With the launch and ongoing development of its Emissions Trading Scheme, the European Union stepped forward and has been the prime mover when it comes to trying to cap carbon dioxide emissions, both within its growing borders and internationally – by establishing market-driven mechanisms that put a price on them, thereby enabling industry, private investors and government agencies to factor them into resource allocation and investment decisions. But have carbon dioxide emissions declined or leveled off as a result? Yes, according to “The European Carbon Market in Action: Lessons from the First Trading Period,” an interim report from an international team of contributors prepared by the Mission Climat of Caisse des Depots.
In addition to establishing the world’s first, and by far the largest, market for emissions allowances, the ETS’s three-year Phase I trial period has been successful in a number of significant ways, the authors maintain. The Phase I trial period has established a basis of price, market mechanics and emissions data that is benefiting market participants, industry and commerce, researchers and policy makers, paving the way for its expansion and more widespread and substantial progress in ETS Phase II, which began this year and runs through 2012. Moreover, it has been a boon and catalyst for the Kyoto Protocol’s Clean Development Mechanism and Joint Initiative.
In addition, problems relating to supply-demand conditions, free vs. auctioned allowances and windfall profits, and regarding emissions data collection and forecasting methods and models were identified and factored into European Commission and individual national government policies, national allocation and market development plans.
ETS Phase I
The ETS’s first, trial phase began in 2005 and ended with the start of the New Year. The carbon dioxide emissions of more than 10,000 facilities in 27 EU member countries were capped at 2.1 billion tons per year. Each facility – primarily those of power companies – was allocated a share of the total emissions allowances. At the end of each year, each facility was required to surrender a quantity of allowances equal to its actual emissions and allowed to sell, save or buy allowances over the period to achieve this goal.
Private marketplaces for trading allowances, or EUAs, developed in short order. A spot market was launched in 2005 just prior to the launch of the first national registries. Exchange-based futures trading began in the middle of the year.
Trading volumes were small in 2005 at 262 tonnes (Mt) but have grown rapidly since. They grew fourfold in 2006 (809 Mt) and increased further, to nearly 1,500 Mt, in 2007. The value of transactions has increased from ‚Ç¨5.97 billion in 2005 to ‚Ç¨24.1 billion in 2007, accounting for some 80% of the world carbon market, according to the World Bank, and making the ETS by far the largest environmental market in the world.
The latter figure included Phase II contracts, which are emissions allowances for 2008-2012 and will count towards EU member countries’ obligations as signatories to the Kyoto Protocol to reduce carbon dioxide emissions by 8% below 1990 levels. Phase II contracts accounted for almost 85% of market exchanges in 2007, according to the report.
So were emissions reductions realized during and a result of ETS Phase 1? “Preliminary results indicate that a modest amount of abatement occurred in 2005-06, fully in line with the modest ambition of the cap imposed in the first trading period,” according to the report authors.
Citing results from a forthcoming, detailed analysis of data to be published in Environmental and Resource Economics, authors Ellerman and Buchner “concluded that a reasonable estimate of the reduction in CO2 emissions attributable to the EU ETS lies between 50 and 100 million tons for each year, or between 2.5% and 5% from what emissions would have been without the EU ETS.”
Of note, the authors believe that “little or no abatement” occurred in 2007, due to the combination of over-allotment of EUAs, which resulted in prices dropping almost to zero, and the inability of participants to “bank”, or hold over allowances between Phase I and Phase II.
The authors also found that emissions reductions were being realized in surprising ways.
A shift from lignite – brown coal – to hard coals and increased use of biomass by power producers in Germany led to reduced emissions.
The efficiency of coal-fired plants increased in the UK, as did use of biomass, as well, though coal-fired electricity generation increased overall due to higher natural gas prices and reduced nuclear power generation. The increases would likely have been greater without the additional cost consideration of carbon dioxide emissions, the authors contend, and further research is being conducted to determine the extent of this.