There are not many pillars to European energy policy. And the most important ones are related to the internal EU markets. However, in particular in times of crisis, this achievement of common markets, which have deepened significantly in recent years, comes under threat.
This is particularly relevant to an elementary pillar of European energy and climate policy – European trading in CO2 emission allowances. The EU Commission has now proposed using this as a source of funding, which jeopardises Europe’s overall framework for climate protection. Furthermore, it damages another major pillar of European energy policy – its ambitious climate policy.
The path to reducing CO2 emissions is clearly defined by the EU Emissions Trading System in strict volume-based targets, i.e. how many pollution allowances are allocated each year. At present, only the sectors under the Emissions Trading System are reaching their emission reduction targets. And they are doing so in the most cost-effective way: The price determined in the auctions ensures that CO2 is most likely avoided where it is easiest or cheapest to do so. The reason for the steadily rising price for a number of years now lies in the system. Fewer certificates are being auctioned and it is becoming more and more expensive to cut further emissions. However, the rising price of CO2 allowances is creating powerful incentives to switch to green technologies. These incentives are anything but trivial given the current and foreseeable prices of more than €80 per tonne of CO2.
The fact that the European Emissions Trading System has been working well again – following a prolonged period of very limited effectiveness due to extremely high certificate surpluses – is attributable to a central reform of the system, the Market Stability Reserve. It is designed to compensate for fluctuations and, during periods of certificate surpluses, to take certificates into the reserve and gradually remove them there. It is this very reserve that the EU Commission now intends to use to raise funds. The aim is to sell as many certificates from the reserve as needed to raise €20 billion. The idea is to sell CO2 certificates, which are taken out of the market for very good reasons in a very transparent and predictable procedure, back to the market for the sole purpose of generating income.
Additionally, available emission certificates will increase emissions and may also trigger a vicious cycle. A greater supply of certificates will bring the price down. A lower price will require an even greater quantity of additional certificates to raise €20 billion in funds, and so on.
The European Emissions Trading System reaches reduction targets and provides companies with reliable framework conditions and planning security for investments aimed at avoiding CO2 emissions. It is this very structure that is being destroyed by the EU Commission’s plan. The consequences will be dramatic: There will no longer be a reliable path to reducing emissions, prices for pollution allowances will drop and, as a result, companies will have fewer incentives to switch to green technologies. The green transformation will be slowed down.
Ultimately, the emission reduction targets will not be reached, the Emissions Trading System will be discredited and regulatory intervention will be the only option for reaching climate protection targets. Europe will be robbed of its viable, market-based and efficient tools for achieving emission reductions. A central tool of European energy and climate policy is being destroyed as there is no political agreement on other funding mechanisms. However, using it to avoid taking on debt is nothing but delusional. It will only be absorbed in a place where it is much more difficult to balance – in the areas of climate protection and the European Single Market for energy, which is also key to the green transformation. So it is not only one instrument that will be looted if the EU Commission’s plans become reality.
A guest article by Felix Matthes and Markus Krebber
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