The European Union began its trade in carbon dioxide emissions at the beginning of 2005. The system was supposed to become a cornerstone or the flagship of the EU’s climate policy, which would show the way to the other world powers following in its wake.
Now, more than seven years later, the flagship is running aground, and the fleets of the rest of the world are each looking for their own courses.
The problem with the EU’s Emissions Trading System (ETS) is an oversupply of emission rights.
Over the years far too many emission licences have been sold to industrial plants and electricity producers. Now that production has declined because of the recession, demand for licences is low, which has pushed the price of emission rights far too low – to about six euros per tonne of carbon dioxide emissions.
One of the most important aims of the ETS was to encourage producers of electricity to move away from fossil fuels, such as natural gas and coal, to renewable sources. The higher price of electricity was supposed to encourage investments, which we consumers would have to pay as a result of emissions trading.
The higher the price of emission rights, the more electricity costs, and the more the producers of electricity earn. Everyone agrees that six euros per ton of emissions is too little to serve as an incentive for investments. The price should be at least EUR 20, or possibly even EUR 40.
So EU officials and climate policy experts have a problem. The price should be pushed up. The best way to do this could be to withdraw some of the emission rights from the market, thereby reducing supply. But there are different ways of doing this and there is no agreement on which ways to choose.