Emission trading- the last chance to get it right
By Eija-Riitta Korhola, Member of the European Parliament
Among my colleagues, I have been called the launcher of the terms "windfall profit" and "carbon leakage". Though not true, I was the first to introduce these phenomena in the EU parliament at the beginning of 2002, well before the adoption of the first EU emission trading scheme directive (EU-ETS).
It was two Finnish energy experts Jukka Leskelä and Harry Viheriävaara who were the first to determine theoretically the upward effect of ETS on electricity prices. At that time the EU commission even denied the existence of carbon leakage. Nor did they believe that ETS would increase the electricity price by more than 10 per cent. But in 2005 when the reality was in front of them, they said that this large price rise was their intention – to influence the behaviour of the consumer! Hindsight is such an exact science! Today, I remain amused that the revised commission ETS proposal is based on avoiding both carbon leakage and windfall profits.
What is carbon leakage? Normally it's the situation where energy intensive industries exposed to global markets – who are usually employment intensive too – find they cannot be competitive and move out of the EU and relocate to where the so-called 'cost of carbon' is free and other environmental norms are lower.
Carbon leakage is difficult to prove. We can never point to a single relocation as evidence of carbon leakage. It would be an ill-posed question. This is analogous to the concept of climate change. We can never say an individual storm is proof of climate change. After all, we had storms and floods before climate change became an issue. What we can say for sure is that climate change will result in more extreme weather conditions with catastrophic and lethal consequences and our time to react is running out.
Due mainly to the artificial deadline of our mandate, we are under severe time pressure, but I contend that as bad as it would be to fail to deliver on time – it would be even worse to deliver a failure for all time.
The current EU-ETS was an innovative ship launched on uncertain waters five years ago. It has holes below the water line and is sinking. All the criticisms about windfall profits, carbon leakage and ineffectiveness are true. For the revision we must learn the lessons of that prototype because another flawed system will dissuade the rest of the world to join us and potentially ruin our energy intensive industries whilst doing nothing to save our planet.
Members of EU parliament industry, research and energy (ITRE) committee from the centre-right EPP-ED party tried to ensure an allocation method which allows industry to meet the emission reduction targets whilst remaining internationally competitive. Success lies in the methodology of allocating of allowances. The choice is between auctioning, free allocation or an intelligent combination of the two. Auctioning is favoured by the commission because it provides revenue that could be used for subsidising clean technologies.
As the shadow rapporteur of the ITRE ETS report, I proposed free allocation to all manufacturing industry – but with the proviso that only those getting their processes to meet lowest emissions and energy-use benchmarks, will get totally free allocation. This is essential to encourage the use of best available technologies. It will also make our own industries more efficient and ahead of others once the international playing field has been levelled. For power generation the situation is different because in most cases the extra cost can be included in consumer prices without creating competitive disadvantage. In the ITRE vote last week, I had the support of my group but we lost narrowly. I will table similar compromises in the environment committee and in the plenary, if necessary.
According to several studies, auctioning is not a better system in terms of the final goal. Free allocation does not mean business as usual. Reduction targets must be achieved through cost-incentivised benchmarking. This is a methodological choice and I believe it is a more predictable approach for our industry until auctioning becomes a global system.
Long term problems demand long term commitments to find sustainable solutions. We have no choice but to continue with what we believe to be right.