Political Gridlock & Collapsing Oil Price Killing Europe’s Climate Policy

Political gridlock and collapsing commodities sent the carbon price in the EU’s Emissions Trading System spiraling to a 20-month low this week, making it even more unlikely that polluters will be encouraged to cut greenhouse gas emissions.

The plummeting price is a blow for the already reeling ETS, which was supposed to be the EU’s main vehicle for getting polluters to cut emissions but has so far been plagued with problems. Under the system, companies receive or buy permits to emit a ton of CO2, with the goal of prompting them to steeply reduce emissions over time.

But wildly gyrating prices undercut that rationale.

There are two main reasons for the unexpected drop in carbon prices: politics and economics.

First the politics

The fall, in a market already plagued by dismal prices, comes as the European Parliament and EU countries prepare to debate the European Commission’s proposals for reforming the ETS after 2020.

The fundamental problem is that Europe’s sluggish economy combined with a boom in renewable and energy efficient technology has created a huge surplus in the emissions market, pulling the price down to a high of about €8 per ton, rather than the €30 or more needed to encourage a shift away from emissions-intensive coal.

Even that €8 per ton is looking pretty good right now. The price of the benchmark contract for emitting a ton of carbon dropped by more than 7 percent to €5.91 on Monday. On Tuesday, prices rose slightly to €6.10.

Those kinds of prices aren’t at all what was supposed to happen when the ETS was created, and Brussels is now trying to fix the scheme.

The EU took a first step to fix the system last year, creating the Market Stability Reserve to soak up surplus permits. But Poland has filed suit at the European Court of Justice to annul the introduction of the reserve. Warsaw says the reform creates uncertainty in the ETS, and they’ve been trying to protect the country’s smokestack industries from higher costs.

Now the Commission’s 2020 reform effort is being held up in the European Parliament with infighting between two of its most influential committees: environment and industry.

Then the economics

The debate in Brussels was probably not the main thing on traders’ minds as they watched the carbon market start the week with a flurry of short-selling by industrial players, market analysts said.

“What is happening is only on the sidelines of overall turmoil in the markets. Market participants are looking at gas and oil and coal,” said Philipp Ruf, lead analyst for EU carbon markets at ICIS Tschach Solutions.

Ian Duncan, the European Conservatives and Reformists MEP overseeing ETS reform, agrees that the “rock-bottom” oil price is likely the single biggest cause of the fall in carbon prices. However, the fact that the price could fall by so much in just one day reflects an underlying problem in the system: too many allowances.

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