After Failed Attempt in April, Europe Approves Emissions Trading System

Ina Fassbender/Reuters Wind turbines and a coal power plant in Germany. Europe approved a measure aimed at raising carbon permit prices. By STANLEY REED Published: July 3, 2013 LONDON — The European Parliament approved on Wednesday a measure intended to revive sagging prices and confidence in the European Union’s emissions trading system, the centerpiece of Europe’s effort to cut greenhouse gases and a model for similar systems around the world. The vote had taken on symbolic importance because Parliament had rejected a similar proposal in April. That vote threatened the carbon trading system, which has been emulated globally as a way of using markets to curb greenhouse gases. The measure passed on Wednesday in Strasbourg, France, by a vote of 344 to 311 after intense lobbying by the European Commission and some national governments, including those of France, Denmark and Finland. It also gained stronger backing from liberal and socialist groups. Among those opposed were the governments of Poland and the Czech Republic, which were wary of the plan’s impact on their energy-intensive industries. A large moderate group, the European People’s Party , was divided, leading many of its members to abstain. “This was to some extent a symbolic vote indicating support more broadly for Europe’s carbon policies,” said Stig Schjolset, an analyst at Reuters Point Carbon, a market research firm based in Oslo. A negative vote would have meant “that European policy makers did not want to fix the carbon market and use it as a key tool to combat climate change,” he said. Richard Seeber, an Austrian and spokesman on the environment for the European People’s Party, voted in favor of Wednesday’s legislation after voting ‘no’ in April. He said he was persuaded by an amendment ensuring that the intervention in the market was “a one-off” and by a requirement that an assessment be made about “carbon leakage,” the extent to which businesses would leave the European Union to avoid the higher permit price. “It is essential to keep the E.T.S. as the main market-based instrument to fight against climate change,” said Mr. Seeber, referring to the emissions trading system. The market for carbon credits reacted positively, rising to about 4.70 euros, or $6.13, per ton, a 9 percent increase for the day, on heavy volume. The approved proposal will try to shore up prices for permits to emit greenhouse gases by delaying the auctioning of some of these allowances in the coming years through what is called backloading. Carbon permits are licenses for companies to release greenhouse gases. The idea behind the European cap-and-trade system is to tighten the amount of permits available each year so as to make polluting more costly, forcing companies to switch to greener technologies. But Europe’s prolonged economic downturn and generous allocations of allowances have created a glut of permits that cut the price to as low as about 2.75 euros a ton after the negative April vote. In a sense, the system is working by providing relief at a time of economic stress. But analysts say that a price of 30 euros a ton or higher is needed to persuade companies to switch to cleaner fuels like natural gas, the main alternative to coal for generating electric power. Coal use in Europe boomed last year. Analysts caution that the number of allowances that will be held off the market, about 900 million, is estimated to be only about half of the surplus of permits that would otherwise have built up by 2020, so it will not by itself shift the carbon market from bear to bull mode. “I think the backloading itself will have limited impact on prices because the market remains significantly oversupplied,” said Roland Vetter, head of research at CF Partners, a carbon trading firm based in London. In addition, there are still negotiations with Europe’s national governments and other hurdles to clear before the changes are put into effect, perhaps in the early part of next year. “This is a marathon, not a sprint, so today is not the end of the story,” said Miles Austin, the executive director of the Climate Markets and Investment Association, an industry group based in London. Business groups, some of which had lobbied against the measure, were critical of what they described as interference in a market system. “Even a one-off intervention undermines the principles of the emissions trading system and will make it more difficult for businesses to produce cost-effectively in the E.U.,” Arnaldo Abruzzini, secretary general of Eurochambres, which represents European chambers of commerce, said in a statement. But the world’s pioneering carbon market has a pulse again. Among supporters of carbon trading there is now hope that Europe will in a couple of years adopt structural changes that would lead to permanently higher prices. Connie Hedegaard, the European Union’s commissioner for climate action, said the purpose of the backloading measure was to “stop the bleeding with the drop in the carbon price while we were discussing more challenging issues.” The simplest overall change that would raise the price would be to “reduce the cap,” or permanently reduce the number of allowances available, said Robert N. Stavins, director of the Harvard Environmental Economics Program. But such a move “is very difficult to do at a time like this,” he said. With Europe mired in recession, politicians do not want to saddle Europe-based companies with even higher costs, especially considering that their American competitors are benefiting from lower energy prices thanks to the discoveries of shale gas. Also, the United States seems to have more or less permanently rejected a cap-and-trade system after the House of Representatives passed one in 2009 that later failed in the Senate. For some businesses, that left the European system looking like yet another burdensome and costly regulatory initiative. “Europe thought it would take the lead and the U.S. would follow,” Mr. Stavins said. Instead, the United States rejected cap and trade and that is affecting the cost of carbon-intensive services in Europe, he said. Mr. Stavins said that countries like Australia, Japan and China were all experimenting to various degrees with systems like the one Europe adopted. A version of this article appeared in print on July 4, 2013, on page B3 of the New York edition with the headline: After Failed Attempt in April, Europe Approves Emissions Trading System. Taylor Scott International