EU Carbon Market Needs Immediate Changes, Policy Exchange Says

Europe’s carbon emissions trading system risks failing unless significant changes are made, including an end to the bloc’s renewable energy target, according to a paper published today by a U.K. research group.

The European Union’s emissions trading system, or ETS, is on target to fall short of the region’s goal of cutting greenhouse-gas discharges by 80 to 95 percent from 1990 levels by 2050 unless the number of permits being handed out is immediately reduced or steeper cuts are imposed after 2020, according to the Policy Exchange, a London-based research group.

Permit prices on the world’s largest carbon market have plunged as much as 92 percent as an oversupply swelled to 1.8 billion metric tons, or 87 percent of the cap in 2012, according to Bloomberg New Energy Finance. Prices are too low to encourage new investment in low-carbon power plants, according to Guy Newey, one of the report’s authors.

“There’s no way you’d invest in carbon capture and storage or renewable energy plant at the current price,” Newey said yesterday in a telephone interview. “I’m not certain whether the price is even strong enough to encourage switching from coal to natural gas, which is the first thing you’d do.”

The paper recommended that the European Commission, the market’s regulator, set a series of caps that reduce emissions by 55 percent from 1990 levels by 2035, to give market participants a longer-term indication of the bloc’s climate ambition. The current target is a 21 percent cut by 2020.

Intervention Conditions

Policy Exchange also suggests that intervention in the carbon market be allowed in three specific circumstances. An independent advisory institution could be established to review the system every two to three years and recommend changes to the market, Newey said.

The specific circumstances in which the market could be adjusted would include “when macroeconomic conditions change significantly from what they were when the cap was set, if the climate science changes, or if there is progress on an international climate deal that would require the EU to take on more ambition, or less,” Newey said.

Policy Exchange was founded by Michael Gove, Francis Maude and Nicholas Boles, who are all now ministers in the U.K.’s coalition government.

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