By Ewa Krukowska, (Bloomberg) --With assistance from Mathew Carr and Wout Vergauwen.
The biggest overhaul of the 13-year-old European Union carbon market has only just been approved but discussions are already underway on how to further bolster prices in the cap-and-trade program so that the cost of pollution makes a real difference. The push is led by several EU member states from the west and north of the bloc, which have always been at the forefront of the fight against greenhouse-gas discharges blamed for global warming. France, the host of the 2015 climate talks that ushered in the most comprehensive global climate-protection deal, is in favor of setting a minimum carbon price for power production. This kind of a mechanism is endorsed by the Netherlands, where a floor price is going to be introduced from 2020. The U.K. has had such a tool in place since 2013. The price of pollution will be discussed at a conference organized by France in Brussels on March 5, following a quarterly meeting of EU environment ministers. The talks could yield more clarity on how various national approaches could becoordinated at a regional level. They are part of a wider debate in Europe about its climate policies, which environmental groups say are too weak to ensure reaching the 2050 goal of reducing emissions by at least 80 percent and the aim of the Paris Agreement to keep temperature increases well below 2 degrees Celsius (3.6 degrees Fahrenheit). “We will see more and more groups of countries going together,” said Bas Eickhout, Dutch member of the European Parliament’s environment committee. Regarding the carbon floor price, “it may be a collaboration of countries that want to go further, not immediately an EU debate. France is there already, the U.K. is favorable, as is Sweden, Finland and the Netherlands. Everyone is a bit waiting for Germany and once Germany takes a step I think you will see quite some countries moving in that direction.” The price of benchmark permits to pollute in the EU Emissions Trading System more than doubled over the past year and a half to 10 euros a metric ton on a sweeping reform of the program that will curb oversupply. It got the final nod from national governments on Feb. 27. Still, the permits trade at less than half of the 25-30 euros range envisaged by lawmakers when the rules for the 2013-2020 period were established last decade. That level is seen as necessary for power plants to permanently switch to natural gas from coal. The ETS covers about 40 percent of European carbon discharges, imposing annually decreasing pollution limits on around 12,000 facilities owned by power producers, airlines and industries from steel to cement makers. For every metric ton of carbon dioxide they discharge, emitters have to submit one emission permit, bought or received for free, or pay a fine. Companies that pollute less than their cap can sell excess permits, getting an incentive for going greener. A carbon price floor could come in the form of an additional tax on products used to generate electricity and be phased out when ETS prices reach the targeted level. Proponents of such a mechanism argue that while EU emission prices are projected to gradually increase following the last reform, their levels in the short-term are not sufficient to trigger a shift to cleaner fuels in the power sector, which accounts for around a fifth of carbon discharges. Critics point to the risk of market fragmentation, stressing the threat of price distortions between member states. Climate Commissioner Miguel Arias Canete has repeatedly said that he favored EU-wide efforts to bolster the cap-and-trade program over national measures. “Such a move could theoretically antagonize the European Commission and create more divisions in the EU,” said Christian Egenhofer, Head of energy and climate research at the CEPS think-tank in Brussels. “People seem not to have yet digested the reform of the ETS. Carbon prices are projected to rise anyway and it may take a couple of years to agree the price floor level so what do you really gain? I would put my energy instead in cancelling carbon permits.” According to Eurelectric, the lobby representing the big power generators in Europe, a price floor needs to be “very well considered” in order to avoid undermining the ETS. With nations worldwide scheduled to take stock of efforts to fight climate change at the United Nations talks later this year in Poland, Europe may need to strengthen its policies and accelerate the pace of emission reductions in a few years, a move that will further bolster carbon prices, said Kristian Ruby, Eurelectric secretary general. “We need to discuss various overlapping policies that have impact on the ETS and begin a discussion about what is the long-term outlook for climate policies,” Ruby said. “We know that the current annual rate of carbon cuts will not take us there to the Paris Agreement goal.”