An economic recession of two years, in line with the expectations of the European Commission, will considerably decrease the effectiveness of the Emissions Trading Scheme (ETS) in stimulating low-carbon technologies. In order to meet EU climate targets in the longer term, new governmental policies will be needed to compensate for this.
This is the key finding of an EU policy impact study for the Netherlands Environmental Assessment Agency (PBL). The study was carried out by Ecofys, a leading consultancy in the field of renewable energy, energy efficiency and climate change.
The line of reasoning behind the Ecofys analysis is as follows.As a starting point, data compiled in the study imply that the recession will lead to a lower CO2 emission development (baseline) in the EU than previously assumed. This could reduce the additional effort required to meet the 2020 emissions cap by as much as 50%.
The study closely analysed the effects of this lower baseline on the two distinct phases in EU emissions trading: the current period until 2012 and the period between 2013 and 2020. Data compiled in the study suggest that for the 2012 compliance, there will be sufficient emission allowances available, which implies that carbon offsetting (using credits from projects outside the EU, e.g. within the Clean Development Mechanism, CDM) is not even required.
Presently, this expected over-supply has already caused a fall in carbon prices to between €12 and €15. The prices have not dropped to zero because most companies are already preparing for their compliance in the period 2013-2020. The present design of the ETS allows companies to maximise their use of carbon credits until 2012 and save the excess EU allowances (EUAs). Unlike offsetting credits from CDM, EUAs may be transferred to the next period 2013-2020. Due to the lower baseline and the transferred EUAs, Ecofys estimates that 65% of the ETS effort in the years between 2013 and 2020 could in practice be covered by offsetting (see the figure).
This mechanism will probably also keep EUA prices low. According to the analysis, the average market price of EUAs in the period until 2020 is expected not to exceed €20 per tonne of CO2. This relatively low carbon price will have a negative impact on the implementation of innovative technologies such as CCS, off-shore wind or tidal energy. Governmental policies will have to compensate for these market effects given that high deployment rates are required to meet the EU’s long-term climate target.
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