In defence of the EU ETS (but not of the European Commission)

Today Reuters talks of the “battered carbon market”.  All this year folk have been swiping and sniping at the EU ETS, starting with the CEO of E.On back in January this year.  They don’t like the low carbon price and they say that’s a problem.

But this has been covered earlier in the Bustard (http://www.thebustard.com/?p=680, http://www.thebustard.com/?p=756, http://www.thebustard.com/?p=782).  Here is a recap:

  1. The EU ETS is a cap and trade scheme.  The environmental bit is the cap, not the trade.  The price just tells us where emissions are vis a vis the cap.  Today emissions are well within the cap, that’s why the price is low.  So the EU ETS is doing its job as far as the cap goes.
  2. People think that the EU ETS is a vehicle for promoting investment in green energy and so are disappointed when they don’t see a high price and lots of windfarms.  They have only themselves to blame for having illogical expectations.  If you want investment in green energy use feed-in tariffs or a green certificates scheme.  If you want a cap on emissions have the EU ETS.
  3. The die was cast when a political decision was taken (in 2008 or 2009?) to set the Phase 2 cap to where it is now.  That level was politically acceptable then and, presumably, as far at the Commission felt it could get away with.  We can blame the Commission for a lot of things, but we can’t blame them for not foreseeing the extent of the recession.

So which bit here means that the EU ETS is bust?  Monitoring, reporting and verification still works.  Annual surrendering still works.  Fines are imposed for non-compliance.  The mechanisms of the cap are robust.

You can say: “Well what about the fact that it’s cheaper to burn coal than gas?”  What about it?  It will be cheaper as long as emissions are well below the cap.  If you don’t want it to be cheaper to burn coal in any circumstances then you should tax coal.

The problem with the EU ETS is not the system but the administration.  Here are some highlights:

  1. Back in Phase 1, amateurish release of emissions data.  They didn’t think of seeing how it is done in financial markets.
  2. In Phase 2, constant breaking down of the registry system.  They wrote their own instead of getting experts in financial markets to provide tried and tested kit.  (http://www.thebustard.com/?p=400)
  3. In Phase 2, diffident and late responses to the problems of fraud and the threat of such problems.  If Brussels were a zoo, then the Commission would be near the ostrich enclosure.  Very near.
  4. In Phase 3, absurdly burdensome auctioning rules which disingenuously claim to make auctioning accessible for all.
  5. In Phase 3, unthinking complexity with the introduction of trading accounts, seven day delays, and byzantine transfer rules.
  6. And of course the eternal catalogue of delays in implementation including linking of the CITL and ITL, allocations, registries, auctions and now NIMs.  Sure, it’s often the member states which are at fault, but if the Commission acts like a wet mop, people will clean the floor with it.

But none of this addresses the predicament of climate change.  For that, yes a cap on industrial emissions is a vital start.  But it’s a drop in the ocean.  The real problem lies in our hearts and until we acknowledge that, everything else is just tinkering.

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