EU Urged to Include Transport in CO2 Market, Research Group Says
The European Union could expand its carbon trading system to include transport and start option contracts between public institutions and private investors to enhance the coverage of the program, Bruegel institute said.
The EU emissions trading system, known as the ETS, imposes pollution limits on more than 11,000 manufacturers and power producers in the region, including Germany’s biggest utility EON AG. While the cap-and-trade program expanded in 2012 to include flights to and from Europe, the price of carbon allowances for December dropped 47 percent from a year ago amid economic slowdown and oversupply concerns.
“The only partial coverage of important emitting sectors, namely transport, creates economic inefficiency,” Georg Zachmann, researcher at the Brussels-based Bruegel, wrote in an e-mailed report. “While the ETS has succeeded in containing carbon emissions in the power sector, it has not provided sufficient signals for incentivizing low-carbon investments. Thus, we suggest making the EU ETS wider and deeper.”
The ETS is the cornerstone of the EU climate policy and leads to a cap on emissions in 2020 that will be 21 percent below 2005 levels. The 27-nation bloc, which wants to lead the global fight against climate change, has a binding goal to cut greenhouse gases from sectors in and outside the ETS by 20 percent in 2020 and plans to lower pollution by at least 80 percent by 2050.
Price Harmonization
The inclusion of transport in the cap-and-trade system could take the form of “obliging fuel outlets to buy emission allowances for the fuel they sell,” Zachmann said in the report today. That would ensure the “harmonization of the carbon price across sectors and create an incentive for the use of the cheapest available abatement options.”
EU allowances for delivery in December dropped 2 percent to 8.17 euros ($10.86) a metric ton on London’s ICE Futures Europe exchange as of 4:30 p.m. today. To reduce long-term uncertainty, the governments could provide assurance that carbon would be “sensibly” priced beyond 2020 by establishing option contracts between public institutions and private investors, according to Zachmann.
“The public institutions would guarantee a certain carbon price to an investor through such a contract,” he said. “In case the realized carbon price is below the guaranteed price, the public institution, the option writer, would pay the difference to the investor, the option holder.”
That would ensure that in a situation of falling carbon prices, which could hurt the competitiveness of investments in low-emission projects, investors gets some compensation, Zachmann said.
“At the same time, if the public institution issues a large volume of option contracts, it creates an incentive for policy makers not to water down climate policies in the future,” he said. “Policies that reduce the carbon price will have a direct budget impact through increasing the value of the outstanding options. This would increase the long-term credibility of the ETS.”
To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net
To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net
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