Bloomberg News

EU Should Mull Expanding CO2 Cap-and-Trade, Poland Says

April 17, 2012

The European Union should consider expanding its emissions trading system to cover the region’s transport industry and shouldn’t judge the effectiveness of the program by a decline in carbon-permit prices, Poland said.

The 27-nation bloc needs to modify its cap-and-trade program, the world’s largest, to make it “a landmark product” for countries taking part in global climate talks, Poland said in a confidential policy paper on the future of the EU emissions trading system, or ETS, obtained by Bloomberg News.

“In order to stabilize and strengthen the system and keep our leadership at climate negotiations by making it an appealing option to our negotiating partners, we must work on enlarging and refocusing its scope,” the Polish government said in the paper.

The document, sent to other EU member states before an informal meeting of environment ministers in Denmark later this week, is Poland’s contribution to a debate about the ETS scheduled for April 19. The talks will take place two weeks after carbon prices fell to a record low on oversupply of allowances amid a recession.

The ETS is the cornerstone of EU climate policy and imposes emission curbs on more than 12,000 carbon-discharging facilities owned by power producers and manufacturers. This year the system expanded beyond the bloc’s borders for the first time since its creation in 2005, covering flights from and to European airports and triggering opposition from countries outside the region, including the U.S., Russia, China and India.

Greenhouse-Gas Reductions

“Considering tensions arising from enlarging ETS to branches of transport touching players from third countries, it is proposed to explore the whole EU transport-sector reduction potential to balance the emphasis of greenhouse-gas reductions between production and consumption,” according to Poland.

Emissions trading is a tool to effectively and efficiently reduce CO2 emissions for all transport modes in the industry, which is the biggest in terms of emissions not covered by the ETS, the Polish government said in the paper, which proposes options for the cap-and-trade system up to 2030.

“Considering that the power sector is included under the system and the fact that we want to promote electric transport, other means of transport should be ideally covered by the same regime internalizing their CO2 costs,” according to Poland.

The government also said that the low price of emission permits will recover when Europe comes out of economic “turmoil” and the EU doesn’t need any “administrative meddling” to boost the cost of carbon discharges.

Emission Permits

EU emission permits for December rose as much as 2.6 percent to 7.09 euros a metric ton on the ICE Futures Europe exchange in London today. The contract has lost 60 percent in the past year, falling to a record low of 5.99 euros on April 4 on concern that the ETS will be oversupplied for most of the next trading period from 2013 to 2020.

Denmark, the holder of the bloc’s rotating presidency, said earlier this month that a decline in emission costs casts “some doubt” on the ability of the program to promote investment in low-carbon technologies.

The reasons behind the decline in carbon prices include the economic crisis, uncertainties over national support schemes for renewable energy sources and failure by governments worldwide to agree a global climate-protection deal, according to Poland.

“The future of the ETS is in doubt for a number of reasons,” the Polish government said in the paper. “But it is still Europe’s major tool for achieving CO2 reductions agreed back in 2008. If we want to make it deliver truly global results, we must change it so it factors in carbon leakage and consumption-based emissions.”

Climate-Policy Framework

To restore investors’ confidence, the EU should overhaul the system to create a “flexible climate-policy framework well integrated with other environmental and economic policies,” the government said. Adjustments can take place only after all tools agreed to in 2008 and due to be introduced from 2013 are fully implemented, including distributing free allowances for east European power producers, it said.

In the future, the EU should consider switching to fuel- based benchmarks as a basis for calculating the number of free allowances for installations rather than relying on product- based benchmarks, according to Poland. The country relies on coal for about 90 percent of its electricity generation.

Europe also needs to provide additional assistance to carbon capture and storage projects and put more effort in encouraging non-EU countries to link their systems with the ETS, for example through a bilateral emissions-offsetting mechanism, the Polish government said in the paper.

Carbon-Reduction Targets

Another option put forward by Poland is to give member states the possibility of using surplus United Nations emissions rights, or Assigned Amount Units, for compliance in the ETS. The government also reiterated that Europe should not unilaterally move to more ambitious carbon-reduction targets.

“A potential trade-off between climate-change policies and competitiveness continues to be a risk or some sectors, especially in a perspective of full decarbonization, if Europe was to act alone,” it said.

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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