9 January 2014

Research shows how to tighten up EU emissions trading

Emitting carbon dioxide in the EU is increasingly cheap. The price of emission allowances is falling, owing to the financial crisis and economic recession. Increased production of renewable fuels is playing a part. A new report from Mistra Indigo identifies ways of reversing this trend.

The price of tradable emission allowances, which entitle companies in the EU to emit defined quantities of carbon dioxide, has successively fallen since 2008. This price fall is substantial. Five years ago, it cost €35 to emit a tonne of CO2; today, the price is down to €5.

There are several explanations for this. One is that the economic recession of the past few years has resulted in lower production in industry, which has in turn brought about a reduction in CO2 emissions. Many companies quite simply have more emission allowances than they need, and therefore no need to buy more.

 Another reason is that, in the light of the EU policy objective of reducing CO2 emissions by 20% by the year 2020, too many allowances are allocated.

Research pinpoints opportunities

The price fall makes fossil fuels considerably cheaper to use than renewable alternatives. Accordingly, the trend towards an energy system better adapted to climate needs has come to a standstill. Investments in new ‘climate-smart’ solutions are also affected, since the plan was for revenues from the trading system to pay the costs of the new technology required.

A new report from Mistra Indigo describes how the researchers, headed by Lars Zetterberg of IVL Swedish Environmental Research Institute, studied the consequences of the price change and outlined conceivable remedies.

‘To get the fossil-free transformation going, we’d need to raise the price of emission allowances to about 50 euros per tonne of carbon dioxide,’ Zetterberg says.

According to the report, there are various possible routes to take if we want the price to rise again. One is to reduce the volume of allowances in the system. This could be done by changing the EU’s goal for cutting CO2 emissions from 20% to 30%.

‘Another option is to get more sectors to join the trading system. Transport, for example, isn’t affected at present. This is an interesting approach since it would boost cost-effectiveness, but there is a danger of the price then rising more than is desirable.’

Vital to change the system

Another feasible way to achieve the objective is by introducing price-regulating mechanisms into the trading system. This can be done by imposing a price floor on allowances. If the price fell below the lowest accepted level, a number of allowances would be automatically removed from the system, causing the price to rise once more.

‘If we don’t do anything, it will be cheap to emit carbon dioxide for a long time to come. Many people are now talking about a lost decade.’

According to the survey, there is a danger of some countries choosing to introduce their own policy instruments to bring emissions down. A trend of this kind would cause the price of CO2 emissions to vary around the EU. This would entail a risk of production being moved to countries with the lowest costs of emissions.

Text: Per Westergård, Vetenskapsjournalisterna

Mistra Webbredaktör