The future of the ETS

Owen Wilson, Chief Executive of the Electricity Association of Ireland, assesses the system’s record to date and the way ahead. New EU targets and policy in China will have a major influence going forward.

Electricity Association of Ireland Chief Executive Owen Wilson makes it perfectly clear that the EU’s emissions trading scheme (ETS) will play a crucial role in delivering long-term stability within Europe’s electricity markets.

“And we need a market compatible instrument,” he continued. “but, in truth, the trading mechanism has endured a fairly bumpy ride since its inception back in 2005. Initial exuberance was followed by the global recession of 2008-2009, which led to an oversupply of allowances.

“The European Commission then tried to address this issue through a back loading process, the development of which has led to a further decline in carbon prices. Markets hit their highest point in 2006-2007 with carbon prices exceeding €30 plus per tonne. The equivalent figure today is in the region of €5 per tonne.” Looking ahead, Wilson added that a mix of economic and political factors within Europe will determine the future operation of the ETS and international factors “such as the willingness of the Chinese to look at carbon trading systems” will also play a role.

Owen Wilson is also mindful of the growing potential for low carbon technologies, such as wind, to help the EU meet its current climate change objectives. And he used his Energy Ireland conference presentation to highlight the dichotomy that exists between using ETS and renewables to achieve its greenhouse gas (GHG) emission targets.

“Brussels can’t have it both ways,” he stressed. The ETS works on the ‘cap and trade’ principle. In essence, a limit is set on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. The cap is reduced over time so that total emissions fall.

In 2020, emissions from sectors covered by the EU ETS will be 21 per cent lower than in 2005. By 2030, the Commission proposes, they would be 43 per cent lower. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value.

After each year, a company must surrender enough allowances to cover all its emissions, otherwise fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.

Targets

Owen Wilson went on to point out that all of this is set against the backdrop of a proposed total decarbonisation of the EU’s electricity supply sector by 2050 but between now and 2030, the EU’s Energy Climate Framework goals will have to be factored in as part of the ETS’ ongoing remit.

In January of this year, the European Commission proposed to set a greenhouse gas emission reduction target for domestic EU emissions of 40 per cent in 2030, relative to emissions in 1990.

However, the EU level target must be shared between the ETS and what the member states must achieve collectively in the sectors outside of the ETS. The ETS sector would have to deliver a reduction in GHG of 43 per cent in 2030 and the non-ETS sector a reduction of 30 per cent both compared to 2005.

In order to bring about the required emissions reduction in the ETS sector, the annual factor by which the cap on the maximum permitted emissions within the ETS decreases will have to be increased from 1.74 per cent currently to 2.2 per cent after 2020.

In addition, the Commission is also proposing the introduction of an ETS market stability reserve (MRS) from 2021 onwards. This will act by triggering adjustments to annual auction volumes in situations where the total number of allowances in circulation is outside a certain predefined range.

Owen Wilson added: “Those involved within the ETS sector believe that the introduction of a market stability reserve will help to maintain pries in the range €5-10 per tonne. We also want to see the early start to the MRS, possibly in 2017 but before we even get to the stage of introducing an MRS, there is the distinct prospect of a global climate change agreement being secured. This will actively involve countries such as China and the United States.

Carbon trading will “almost certainly” be a key component of any deal arrived at in this regard. This may well have the result of “shifting the centre of influence,” where ETS is concerned, away from Europe.

He continued: “Europe’s electricity generation sector supports the EU Commission’s proposals regarding the current GHG and renewable energy targets. Specifically, we want to see a 2017 start to the proposed MRS mechanism. A system of permanent set-aside should also be looked at in terms of dealing with the current ETS surplus.

“More effort is also needed to secure solutions regarding policy options pertaining to the electrification of heating, cooling and transport. In addition, the EU Commission must also address the current (and out-of-date) concept that is energy efficiency.”

Irish impact

Commenting specifically on the impact of ETS in Ireland, Wilson said: “The system has delivered from a narrow, environmental perspective. The Commission proposal for structural reform has been a good starting point. But uncertainty surrounds the delivery of the envisaged measures. The ETS must take “full account of the impact which low carbon projects will have within the Irish energy market over the coming years.”

Wilson concluded: “For the ETS to work into the future, it must deliver a degree of stability and investor confidence. The Electricity Association of Ireland recognises that climate change is a pressing challenge requiring a substantive response from policy-makers at a global level.”

The association considers that the ETS provides a market-based measure, compatible with the good functioning of the electricity market that can ensure the least cost delivery of carbon reduction targets and promote appropriate investments. In this context, the ETS should be promoted as the key driver of CO2 abatement within the EU.

The Commission, in its view, must provide greater certainty on whether the ETS is to remain the key instrument to deliver least-cost emissions abatement or if alternative technical policy measures, specifically renewable energy goals, are to take the lead.

Such certainty is especially required in the all-island SEM which leads the EU in both the level of its ambitions to generate electricity renewable energy and the challenge it faces to reduce emissions in the non-traded sector.