This is an interesting paper that deserves to be discussed. The beginning of part I, on page one, proves clearly how the EU was too hasty with the start of ETS and the preparation period was way too short. Even today the registries of some countries and even plant specific NAPS (e.g. Poland) are not ready. Seven member countries are still lacking the verification methods of the emissions.
EU emissions trading scheme has been operating for 14 months which is about 40 % of the entire first trading period. Essential parts of the scheme are the emissions reporting and verification procedures and the national registries where the emission allowances are kept, transferred between market participants and surrended according the emissions.
At least one month ago the greenhouse gas emission registries were not operational in the following EU member states: Cyprus, Greece, Hungary, Italy, Luxemburg, Malta and Poland. In practice it means that the companies of these countries could not have even received the emission allowances in their accounts. It is also known from many sources that in many of these countries it will be impossible to have the registries operational until the end of April this year.
Thus, for these companies it is impossible to fulfil the requirement of the emissions trading directive to surrend allowances according the emissions of year 2005 until the end of April 2006.
Even before that, until the end of March 2006, the companies should give their verified emissions reports to the national competent authorities. However, according to my information even the accreditation procedures of the verifiers are not in place in a number of EU member states. For the companies it is impossible to hire a verifier. The verification is planned to be the guarantee of the reliability of the entire emissions trading scheme.
This creates a serious question of both credibility of the system and juridical position of many EU companies. The sanctions of the emissions trading system are hard.
In some of these countries it is not even question about functioning of the registries or lack of verification procedures. In addition, the installation level allocation has not yet been decided on. It means that the companies do not even know how many emission allowances they will receive. Consequently, the companies do not know their position in the emissions trading market. The unclear situation is affecting the actual allowance market even in the countries that have operational registries possibly keeping the market price high and affecting the economy of entire Europe through power prices and through higher compliance costs of emissions reductions.
For the functioning of the emissions trading scheme and for the equity in the internal market of the products it is necessary that system is operational in all member states. From the emissions trading market point of view the information on the allocation and from the emissions is necessary, but obviously will be lacking for a long time. The reliability and credibility of the system is under suspicion. The market itself has not been liquid and the prices have been unexpectedly high for the first period. The market effects of the trading scheme have also been larger than preassessed.
The beginning of the system is often reported as a success but from the background presented here, it seems to be a disaster. The environmental benefits of the system remain to be seen until there are reports on the emissions.
What is also extremely worrying is, that according to information form many member states it is obvious that the member states cannot fulfil their schedule for the trading period 2008-2012 either. The member states should, according to the directive, notify their national allocation plans until the ends of June 2006 to the Commission and the final decision in the member states to allocate the allowances for 2008-2012 should be made until the end of 2006. In the case of further delays, the EU economy will be hurt through uncertainty in the emissions allowance market.
Therefore here is one of my questions to Delbeke: what is, according to the Commission, the realistic schedule for the system. How are we going to guarantee that the European companies do not loose either their competitiveness or their legal status because of the malfunction or the negligence of the member states. My suggestion is, since this first period was originally marketed as a training period, it could easily to be suspended or interrupted, and the system would start again earliest first of January 2008, provided that everything is completed.
It could be quite ok to admit that the schedule was too ambitious. During this suspension the commission could do some extra research in the spirit of Lisbon strategy, keeping in mind the effect on the price of electricity. This whole system was originally created in order to guarantee that the EU could meet its Kyoto targets in cost efficient way.
There is no need in linking new fields or gases into emission trading scheme (ETS) at least before 2013. The essential thing would be to get the system as a whole to function and for us to learn something from its. For instance we have no idea of how the emission market would react to air traffic joining in. Most probably prices would rise. In my view, the discussion should rather be on whether some of the current fields should be taken out of the system. As it seems that Member states will continue to distribute full emission rights to energy intensive industry, we must put forth the question, is there any sense in keeping these within the system at all? It would be interesting to hear Commission?s opinion on that.
Debate on the economic impacts should also definitely be continued. DG Envi continues to try to talk away from the fact that emissions trading has great economic impacts that derive explicitly from ETS, NOT climate goals.
We could put forward a simple calculation: If EU emissions are reduced during the first emission trading period around 100 Mt CO2/a, is the price of this approximately 2500 million euros per year.
A very cautious estimate on the consequences is that an average rise in the wholesale European electric market of about 10 euros/MWh. This is an estimate that for instance the Finnish research institute VTT has made.
The electricity consumption of the EU-25 is around 3 000 TWh/a. So the imaginary cost to the wholesale market in the EU-25 would be around 30 billion euros per year.
Of course all methods leading to emission reduction have market effects. One starting point – and a rather unorthodox one – would be to tax electricity and allocate the funds gathered to actual emission reduction investments. The hypothetical cost of 30 billion per year in investment grants would help build an enormous of capacity that in turn would replace fossil fuels.
Nuclear power, for one, is one way to produce energy and even without subsidies. It dos not need subsidies, unlike many other sources. An investment of 3 billion euros (e.g. Olkiluoto 3) in nuclear energy amounts to a reduction in emissions of around 10 MtCO2. This means that a 30 billion investment in nuclear energy would cover the emission reducement of 100 MtCO2/a needed. With, of course, the difference that the energy is there to sell as well. So not only would there be emission reduction but also profit to be gained.
These thoughts are just some that have been aroused by the results we already have seen as a result of ETS. Emission trading has had a huge leverage impact in the energy market. The essential thing is to keep doors open to investments. We don't need any extra subsidies for renewable energy sources if the actors on the market can count on this leverage power in the future as well.
One extra question I have for Mr. Delbeke: If other countries and country groups don't move towards quotas in post-2012 negotiations, would it not be sensible for EU to reduce its own ambitions for instance in emissions trading? To simply make a conscious decision to being down emission prices by reducing climate goals. This would mean the competitive effect would be smaller but least something would be done regarding climate change.
Some further comments on the study:
The recommendations1-4 on page 2 are fine.
Recommendation 5 on page 2 is not really clear. If it tries to imply that the costs of emissions reductions of a certain sector, e.g. steel, are the same everywhere in the EU, then the conclusion is wrong. Steel factories in the EU are not all alike and some have taken early actions, while others have not.
On pages 2 and 3 the problems of ETS are described well. Recommendations 6-7 which are linked to the problems are good.
Recommendation 8 states that benchmarking in all EU-countries should be harmonized. This is a good idea as such, if this would lead to an efficient plant being reimbursed fairly in the division of EU emission rights. But then there might arouse a problem with the EU burden sharing which would tie up an individual country's possibilities to hand out emission rights to its emission trading sector.
The Auction-part on page 3 binds auction correctly to the method of rotating funds back to the actor from whom the funds have been gathered in the first place.
"Competitiveness" page three: it brings up in a right way the problem of competitiveness for the EUs industry when compared to those from outside of EU, and also the really bad problems the energy intensive industry (aluminium, cement, steel) has to face.
In the beginning of page four it is correctly pointed out that the increase in the electricity prices is due to also other factors (increase in the price of gasoline, weather) than the emissions trading alone. Because of the emissions trading, there hasn't been a change from coal to gas, but burning coal has been continuing and emissions rights have been bought, and emission rights' price has increased strongly due to the increase in demand. Also the fact of the bad functioning of the EUs electricity market is mentioned.
The suggestion 10 (on page four) is great and bold and to be supported: because of the competitive disadvantage, the EU ETS should be re-assessed thoroughly and it should be compared with another alternative directing measure! This is the way to go! But I wonder why suggestion 11 then takes back a little the vigour of the suggestion 10 and I can't really support suggestion 11.
I have to a large extent been profiled as an EU ETS critic and freezer and someone who demands for its re-assessing. My impression is that the CEPS report supports the view I have expressed earlier many times. The CEPS report can be praised for not just sweeping the ETS' problems under the carpet like so many other similar reports have done (or for instance all commission's DG ENV reports/documents), but it brings the problems up for an objective monitoring.
And it is also good, that CEPS has the courage to suggest alternative directing measures to be looked into (suggestion 10).
In general, this text is an excerpt from the EU energy strategy which says the EU has to make sacrifices and it would be regrettable if this would lead to a situation where EU was not a leading producer of environmental technology. We have to invest in technology, And if EU is pushing industry out the question remains, who then will invest in technology? We might have a chance if we streamline the expenses of ETS to development instead of restrictions.