Strong ETS more crucial now than ever before
If the ETS is to drive low carbon innovation within the carbon emitting sector, then something has to change
The Emissions Trading System (ETS) is the cornerstone of the EU's climate change policy. Or at least it's meant to be.
However, with ETS carbon price scudding around €4 a tonne on the open market, it is currently cheaper to buy a cup of coffee and a bun than it is to purchase allowances that would permit you to emit a tonne of carbon into the atmosphere. This is hardly the driver of change envisioned by the drafters of the original scheme.
Clearly, something has to change, if the ETS is to be a driver of low carbon innovation within the industries that emit carbon. As the European Parliament's rapporteur on reform of the scheme it is my role, together with my shadow rapporteurs, to deliver the reform. So what have I been up to?
Well, to date I have convened four informal meetings where the shadow team have been able to hear from a range of witnesses, representatives of the European Commission, industry, NGOs, academics and national governments.
The aim is to ensure that my fellow MEPs get to the bottom of issues, exposing the witnesses to serious interrogation of their position. It will mean that when the drafting process begins, we will understand where we all stand on the key issues.
In terms of drafting, pen will hit paper in April. The first draft will be a 'skeleton' report, setting out a series of options for the key issues.
The shadows will help determine the final report. This is where the political dimension will be important. Each shadow will have to be able to explain how their environment committee delegation will vote, and ultimately how their political group will vote in plenary.
The final compromises must necessarily reflect this reality, but I do not doubt that they will be the subject of serious debate. The final report will be considered by the environment committee at its meeting on the 8 December, having looked at amendments in September.
The final vote in plenary will take place at the beginning of next year. Let me talk briefly about some of the issues that the team have been wrestling with. ETS reform is taking place in the shadow of the recent Paris climate agreement. We are now bound by a commitment to keep the global temperature rise to 'well below 2° C ', with a nod to 1.5° C.
However, the Commission and now the Council have made it clear that this target cannot feature in the current reform of the ETS, despite the urging of countries such as the UK, France and Germany. It will be interesting to see how Parliament responds to this challenge.
Carbon leakage has also been much discussed. While there is a general recognition that with a carbon price of only €4 a tonne, industry is unlikely to take flight, there is also a recognition that were the price were to begin to rise, that risk would become more real with each euro added. The French and the British have been lobbying hard for a tiered approach to the carbon list.
Their argument is that better focusing allowances among industry will ensure that each sector does not take an across the board cut of between 10 and 20 per cent of allowances through the cross-sectoral correction factor.
The French have recently added the suggestion that there should be an auction price floor, and a 'corridor', which outlines a minimum price below which the carbon price cannot fall.
On the process of allocation, there is widespread acknowledgement that better alignment of allowances to actual production would reward innovators and help keep us within our carbon budget.
Regrettably, the significant debate about carbon leakage has meant that one other significant part of the proposal has been largely overlooked: the innovation fund. Consisting of 450 million allowances, the innovation fund is open to industry to help new and first of a kind technology come to fruition.
Parliament will help shape how this fund is spent, and I want to see it become as accessible and as streamlined as possible. We need to avoid the mistakes of the past, where bureaucracy and red tape stopped projects from going ahead.
Instead, I want to ensure that the fund truly delivers the innovation we need to see. I don't want to see a new regional development fund, but rather a fund led by excellence.
I want to give the last word in this article to small emitters. If one thing about the ETS is clear, it is that small emitters face a disproportionately high administrative cost compared to their climate change contribution.
Nearly three-quarters of the 11,500 individual installations covered by the ETS collectively emit only five per cent of the total emissions.
Subjecting these small installations - which include hospitals, distilleries and brickworks - to the same rules and the same costs as large emitters is disproportionate. Serious consideration needs to be given to the exclusion clause for small emitters.
Without significant change the ETS will never drive the innovation that we need to see in Europe's industry. At €4 a tonne the system is at best an irritant right now.
Yet the imperative of Paris to aim for more climate ambition, coupled with the challenges faced by European industry on a global stage make a strong and well-functioning ETS more crucial now than ever before. That is the challenge before me, and I will not shirk away from delivering against it.
This article first appeared in the Parliament Magazine, 30th March.