on the suggested start date of 2021. We have ensured that the number of backloaded and unallocated allowances will be reduced and won’t be returned to the market, which would lead to further destabilisation.”

The market reform should prevent nightmare scenarios, such as a 4.5bn carbon credit glut by 2020 forecast by the environmental think tank Sandbag. A new report today by analysts Reuters Thomson Point Carbon estimates that by 2020, the reforms could nudge carbon prices up to €20 per tonne.

From April, the UK will have its own carbon floor price of £18 a tonne, pushing British prices close to the €30 a tonne price envisaged at the ETS’s inception, which could trigger fuel switching from coal to gas.

The energy minister Ed Davey called for reforms to be introduced even earlier, by 2017, in a joint ministerial statement signed by his counterparts in countries including Germany, the Netherlands and Denmark.

“Ambitious and early action is good for Europe, providing the certainty needed to create investment, jobs and growth as we move to a low-carbon economy,” Davey said. “Delay will only cause investor uncertainty, raise costs for businesses and ultimately leave consumers to pay the price.”

Reuters Thomson Point Carbon say that a one year difference in start dates will only add a Euro to prices.

But environmentalists argue that the reforms do not dispatch underlying questions about the ETS’s effectiveness as 400m allowances will be allowed to trickle back on to the market before 2030. Another 300m carbon credits will go to an innovation fund, whose low carbon credentials are yet to be proved. In the meantime, the delay until 2019 will allow further carbon allowance surpluses to accrue.

“Postponing necessary reforms until 2019 is simply irresponsible in times of a climate crisis,” said Femke de Jong, a policy officer at Carbon Market Watch. “Every year we wait with setting up the reserve, the surplus that is suffocating the EU carbon market will grow bigger, pushing the EU’s cornerstone climate instrument closer to the brink of collapse.”

Keith Taylor, the Green MEP for South East England added that “with big climate change talks coming up in Paris in December it’s crucial to create effective mechanisms to ensure that excess carbon allowances cannot undermine emission reduction targets.”

The EU expects carbon markets to play a major part in international emissions cutting efforts, and UN-accredited offsetting under an exotic array of schemes can be used by countries to meet their carbon reduction targets.

This has led to criticisms of schemes for human rights abuses and scams involving the destruction of industrial gases in Asia. Until a ban in 2011, over 80% of the EU’s offsets were spent on these latter projects, which the EU’s then-climate commissioner later admitted had a “total lack of environmental integrity”.

One Carbon Market Watch report estimated that “up to 70% of all offset credits issued from the [UN’s] clean development mechanism between 2013 and 2020 may not represent real emissions reductions”.

Nonetheless, carbon trading schemes have already been set up in South Korea, California and Quebec, with China due to roll out a regional carbon market next year that could fully cover the country by 2020.

International spot carbon prices vary from around US$13 (£8.4) a tonne in California to $6 a tonne in China and $9 a tonne in South Korea.

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