The vote in the European Parliament on the future of the EU Emissions Trading System (ETS) was crucial, not only to provide an interim remedy to the lame duck carbon price, but to also begin to restore faith in Europe’s flagship climate change policy.
There will be much written in the coming days examining the minutiae of European Parliamentary procedure around bringing this amendment or a variation of it back to the Parliament for another vote. However, what if this vote has mortally wounded the EU ETS or – at the very least – opened Pandora’s Box to the previously unthinkable alternatives?
Many of the MEPs who voted against this amendment will have seen it as a vote against raising costs on industry at a time of economic difficulty – whereas it is in fact a vote for short-term gain at the expense of longer term pain, in the form of higher costs for European industry to manage the risks posed by climate change. Businesses are left vulnerable as the reality is that the cost of the transition to a low-carbon economy will only go up the longer we delay effective action.
The only hope we have now is to ensure that the EU ETS is fundamentally restructured; the time for fiddling and short-term solutions has passed. The patient needs a lifesaving operation to ensure it can deliver on its original objectives and create a robust policy and investment framework for businesses in Europe. Without this, European industry will remain on a treadmill while others overtake us.
The issue of climate change is not going away; therefore a policy and regulatory response will be required sooner or later. If cost-effective, market-based solutions are discredited because of the current lack of political leadership, the real danger for business is that policy-makers could look elsewhere for a solution – potentially including expensive and intrusive command-and-control style regulations.
So what might the alternatives be? In my view, there are just three:
1. A carbon tax, needing to be set at a rate far higher than we have ever seen in the EU ETS to achieve the same outcome. This seems unlikely to be politically acceptable, given MEPs’ recent voting habits, so may never be able to provide a robust and stable framework.
2. A patchwork of uncoordinated responses by member states, as was discussed during the debates in Parliament – an economically inefficient measure which may create intra-EU tensions.
3. A command-and-control response, which would likely be far more expensive and rigid. But this understudy may be closer than we think – the Industrial Emissions Directive is waiting in the wings and is readily able to accommodate direct regulation of carbon dioxide emissions without any of the flexibility, benefits or international opportunities of the EU ETS.
The irony is that it was the fear of such ineffective, uncertain or inflexible regimes being implemented to address the risks of climate change which led to the great alliance between business, NGOs and governments over 10 years ago for the creation of the EU ETS.
We must not lose sight of what is important, which is the end goal of creating a stable carbon market to deliver Europe’s decarbonisation targets, providing a certain policy framework for business to quantify and manage risk, and allocate capital to the lowest cost and most effective emissions reductions possible, thereby making European industry globally competitive.
Anthony Hobley is the London-based global head of climate change and carbon finance at law firm Norton Rose and president of the Climate Markets and Investment Association
