13 September 2010

"Minuscule": Effects of European ETS on CO2 Emissions

The UK NGO Sandbag has released a report (PDF) evaluating the effects of the European Emissions Trading Scheme on the bloc's carbon dioxide emissions.  Here is an excerpt from the report:
We are now two years into the second Phase of the EU Emissions Trading Scheme (ETS) and it is already clear that, like Phase I, Phase I I will fail to deliver significant abatement2. Policymakers set a Phase I I cap sitting just 6% below 2005 allocations3. But as 2005 was actually overallocated by more than 7% meaning Phase I I actually represents a 1% growth cap against 2005 emissions4. Furthermore, this unambitious Phase I I cap was almost immediately blindsided by the recession. In 2009 the recession dragged down production levels by 1 3.85%, reducing emissions by 1 1 .6%5.

Even with an aggressive economic recovery, our projections find it unlikely that the Phase I I cap would constrain emissions by more than 32Mt across the full 5 years of the phase (2008-1 2), a meagre 0.3% of the 1 0.5 billion tonnes we expect covered installations to emit across the period. To put this in context, the current phase of the ETS, which polices more than 12,000 installations, would have been almost twice as effective if it had simply enforced a cap on one of Europe's largest polluters: Drax power station in the UK is likely to face a shortfall of 60Mt across the same period, double the net effect of the entire scheme.

Furthermore, the low cost and high availability of offsets make it is highly unlikely that this meagre 32Mt of abatement will take place in Europe. I t is more probable that European emitters will purchase cheap offsets to give them a carbon space to grow domestic emissions. In fact, despite the promise of much more aggressive Phase I I I caps we find that on-going availability of cheap offsets could allow Europe’s domestic emissions to grow a staggering 34% from current levels by 2016.
In The Climate Fix, I present data suggesting that Europe's rate of decarbonization was essentially unchanged before and after implementation of the Kyoto Protocol, up to the period covered by the Sandbag analysis.  The Sandbag analysis suggests that this finding holds to the present.  The strong implication is the that EU ETS has not accelerated BAU decarbonization in Europe.

Of note, the European Commission agrees with the Sandbag analysis, but not the implications that they draw:
The European Commission agrees in broad terms with the analysis underlying the Sandbag report, in that supply exceeds demand for allowances in the current trading phase, Maria Kokkonen, spokeswoman for Climate Action Commissioner Connie Hedegaard, told EurActiv.

"We do not, however, share all the policy conclusions drawn from it. The EU ETS has undergone a fundamental reform as part the climate and energy package and is on course to be even more effective in the future. The priority is to properly implement these fundamental reforms in a timely manner," she said.
This response would seem to suggest that the spell of emissions trading is still working its magic.  It will be interesting to see how long this illusion can persist.