IETA’s net zero plan

EIC breaks down the IETA’s proposed ideas to help guide Europe towards net zero 2050, specifically the role cap and trade practices may play and why we must raise ambitions.

Rowing together

Last month the International Emissions Trading Association (IETA) announced its 2020s forecast for the price of carbon emissions, expected to rise to  €32 per CO2 tonne equivalent.

The IETA, in a report published last week, also outlined several ways in which international carbon trading, spurred by the increased price, could aid the fight against climate change.

The report outlined that some countries and firms were better equipped than others to reduce and replace carbon-intensive practices. Infrastructure, resources and trade exports are among the variables that can impede or hasten an organisations ability to stay within allotted carbon allowances while remaining soluble.

The trading of such allowances frees individual states and firms up to offset one another’s emissions in order to achieve the collective goal of limiting global temperature rise.

Moreover, it is effective; the European Union’s Emissions Trading System (EUETS) reported a drop of 29% in emissions from stationary structures when comparing 2018 to 2005, thanks largely to such ‘cap and trade’ schemes.

Cap and trade is not a novel concept, it has been suggested as a market-led solution to polluting industry for years. During his presidency, Barack Obama met with a lot of criticism for introducing a bill in support of such schemes with pundits calling it a “sledgehammer to freedom”.

The concern was not unjustified since it was predicted that Carbon intensive industry would simply be undercut by foreign interests able to offer more competitive energy rates to consumers.

However with international cooperation now being actively encouraged, the attraction and probability of price gouging between domestic and international firms is likely to reduce.

The price is right

Alongside the proposed price rise has emerged a surge of concern that, while ambitious, the UK will fall behind on its own national targets unless an even higher charge is established.

The IETA’s forecast would mean an increase on the €27 price that was in effect from June 2018-19 however, think-tank Carbon Tracker believes this would still fall short of the targets stipulated in the UK’s Green New Deal.

A report released by the Zero Carbon Commission has estimated that the IETA’s price would need to be increased by almost 100% to €60 by 2025 to stay within established carbon budgets.

“We need to introduce a stronger, more consistent carbon price signal across more sectors of the economy if we want to accelerate the transition to a low-carbon economy.”

Sam Fankhauser

Assuming that Fankhauser’s perspective is adopted in the UK, carbon allowance trading promises to become a lucrative venture for firms that are able to significantly reduce their carbon emissions ahead of time. Any shortfall between emissions and allowance could be traded with more carbon intensive firms, thereby effectively doubling the value of carbon emissions saved.

Intelligent utility management, on-site generation and smart procurement are all methods to increase the gap between emissions and allowance and, subsequently, its potential value in cap and trade. EIC offers all of these services as well as over forty years of direct experience in integrating and applying them to the benefit of its clients.

The future of the carbon market beyond Brexit

EU carbon allowances are bought and sold as part of the European Emissions Trading Scheme (EU ETS). Currently the UK is part of the EU ETS, but continued participation is contingent on a deal with the European Union.

 

What are carbon allowances?

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the European Emissions Trading Scheme (EU ETS). EUAs are auctioned for use by energy-intensive industries that fall under the scheme, namely power generators, oil refiners, and steel companies, entitling them to emit one tonne of CO2.

The EU ETS works on the ‘cap and trade’ principle. A limit has been set on the amount of EUAs made available, capping the total amount of greenhouse gases that can be emitted by installations that fall under the system. As the cap decreases with time, total emissions fall.

These emission allowances work as tradeable goods, allowing companies to receive or buy them. After each year a company must use enough allowances to cover all its emissions, otherwise they will be heavily fined. Spare allowances can be saved to cover future needs or sold onto other companies that are short of allowances.

 

Overcoming the oversupply

The 2008 global financial crisis and the recession that followed saw a large oversupply of carbon allowances build up, which in turn saw prices reach all-time lows for an extended period. At the end of 2016 the EU ETS had an oversupply of 1.7bn tonnes worth of EUAs, which significantly weakened the incentive to reduce emissions.

In response, the European Commission has introduced a long-term solution known as the Market Stability Reserve (MSR), which will begin operations in January 2019. The purpose of the MSR will be to address the current surplus of allowances and to improve the system’s resilience to major impacts by adjusting the supply of allowances to be auctioned.

This will see 900 million allowances, which were back-loaded between 2014 and 2016, transferred to the Reserve, rather than be auctioned in 2019-2020. After this, unallocated allowances will also be transferred to the Reserve.

To improve regulation, the Commission will publish the total number of allowances in circulation by 15 May each year. They will then examine whether more allowances should be placed into the Reserve or released.

 

 How will Brexit affect these plans?

With Brexit looming, there’s uncertainty as to whether these changes will affect the UK. Under current plans the UK will remain a member of the EU ETS until at least 2020, almost a full year after its scheduled departure from the EU in March 2019.

Experts have warned that exiting the scheme before 2020, in the middle of an ETS trading phase, would cause disruption for both UK businesses and EU firms. However, staying within the scheme is contingent on a deal with the EU, something which the Energy and Climate Change Minister, Claire Perry, has acknowledged is yet to be formally agreed with EU policymakers.

 

What if there’s no deal?

Under a ‘no deal’ scenario, the UK would be excluded from participating in the scheme. This would mean current participants in the EU ETS who are UK operators of installations will no longer take part in the system. The UK government plans to remove the requirements relating to the surrender of emissions allowances as, post-Brexit, the European Commission will invalidate any allowances issued by the UK in 2019, such that they would have no value on the carbon market.

In this instance, the UK government will initially meet its existing carbon pricing commitments through the tax system, taking effect in 2019. A carbon price would be applied across the UK, with the inclusion of Northern Ireland.

 

Stay informed with EIC

Further details on how the Government intends to apply this carbon price will be covered in next week’s Budget. For the most timely updates you can find us on Twitter. Follow @EICinsights today.