This document – produced by the World Wildlife Fund – provides a good concise overview of the Emissions Trading Scheme being used to reduce greenhouse gas emissions in the European Union.
In addition to outlining the basic design of the system, the document describes some of the errors of implementation that have occurred. The biggest of those were probably the over-allocation of permits and their free distribution, as opposed to auctioning. Together, these sharply reduced the effectiveness of the system during its first phase of operations. Hopefully, lessons learned during this period will help to make future emission trading schemes work more efficiently and equitably.
Green fleeces, red faces
A theft of carbon credits embarrasses an entire market
IT IS, according to enthusiasts for carbon markets, a sort of backhanded compliment. Scoffers may think the trading of carbon emissions cannot be taken seriously as a proper commodity market. But hard-nosed criminals have seen that it involves enough real money to be worth casing.
Unfortunately, the criminals also spotted that the people who were not taking the market seriously enough included the European Commission and the EU’s member states, which oversee the Emissions Trading Scheme (ETS), the world’s biggest market in carbon emissions. In early January thieves took advantage of lax security to steal over 3m carbon credits (about 2 billion are issued each year). They managed to take 1m from Holcim, a cement maker, half a million from the Austrian government, a bunch more from various accounts held in the Czech Republic and some from the Greek registry. The market value of the haul is about €45m ($62m).
Within the ETS the carbon credits which large emitters need to surrender to governments in order to keep emitting are held in electronic form in national registries. The thieves managed to break into the accounts in which companies keep their credits on some of these registries and transfer the credits to other accounts, from which they could quickly be sold on. Europe’s registries were closed down on January 19th, to reopen only when better security standards are in place. Some registries were expected to reopen by February 4th but as long as they remain closed spot-market trading is impossible, since no one can get at their credits.
Holding the presidency will not stop the Poles fighting their corner. European competitiveness, they argue, cannot be secured just by cutting public spending. So they will want to promote a bigger EU budget for 2014-20 ahead of European Commission proposals on June 29th. This will see them clash with Germany, France and Britain. This week Poland showed its teeth by vetoing moves to set a higher target for cutting EU carbon-dioxide emissions by 2020.
Europe has always played an outsized role in the climate-change debate. It was a Swedish scientist who, in 1896, first posited a link between surface temperatures and the concentration of carbon dioxide in the atmosphere. A century later the European Union’s environment ministers (who at the time numbered among their members one Angela Merkel) adopted the aim of keeping global warming to below 2°C. For years the European Union has set policies to curb emissions and discourage energy use (see chart). Germany is switching to renewables in a massive “energy transition”. The Paris agreement, which saw more than 190 countries pledge to keep global warming to “well below” that threshold, was a triumph of Gallic diplomacy.
At least, so goes the boosterish story Europeans tell themselves. In fact, the EU’s stated goal of a 40% cut in greenhouse-gas emissions by 2030, as measured against levels in 1990, is inadequate if it is to do its share in keeping global warming below 2°C. Its policies for electricity generation have misfired, too. True, subsidies have boosted wind and solar power, and by around 2030 these will become the EU’s largest source of power generation, according to the International Energy Agency. But that has had two perverse consequences. The first is lower wholesale electricity prices, meaning squeezed revenues and lower investment. The second is rising imports of fossil fuels to keep the lights on when the sun is hidden and the winds are still. Together, these have meant a heavy reliance on plants burning cheap-but-dirty fuels such as brown coal. Europe’s shift away from nuclear power, which generates no carbon dioxide, has made reducing emissions harder—especially in Germany, which decided in a panic to close all 17 of its nuclear plants after the Fukushima meltdown in Japan.
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The EU Emissions Trading Scheme has also fallen short. After the financial crisis of 2007-08, there was a glut of carbon permits. Prices have dropped by four-fifths since then, to around €5 ($5.67) per tonne. To help the planet much, they would have to be €40 or so.
Last year the value of global carbon markets hit a record €229bn ($278bn), a five-fold increase from 2017. The European Union’s emissions-trading system (ETS) accounts for nearly nine-tenths of both that value and that growth. In 2020 around €1bn-worth of emissions allowances changed hands each day, as well as plenty of options and futures contracts. There are signs that trading is becoming more sophisticated, as investors take an interest.
For a long time after it was launched in 2005, the ETS barely functioned; a glut of allowances (which give the holder the right to emit a certain amount of greenhouse gases) and cheap offsets kept prices close to zero. But after the European Commission sucked excess allowances out of the market in 2019, it began to thrive.
https://www.economist.com/finance-and-economics/2021/02/24/prices-in-europes-carbon-market-the-worlds-biggest-are-soaring