The European Commission wants to limit high energy costs for heavy industry by lowering the price European companies pay to Brussels for their CO2 emissions. It would give entrepreneurs more financial breathing room in times of high energy prices and geopolitical unrest.
A growing number of countries, including Poland and Italy, have been pushing for some time to weaken or even abolish the system. However, this threatens to make polluting cheaper. Other countries – the Netherlands, the Nordics, and Spain – strongly defend the system.
How exactly does the ETS work?
The ETS operates using a system of emission allowances. For every ton of CO2 a company emits, it must purchase one emission allowance. To prevent prices from fluctuating too sharply, emission allowances are removed from the system every year.
That decision was taken in the aftermath of the 2008 economic crisis, when European industry suddenly produced much less than expected. As a result, the demand for emission allowances also fell sharply.
According to market laws, lower demand means a lower price. And that lower price threatened to bring down the ETS system. That is why unused allowances are now destroyed every year.
Emission allowances are offered for sale on the ETS market, but there is also a buffer that is not sold. The European Commission can use this buffer to regulate the price. Every year, this buffer is capped, and the excess emission allowances are destroyed.
What’s happening in Brussels?
So, energy-intensive companies in the European Union must offset their emissions by purchasing emission rights. Brussels is making fewer and fewer rights available, driving prices up and leaving companies with a choice: go green or pay.
“Europe must build a larger buffer to protect the industry against unexpected increases in the CO2 tax,” the European Commission proposes. “This can be done by keeping unused emission allowances in the system. Currently, these are still destroyed annually.”
“By no longer destroying excess emission allowances, the Market Stability Reserve will be “better able to respond to future market developments, including potential scarcity in the coming decades,” according to a press release from the European Commission.
Under fire
The Emissions Trading System serves as the engine for climate policy: emissions trading not only encourages greening, but the system has also already generated 260 billion euros in revenue, with which the EU and the 27 member states can finance climate policy. But now that the industry is under pressure, partly due to high energy costs, the ETS is under fire.
The step proposed by the European Commission is relatively small. Brussels maintains a buffer stock for emission allowances. The Commission can transfer allowances to this stock if the price rises. The Commission now wants to increase this buffer stock by preventing surplus allowances from being declared void.
Evaluation
The intervention is seen as a prelude to larger changes. This summer, the European Commission will present an evaluation of the entire Emissions Trading System. Critics will undoubtedly seize that opportunity to cut back further.
“However, the intervention could affect the carbon market and greenhouse gas emissions,” says researcher Marten Ovaere (Ghent University). “If companies know that more rights will be available, they will experience less pressure to buy rights. As a result, the price can already drop today. And if the CO2 price falls further, more greenhouse gases will also be emitted in Europe,” Ovaere concludes.
