The cap-and-trade system of pricing greenhouse gas emissions is intended to provide the financial incentives that could come from a system of taxes in a more efficient way by using a market mechanism to determine prices. However, this contains a contradiction that has not been fully resolved. When the market sets a price that no longer adequately incentivises investment in reducing emissions, should policy makers stick to their free-market principles or act to ensure that industry will face costs if it does not invest in green technology?
At the end of June the European Commission stated for the first time that it might restrict the supply of carbon credits to support prices. This would, in effect, place the commission in a position similar to a central bank, controlling the supply of credit to maintain the value of its currency. While DG Climate Action views this as a legitimate means to ensure its emissions reduction targets are achieved, many energy intensive industries complain that this violates the market principles of the cap-and-trade scheme.
SBB 27 June The European Commission (EC) has said for the first time that it may increase carbon credit prices by setting aside credits from the Emissions Trading System (ETS). Maintaining high prices is necessary to avoid any one sector from getting a “free-ride,” DG Climate Action spokesperson, Isaac Valero-Ladron tells Steel Business briefing.
The EC energy directorate’s energy efficiency programme could reduce demand for European Union Allowances (EUAs) from power companies. If this causes EUAs to fall, sectors which have not reduced their emissions will face lower costs and have less motivation to reduce their own emissions, Valero-Ladron points out.
However, artificially increasing the price is not in line with the directive which covers the ETS, Eurofer complains. This was intended to create a system which reduced greenhouse gas emissions at the lowest possible cost. As long as the shrinking cap on emissions in the ETS is met, the price should remain low, it argues.
The energy efficiency programme has been seen as a shift in focus away from the ETS. The December 2011 EUA contract fell more than 9% on 23 June to €13.37/t ($19/t) after the programme was launched.
But the EC will ensure that the ETS continues to function, says Carine Hemery of French carbon and energy analysts, Orbeo. This is likely to mean setting aside EUAs to reduce supply. But this could add an element of political risk to the carbon markets. If traders are put off by this, the liquidity of the market could suffer, she warns.