The European Union’s flagship emissions trading scheme, the EU ETS, was launched 15 years ago with the aim of reducing the emissions of Europe’s largest polluting sectors. The cap and trade system incentivises big polluters to decarbonise by putting a cap on the amount of emissions they are allowed to produce. The cap is represented by a set of tradeable allowances that companies are issued each year, each allowance accounting for one tonne of CO2e. This system allows for the price of emission allowances to fluctuate according to supply and demand. The EU ETS has also played a key part in the European Commission’s Green Deal, aimed at pushing Europe’s emission reduction target from 40% below 1990 levels to 50–55% and reaching net-zero emissions by 2050. Achieving an effective carbon price has proven to be tricky, however. The over issuance of early allowances and the 2008 financial crisis led to prices remaining much lower than the €30 a tonne level identified as the place where the scheme begins to be effective. Eventually, ambitious targets and expectations of a tighter market led to a steady rise in prices that appeared to finally reach the €30 mark.
The EU ETS is not working as intended
Over the last few months, the entirety of the European Union and most of the world have endured life under lockdown because of the COVID-19 pandemic. While the exact economic toll of the new measures remains unknown, some industries are already feeling its effects. As the entertainment and travel industries slow down and retail demand plunges, so does our energy use and footprint. A reduction in emissions should be seen as a silver lining in the fight against the global pandemic, but such a sharp fall in greenhouse gases is likely to have a negative long-term impact on the EU ETS and Europe’s carbon neutrality hopes.
The outbreak and the subsequent measures implemented have forced large manufacturing groups, such as Airbus SE and Volkswagen AG, to temporarily close their factories, reducing emissions but also removing the need to buy allowances. This led to panic selling from banks and financial institutions who had bought credits in the hope that the market would tighten, making the price of permits plummet.
The EU ETS was worth more than 200 billion euros last year due to ambitious EU goals and reductions in the number of allowances issued. When the price of the allowances crashed by 40% in less than two months, all the stable gains made over the past years were wiped out.
The reduction in the price of allowances has once again opened the door for high-emission energy sources that had become uncompetitive. Coal, one of the most damaging energy sources for the climate, became profitable again and led to the reopening of plants. This has had the opposite effect of what the trading scheme is supposed to deliver, raising questions about its effectiveness. While these are exceptional circumstances, a reduction in energy use should not lead to increased emissions. Some solutions have been proposed to tackle this issue but changes in the structure of the ETS are likely to take years to be implemented as most member states currently have other political priorities.
The Green Economy will have to wait
The fall in energy demand caused by the pandemic also drove the price of everyone’s favourite commodity down which triggered a price war between Saudi Arabia and Russia in a bid to obtain market share. Nothing seems to point towards an increase in demand in the short term which means the current price of around $25 a barrel (WTI crude) is set to stay, the lowest it has been in the last 18 years. This will have a potentially devastating impact on less influential producing countries such as Venezuela. While low oil prices should be good news for consumers, the current global fear of the next recession is likely going to outweigh any positive economic effect.
In short, the world will almost certainly enter another recession, and we should therefore not expect too much financing for green projects in the near term. Governments have good reason to halt their stimulus towards a sustainable future as they direct all available resources to keep people safe. The global crisis has also encouraged some EU countries with a large coal consumption, such as Poland and the Czech Republic, to call for the abandonment of the EU ETS which could further hamper the EU’s transition towards a cleaner energy mix.
In the midst of chaos, there is also opportunity
No one knows for sure how long this crisis is going to last, but it will end and once we have all come back to our unconfined lives, the attention will be focused on stimulating economies. This presents a unique opportunity for governments and organisations to come out of the current situation on the right foot. Recent developments on the world stage, such as the creation of new domestic carbon markets or the rapid EV expansion, prove that the world is now “equipped”, more than ever, to push for the green transition once reflation happens.
To add further optimism, existing low-carbon frameworks and technologies will be bolstered by a wave of new innovative solutions that have been fast-tracked into development during these pressing times. Many start-ups that were created during the 2008 recession have become major corporations today. Firstly, with a large part of the population working from home, video conferencing software is going to see rapid innovation and in turn convince employers to be more flexible towards virtual offices in the future, reducing emissions related to commuting. Flexible working hours will also flatten peak energy demand, facilitating the transition towards a cleaner energy mix. Secondly, services that usually require a physical presence, such as health care and education, could go remote through better diagnosis and examination technologies, keeping more cars off the road. And finally, the delay of COP26, the annual global climate change conference, should be seen in a positive light. After COP25 failed to reach a consensus around Article 6 (more on this here), another year of preparatory work might be exactly what member states need to finally get the Paris Agreement to work as intended.
The pandemic has disrupted business around the world and has obstructed green initiatives, but once it passes, through cooperation and innovative solutions, we could enter a new phase of unprecedented climate breakthroughs.
