The EU ETS – working but not working

The German magazine, Spiegel, published an article saying that the EU’s emission trading scheme isn’t working (  Johannes Teyssen, the CEO of EON, voiced a similar opinion at a conference in Brussels recently: The scheme is “bust”, he said.

As with many political constructs, the problem is not the scheme but the people.  Blaming the scheme, rather than people, is pointless.  The scheme does what people want it to do.  I don’t think you can have a perfect scheme, so people will have to work with what we have.

The principal purpose of the scheme is to set an ever-tightening cap on emissions.  The scheme is, after all, a cap and trade scheme.  It is not a “trading scheme”.  It is a mistake of the Commission to call it a trading scheme.  By emphasising the trading and ignoring the cap they make it look like it’s about making money and not about cutting emissions.

In fact, the cap is in place and emissions are within the cap.  That is what we wanted.  The cap is quantitative: it sets a numerical limit.  That limit is being adhered to.  The cap is not qualitative: free-market spirits like big power generators didn’t want governments telling them what technical interventions to do, so the EU ETS does not prescribe technologies or emission reduction measures; it just sets a limit.

An implication of this is that we can have a loose cap for totally different reasons, but they all result in a low price.  One reason for the loose fit is the recession.  Emissions are lower than people thought they would be.

Another reason that the cap is loose is because energy and industrial companies have lobbied against a 30% reduction target.  Do not blame the Commission for this.  Blame the lobbyists; blame the power companies; blame the steel companies; blame the national politicians; blame the voters.  But don’t blame the Commission – they’d love to set the reduction target at 30%.

A third reason for a loose cap could be that industry went really super green and people started saving energy like mad.  It isn’t that one.

So it is a simple fact of cap and trade that the low price does not tell us why emissions are within the cap, it only tells us that emissions are within the cap.

The “signalling” to investors is a secondary goal of the EU ETS.  Economists argued that the carbon price would signal to investors to invest into green technology.  Unfortunately they didn’t have their thinking caps on then they argued this, but they still managed to persuade the Commission.  Mr Teyssen is right.  The EU ETS should give “signals” through its price, but as we saw above, the price can mean so many things that any signal is ambiguous and therefore useless.  It was a mistake of the promoters of the scheme to suggest that it gives a useful signal.  And even if it did, from time to time, give a signal, would you base an investment decision on it?  To quote from chapter 42 of Climate Change for Football Fans: “If politicians were railway signalmen, we wouldn’t use trains.”

In fact there is a case where carbon pricing gives a signal.  When the price gets high it gives a signal to energy and industrial companies to bring out their lobbyists.  This is a fundamental limitation of the idea of carbon pricing (and also carbon taxation) in a democracy – if the price gets to high it becomes politically unacceptable and has to come down again (  People should talk about this a bit more rather than brush it under the carpet.

So, in summary.  (1) The EU ETS does work – inasmuch as emissions are within the cap.  (2) The cap is too loose: that reflects the will of people with influence, not any structural problem with the EU ETS.  (3) The EU ETS doesn’t in fact or in theory provide a reliable signal.  But as long as the people don’t want to cut emissions, the politicians will never be able to give a signal anyway.  If Mr Teyssen is looking for a signal, he needs to make it for himself: sack the lobbyists, sell off your coal-fired plants and invest in home insulation.


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One Response to The EU ETS – working but not working

  1. The above remarks are correct. There is really a difficult situation: if the scheme is market-based politicians shouldn’t intervene. What will be in the opposite case – the economy booming – will the supply of permits increase?