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European Carbon Market: Good Branding, Poor Substance

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By Roger Pielke Jr, a Professor of Environmental Studies at the University of Colorado. Originally published at the Lowy Institute for International Policy Interpreter Blog

Last week, in a surprise to many, the European parliament defeated a proposal to postpone the auctioning of emissions permits, a move that would have propped up prices in the bloc’s carbon market, known as the EU Emissions Trading Scheme or ETS. The market reaction was quick and brutal, with the price of carbon allowances falling by more than 30%. The political reaction was similar — the Wall Street Journal wrote that the vote was the ‘equivalent of the pope renouncing celibacy‘.

Such proclamations are not limited to those opposed to action on climate. In London, a carbon industry insider explained that ‘We have reached the stage where the EU ETS has ceased to be an effective environmental policy.’ However, the fact that the ETS has fallen short of expectations has much more to do with unrealistic expectations than it does with a surprising decision by the European parliament. After all, the price of EU emissions allowances was €4.50 before the vote, hardly an indication of strength.

Tom Brookes, director of the European Climate Foundation, explained that the EU vote took on even greater significance because climate policy, ‘was an integral part of the brand’ of the European project.

As a brand, the commitment to climate policy has served Europe well, even as it has stepped back from a proposed tax on airline emissions and seen the recent expansion of new coal generation. However, when Europe has faced decisions that appear to place economic growth in opposition to climate policies, no one should be surprised that policy makers have chosen growth. As the Financial Times explains, ‘These days, it is accepted…that global warming has been consigned to a seat in the waiting room while the EU tends to a chronic economic crisis that has threatened the single currency and increased unemployment.’ Expressing a preference for economic growth simply means that Europeans have much in common with people all over the world, who have made similar choices in similar situations.

With expectations that Europe’s economic malaise is set to continue, and continuing concerns among European policy makers, industry and the public over high energy prices, it seems unlikely that the EU will soon revisit the parliament’s decision not to prop up the flailing carbon market in a way that dramatically increases carbon prices, much less the actual costs of energy. So while the ETS is not going away, advocates for action on climate are going to have to look elsewhere for progress.

From this perspective, perhaps the vote of the European parliament could serve as a wake-up call, much like the disastrous Copenhagen climate conference and the failed efforts to pass cap and trade legislation in the US. If climate policies are to succeed in decarbonising the global energy mix, they will have to be designed to work in concert with people’s hopes and dreams, which typically means economic growth in rich and poor countries alike.

Climate policy will be in focus in several elections later this year, including in Germany, which has embarked on an ambitious ‘energy transition’ away from fossil fuels and nuclear power, and Australia where the deeply unpopular Julia Gillard looks set to be replaced by Tony Abbott, who has promised to terminate the recently implemented carbon tax.

Just like Europe, Australia illustrates the perils of elevating branding over substance. Australia is due to join the European ETS in 2015, when the EU carbon price is expected to be in the neighborhood of A$4. This means the price of carbon in Australia would plummet from its current peg at A$23; that’s a price drop of A$19 for which Julia Gillard will be responsible. Tony Abbott, meanwhile, plans to terminate the Australian emissions trading scheme altogether, so he would be responsible the remaining A$4. From my perspective, far removed, it looks like opposing political parties in Australia are working together!

The reality of emissions reductions is that the decarbonisation of the global economy will occur when less carbon-intensive energy alternatives displace dirtier sources. In the US, a revolution in technologies for natural gas extraction has led to an unexpected increase in rates of decarbonisation and significant reductions in emissions, while underpinning economic growth and cheaper energy costs. However, broader expansion of gas technologies faces opposition, as does nuclear power which holds even greater promise for large quantities of carbon free energy, often from those same lobbies pressing for action on climate change.

Decisions about energy technologies matter a great deal: the IEA observed in a report released last week that the carbon intensity of global energy generation has not changed in 20 years, despite the rapid increase in solar and wind technologies.  The lesson here is that markets don’t change carbon intensities, technology does. So long as debates over climate policies focus on trying to reify esoteric carbon markets and their associated politics, it is highly unlikely that the future will see policy outcomes any different than those observed to date.

Europe’s latest setback should nevertheless remind us that people remain generally willing to pay some price for attaining climate policy goals via a price on carbon, a lesson reinforced in Australia, New Zealand, California, my home town of Boulder and perhaps soon in China. We also know that accelerating decarbonisation of the economy requires a substantial commitment to energy innovation. Perhaps we are getting closer to the moment when advocates for action on climate put these points together in the form of a sustainable approach to climate policy.

Photo by Flickr user dmytrok.

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About the author

Matthew Stepp is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF) specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.