"Jason Anderson is the Head of EU Climate and Energy Policy at the World Wildlife Fund European Policy Office."
When it became clear that acid rain, due to sulphur emissions from power plants, needed to be tackled vigorously, the United States and the European Union took different approaches: markets vs. standards. And although the EU regulatory approach was effective, the US market gained a lot of attention for being an innovative system.
When it came to curbing carbon emissions, after the failure to agree on an EU-wide tax, emissions trading was adopted from the United States. Heavy hitters like Shell and BP recognised that the logical consequence of carbon pricing should be to move from higher-carbon energy to lower carbon forms, starting with coal to gas switching.
Most environmentalists overcame scepticism about 'rights to pollute' but issued conditions for support. It asked that the allocation be stringent enough in the short and long term, and that it is met through real efforts that reduce emissions in Europe.
After 10 years in action, the EU's ETS has yet to meet those conditions: it does not (yet) aim for Europe's 2050 goal of 80-95% reductions. It has been chronically oversupplied and it allowed overseas offsets in large numbers to flood the system. The system has been exacerbated by the economic downturn and has undermined its credibility by allowing exemptions to certain industries and countries.
We have learned that it is not easy to manufacture a market and have it run smoothly right out of the box. Interventions are needed to make it work properly, which the EU has been partially willing to make.
As EU countries handed out permits for free, it led to preferential treatment that wildly over-allocated the market. That changed in the 2008 reforms.
Despite those changes, there is still a vast oversupply of tonnes, and the resulting low price is dragging the ETS down. Fortunately the opportunity for further reform is at hand, with a 'market stability reserve' currently on the table, and a revision of the system for the post-2020 period waiting in the wings. These laws could make the system more ambitious and reliable, while eliminating the 'toxic tonnes' now plaguing the system. At that point, the ETS would return to playing an important role in decarbonisation.
But even then it will have its limits. Switching to fuel might not happen if the carbon prices will rise. For every EUR1 coal become cheaper relative to gas, the CO2 price needs to rise EUR3 to compensate. At today's coal to gas price ratio, unless the carbon price rises to levels we are very unlikely to see for a long, long time in Europe, the ETS will struggle to be a decisive factor.
Thus, the idea that ETS might carry the sole weight of decarbonisation effort has been shattered.
Research from the International Energy Agency and others demonstrates the need for complementary policies. The alternative is either highly lopsided burdens, or foregone benefits.
If we were to want to have a carbon price that motivated renewable energy or CCS, the price would need to be over 100 euros/tonne with the certainty that it would persist for a long period. And given that many efficiency measures are theoretically already cost-positive, raising carbon prices is not the point - different kinds of policies are needed to unlock those opportunities.
Six years ago, WWF initiated an effort together with partners E3G and Bellona to promote the concept of an emissions performance standard (EPS) in the Industrial Emissions Directive. An EPS would set emissions limits for power plants, giving clear guidance about which should be decommissioned first, and over what time horizon. Within those guardrails, the ETS could continue to allocate resources efficiently.
There were two rationales for the NGOs involved. Those who saw carbon dioxide capture and storage (CCS) as an important solution to coal and industrial emissions knew that it was not likely to get off the ground only with the limited amount of public and private finance that governments and industries were willing to put up. It is far easier to ignore CCS if there's nothing pushing industry to act with any urgency (and indeed that is what has happened since then).
Those less favourable to CCS still saw the benefit of the EPS, since it would be a means of addressing the major culprit in EU power emissions directly - coal power. Already it was becoming clear that support for renewables was generating significant progress, but those gains were not coming at the expense of coal power one-to-one.
Since then, the United States has again jumped out ahead of Europe by putting in place an EPS on new power plants that all but rules out coal power. And just as happened with the EU ETS, the first mover in the EU has been the UK, which has put in place an EPS on new power plants.
European policy should learn from these experiences because an EPS is even more necessary than ever.
Despite the Commission and Council's goals for decarbonisation after 2020, there are still risks. Two years ago, WWF published a report showing that within the EC's own modeling, there were many assumptions made about how the power sector could continue to invest in fossil fuels and then decarbonise just in time to keep emissions ramping down over time.
This included large amounts of CCS that seem to materialise out of nowhere. We know this isn't how things work. Not least because all the fossil assets currently online, being extended, or being built, are potentially stranded assets with political weight behind them to keep them open.
We can't put ourselves in the position of having to choose between decarbonisation and economic viability.
If we want to have an ordered transition for industry, a just transition for workers, and an effective solution for environmental protection, we need to start now, and with clarity. This is why emissions performance standards are an essential tool in the EU policy toolbox.
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