Q & A: How does carbon pricing work in practice?
Australia’s climate change policy debate is far from over. Earlier this month Kevin Rudd conceded it was a mistake to shelve the ETS, and yesterday Rio Tinto joined the fray, warning Australia not to go it alone on pricing emissions. At The Punch we realised we hadn’t heard much about the international experience, so we spoke to Scott Wyatt, Energy and Environment Advisor at the Delegation of the European Union, about how carbon pricing (they have an ETS) has gone in the EU.
Q. How does carbon pricing work in the EU? Is it similar to the proposed Australian system (what details we have!)?
A. There are differences in scheme design, but the principle is very much the same as (the cap and trade system) proposed under the Carbon Pollution Reduction Scheme White Paper.
The European Union Emissions Trading Scheme (EU ETS) has been in operation since 2005. Under EU law, it places a limit or ‘cap’ on the total level of emissions across the covered sectors, and this cap declines with time. It covers electricity generation and emissions intensive industries–such as cement, iron and steel, and pulp and paper–across not only the 27 Member States of the European Union, but also in Norway, Iceland and Liechtenstein.
Participants with obligations under the scheme must surrender allowances to cover their actual emissions. Allowances can also be traded. The price companies have to pay for polluting acts as an incentive to invest in lower emissions technologies and the ever-declining cap ensures a continuous reduction in emission is achieved.
Q. Was the EU community initially resistant to carbon pricing?
A. Some in the EU were - and even those that were supportive obviously had concerns with how it would be implemented and what that would mean for them. The apprehension largely died away as they became familiar with the system, though clearly the EU is looking to what others are doing around the world in regards to industry competitiveness. We have dealt with this through continuing free allocation of allowances - although from 2013 this will be revised to create stronger incentives to reduce emissions.
Q. What has the outcome been so far? What results have you seen?
A. It’s abundantly clear that the EU ETS has brought climate change into the boardroom. In reality though, exploring the counterfactual is always fraught with challenges about assumptions on business as usual. However, if you look at the emissions and the price, even in the first learning phase, you can see an apparent relationship between the carbon price and emissions.
I think more telling is the results of surveys from Point Carbon and others that show that emissions trading has helped mainstream action to reduce carbon emissions and to include that consideration in investment decisions. The declining cap will ensure emissions keep dropping over time.
Q. What are the negative or challenging aspects of carbon pricing?
A. Getting the right coverage, and the right point of obligation is important - the latter can have an enormous benefit in terms of behavioural change that can equal the price effect. Operators will all say that they want transparency and certainty to make investment decisions (and argue as to why they are a special case!). It is important to remember that carbon pricing is a means to an end - a low carbon economy.
Q. Is carbon pricing the most effective mechanism for tackling climate change?
A. Emissions trading is a proven, effective, least-cost tool for reducing pollution and this is what the EU has chosen. However, tackling climate change requires a whole range of tools. Carbon pricing for some sectors provides flexibility and cost effectiveness but it is not the only policy instrument.
Again, it is important to remember that this is a means to an end, so alongside a carbon market it is important to look at the obstacles to reducing emissions and whether other policies can help unblock these. For example, the EU has binding renewable energy targets for each Member State, and legislation covering areas as diverse as energy standards for buildings, appliance energy labelling, and vehicle fuel efficiency standards. The reform of the Common Agricultural Policy will consider further abatement opportunities in the land sector.
Q. Do you have anything else to add?
A. It’s very important to note that the EU ETS was divided into three phases. Phase one ran from 2005 to 2008 and was very much a pilot, ‘learning by doing’ period. We drew some important lessons from this initial trial. For example, the level of emissions across the scheme was overestimated, too many allowances were allocated, and the price eventually crashed as a result.
Of course, we now have robust, verified emissions data underpinning the scheme. So to criticise the current EU ETS on the basis of the pilot phase is ill-informed. Furthermore, a number of very important improvements have been made leading into phase three, which runs from the start of 2013 to 2020. These will make the scheme more efficient and effective.
For example, there will be a single registry; the allocation of allowances will not be done on a national basis, but across all participating countries; the level of auctioning will go up dramatically from about 4% now to around 50% - and 100% auctioning is the new rule for the power sector, with some limited and temporary exceptions; and lastly, access to certain international credits under the Kyoto Protocol’s Clean Development Mechanism will be further restricted.
For more information see the European Commission Climate Action website.
Read all about it
Up to the minute Twitter chatter
The latest and greatest
Good morning Punchers. After four years of excellent fun and great conversation, this is the final post…
I have had some close calls, one that involved what looked to me like an AK47 pointed my way, followed…
In a world in which there are still people who subscribe to the vile notion that certain victims of sexual…