By Gerard Wynn
LONDON, Sept 28 Britain's prospective carbon
floor price, meant to motivate low-carbon investment,
illustrates some doubts about the environmental and economic
impacts of wider reforms to Europe's emissions trading scheme.
The EU's emissions trading scheme (ETS) has driven emissions
cuts partly by driving a shift to gas from higher carbon coal,
by forcing polluters to pay for their emissions in a measure
which also raises wholesale power prices.
The scheme has suffered setbacks including most recently a
glut of emissions permits following the financial crisis which
has caused carbon prices to crash.
Its goals are both to set a clear cap on carbon emissions by
industry and give companies flexibility over how they meet the
target whether by cutting emissions or buying EU allowances
In a less strategic but lower cost approach to driving cuts
in carbon emissions, burgeoning U.S. exploitation of cheap shale
gas has also driven a shift from coal, in a process which has
cut wholesale power prices instead of raising them.
While drilling for shale gas is not a carbon policy, it may
flag up a warning for European cap and trade: not to rush into
emissions trading reforms which may hike carbon and power
Alternative, pre-2020 approaches to cutting carbon emissions
include improved cross-border energy trading and connections to
boost gas and renewable energy, investment in liquefied natural
gas import terminals, and exploitation of European shale gas, as
well as continued support for renewable energy.
Short-term carbon market reform to boost carbon prices, as
planned by the European Commission, has no guarantee of success,
given opposition from some member states and a rather convoluted
process of EU approval.
And the impact is unclear given the lack of conclusive
research on how far emissions trading cuts carbon emissions.
A prospective, unilateral UK carbon floor price illustrates
the dangers of tinkering.
Perhaps surprisingly given emissions trading is now in its
eighth year, there is no conclusive research demonstrating how
far it has cut carbon emissions.
Such a lack of knowledge appears a flimsy basis for rushed
reform, especially where there is a possible negative economic
The European Commission reports that carbon emissions per
participating installation in 2010 were 8.3 percent below 2005
levels, but it is more important to establish cause.
Emissions are impacted not just by carbon prices but by
drivers of energy demand, falling in response to high oil prices
(in 2008), recession (2009-present) and mild winters, for
A paper for Britain's Department of Energy and Climate
Change (DECC), published in July, found that evidence that the
scheme had cut greenhouse gas emissions across all sectors by
about 3 percent annually from 2005-2009 compared with
It found no firm evidence for cuts beyond fuel switching in
the power generation sector.
"Despite being of prime interest for policy design, the
evidence on the drivers of abatement was scarce and anecdotal,
based on surveys of a small number of participating firms," it
FUEL SWITCH PRICE
In the power generation sector, the scheme has driven cuts
by causing emissions fuel switching, when carbon prices make
gas-fired power more economic than coal-fired generation.
But gas prices are now relatively higher than coal prices,
meaning EUA prices would have to be six or more times higher
than at present to force such fuel switching, see Chart 1.
That dims prospects for policy tinkering to drive emissions
cuts in this way.
The European Commission is presently trying to get member
state approval to remove temporarily several hundred million
emission permits, or EU allowances (EUAs), with a view to
cancelling these permanently.
If the aim is to drive long-term, low carbon investment,
then direct support for renewable energy may be more effective,
coupled with long-term cap and trade reforms beyond 2020,
focusing on a tough emissions cap in 2030, dove-tailing with
global efforts to secure an international climate deal.
UK CARBON PRICE FLOOR
Britain next April introduces a carbon floor price which is
illustrative of the dangers of pushing up carbon prices.
The aim is to reduce volatility in carbon costs, for a
clearer signal for low-carbon investment.
Chart 2 shows the schedule for the carbon price floor which
starts at 15.7 pounds next year, or nearly 20 euros, more than
double present EU carbon prices.
Polluters will pay the difference as a carbon tax and pass
the extra cost to energy consumers.
The UK government estimated in 2011 a top-up of about 5
pounds per tonne of CO2 in 2013/14, but the number could be far
higher subsequently, taking account of sharp cuts in EUA prices.
That top-up is now nearer 10 pounds according to a panel of
UK lawmakers, which would drive UK wholesale power prices up
about 10 percent. "This could have a devastating effect on UK
industry," the panel reported in January.
While Britain plans to compensate energy-intensive users,
that will add to the complexity of the scheme.
The policy will also deliver a windfall to existing nuclear
and renewable energy operators, compared with coal, while a UK
impact assessment of the price floor made no detailed case for
how it would drive certain estimated emissions cuts.
In the same way, intervening now to raise EU carbon prices
will provide a one-off economic rent for speculative investors
in carbon emission permits, will raise wholesale power prices,
and could over-reach itself and drive carbon and power prices
too high as economies recover.
Britain may be wiser to wait for EU cap and trade reforms,
which in turn may be better to focus on a tougher emissions caps