The EU Emissions Trading System (ETS) – from EU initiative to global impact

Since 2005, the EU ETS has led the charge for a stable and market-led carbon price across the European Union. Now, in its 8th year, the merits and future of the ETS, and its role across transnational industries, is looking likely to dominate the political landscape before the current European Commission engages in its timely re-shuffle at the end of 2014. But it’s not at the EU level that the long-term future of the ETS will be determined but on the international scene; with countries such as Canada, Brazil and India creating their own carbon regimes off the back of the ETS, the collapse of the market price since the global recession, and the on-going aviation emissions negotiations all contributing to the success or failure of this initiative. 

Let’s start by briefly looking at the current situation. In the past year, the EU adopted plans to backload – postpone – upwards of 900 million CO2 units up for carbon auctioning until 2018. Carbon auctioning between companies constitutes the cornerstone of a successful market-led carbon price and in doing so, ensures competitive prices, and therefore incentives for industries to be gently pushed towards renewable energy strategies and innovation. This was done for two key reasons:

•  Firstly, the collapse of carbon unit to only ¼ of the originally intended price (currently bordering on 6EUR per metric ton) – due to falling manufacturing output – has meant that the money received via these trades has been much less than anticipated, leading to a much smaller fund to invest in renewable energy strategies.
• Secondly, the original ETS gave widespread exemptions to energy intensive industries, showcased through the damning figure of only 50% of carbon allowances created within the EU actually being processed through trades. In reality, meaning that there was virtually no incentive for companies to partake in competitive pricing due to low cost and exemptions already in existence.

How you can have an effective ETS with a goal of limiting emissions and pushing for green investment with such little scope and market consequence is just one question which seriously needs to be addressed.

Even though this is a startling figure, it must be remembered that the ETS was the first of its kind, anywhere. And as I’ve already mentioned, its success has led to the uptake of similar schemes across the globe. The most impressive – at least in my eyes – is emissions intensive India. Even with a ludicrously low unit price (2EUR per metric ton), its emerging economy status and dependence on energy intensive manufacturing, this move must be applauded. Further schemes are being contemplated in Asia and the Africas, and there have even been low level talks of a NAFTA agreement, due, in no small part, to America’s new found “gift of gas” in fracking – instantly widening the policy scope achievable in this area by the notoriously divided house. 

The talks which piqued my initial interest in the EU ETS though were focused on a single industry: Aviation. Last year, the EU put a “hold” on all aviation emissions charges for international flights in, or out, of the EU after one of the largest and most damning aviation disputes in recent memory. China was so aggrieved that they pulled the plug on a 2.3bn EUR deal with Airbus for new aircraft and are now in negotiations with the US firm Boeing, while the US passed a law which made it illegal for US companies to pay the tax.  EU flights are still bound to pay, or abide by, the ETS deal as it stands while the international aviation industry continues in its talks to create a worldwide emissions price – the most effective and non-discriminatory solution for an industry which transcends borders, regulations and political views. The UN is currently leading these ongoing talks but with the best will in the world, an agreement is still a long way off.

The outcome of these talks will have a resounding impact on the future of the EU ETS. With the inclusion of manufacturing and solutions to solve the current failings of the ETS within the EU in effect, the chance of a global carbon price for aviation will signal a clear understanding and need to invest in recoverable energy strategies. It will also transform (maybe too strong a word) – in the long run – the price of travel across all sectors. Where once only firmly secured manufacturing industries were charged (location focused), global supply chains will now be affected. Shipping will follow shortly, as will the ability of multi-national companies to up and move for favourable incentives the second their practices are questioned.

The EU ETS has its failings: low price, mass exemptions, low financial impact for companies, high tax fraud and emissions tampering. But the overall impact, not just on EU companies, but the discussion it has generated at a global level has been beyond what was expected upon its inception. The ETS will not go away, even if aviation talks fail, and international companies balk at the cost once the moratorium on aviation costs ends. Its scope will only increase. The true testing point of the ETS will not come now, or even in a few years – the ETS is still finding its feet – but in 2020 when emissions targets come to a head, and maybe most importantly, the goal to have a functioning Carbon Capture & Storage (CCS) facility is completed. Only then can we judge and review the ETS, alongside its international cousins.

Ed Gavaghan

I have a passion for realistic politics, Tarantino films, travelling, aviators and explaining the rules of cricket to anybody who will listen.

Feel free to contact me at: egavaghan@europeanpublicaffairs.eu / Or follow me on Twitter: Edmund Patrick Gavaghan