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Connie Hedegaard European Commissioner for Climate Action EU ETS: Our central tool to reduce emissions Speech at the launch of Sandbag's report Buckle Up! 2011 Environmental Outlook for the EU ETS, European Parliament Brussels, 14 July 2011

Commission Européenne - SPEECH/11/527   14/07/2011

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SPEECH/11/527

Connie Hedegaard

European Commissioner for Climate Action

EU ETS: Our central tool to reduce emissions

Speech at the launch of Sandbag's report Buckle Up! 2011 Environmental Outlook for the EU ETS, European Parliament

Brussels, 14 July 2011

Ladies and gentlemen,

I would like to start by thanking Sandbag for its interesting report on the environmental outlook for the European Emission Trading System (EU ETS). The report strikes a balance between underlining the merits of the EU ETS and criticising the weaknesses. It is also well timed: we need solid input to the debate which is often dominated by extreme views of carbon market opponents or climate sceptics.

ETS drives real abatement

Let me be very clear on this: the EU ETS is Europe's flagship policy to tackle climate change and is there to stay. It is the central element of Europe's strategy for achieving a 20% emission cut by 2020. Both the target and the way how to get there were endorsed by the member states and the European Parliament. So there's no discussion about this: the EU ETS is a key instrument for our climate policies. I believe the ETS will also be crucial for meeting our long-term goal of an 80% reduction of domestic emissions by the middle of this century.

The ETS is delivering real emission reductions. Sandbag's report acknowledges this and new calculations by DG CLIMA show that average annual emissions per installation in 2010 were around 8% lower than when the ETS was launched in 2005. This fall can not be attributed to structural changes in the number or sizes of installations included – even if one looks at a large fixed sample of installations that have all been covered by the system since 2005, the picture is the same: emissions have come down quite significantly.

Some will say this reduction is mostly due to the economic crisis. But even as the economy comes back to normal, the ETS emissions remain well below the cap for the 2008-2012 trading period. This is a fact.

Independent studies confirm that putting a price on carbon stimulates companies to reduce emissions. In a recent survey by Point Carbon1, more than two thirds of the respondents from heavy industry and power sectors say the ETS has caused them to reduce emissions or plan for future emission cuts. Evaluations of the system are also getting more favourable: half of the respondents hold the ETS as the most cost-efficient instrument for reducing emissions.

I understand that tomorrow, a new piece of independent analysis will be published by the think tank Bruegel which also concludes that the ETS has triggered mitigation and coincided with emissions reductions, which cannot be explained by the crisis.

While the economic crisis of course has played a role, it has also highlighted that emissions trading works. Yes, the price came down. But that's only natural in a market-based system; it's the proof that we are dealing with a true market-based system.

These basic conclusions from Europe's pioneering efforts are crucial at a time where partners across the world consider whether or how to follow the EU's example. Because we are no longer alone with this. New Zealand already has an emission trading system; and Australia, California, Korea and China, are all preparing for introducing ETS. Whereas until recently the EU was alone with emissions trading; the big players are now joining us.

Reforms third phase 2013-2020

In Europe, these lessons have already had implications for our system. Looking forward to the upcoming third phase from 2013 to 2020, some fundamental reforms have been implemented. Let me give you a quick overview of the main changes:

Allowances will no longer be allocated per member state, but at European level, per sector. And we are continuously tightening the belt: the cap is lowered by 1.74% annually. The Directive does not end this gradual tightening in 2020, so without further changes to the Directive this trend will continue unchanged also after 2020.

Allocation is based on sector-specific benchmarks: only the 10% best performing installation will really get all allowances for free.

The ETS will also gradually move from mainly free allocation to more than half of the allowances auctioned. And member states have committed to invest at least half of the revenues in climate-friendly measures.

In addition, international offsetting will be further limited from 2013 onwards. It will increasingly focus on least developed countries as credits from new projects will only be accepted in the ETS if the project is located in such countries. We have also banned some controversial industrial gas projects and continue to push for a reform of the Clean Development Mechanism at international level.

Sandbag says we should stop indirectly supporting competitors of European industries in emerging economies. I fully agree. That's why in the Roadmap for moving to a competitive low-carbon economy we focus on an 80% domestic emission cut by 2050. This is a major paradigm shift: in future emission reductions will be mainly done domestically. The current system is not the most cost-efficient. We should stop pouring money into our competitors' economies.

Over-allocation

Sandbag has been very consistent over the years in pointing at one of the imperfections in the European Emission Trading System, and does so again in the report that is launched here today: the growing surplus of allowances.

Let me first say that a surplus is not all bad. As emitting carbon comes with a cost, businesses naturally react by cutting emissions. This is the kind of surplus for individual installations or companies, we would all welcome.

But the big surplus we are now faced with is mainly caused by other developments:

In the first years of the ETS, member states clearly over-allocated their industries. Lessons were learned, however, and the cap was tightened.

But the main cause of the current surplus is the severe and totally unexpected economic crisis that hit us. Many of the companies sitting on big surpluses saw their output diminished by up to one third during the crisis.

Set-aside

I agree with Sandbag that there are reasons for reinforcing the European Emission Trading System even more.

Two recent Commission initiatives, the low-carbon Roadmap and the proposal for the Energy Efficiency Directive indicate that actually achieving the 2020 energy efficiency target might put a downward pressure on the carbon price in the ETS.

However, if we are to meet our long-term emission reduction goal, we must stick to the agreed target of improving energy efficiency by 20% by the end of this decade.

Energy efficiency is good; it is needed to further reduce emissions. But there is a correlation between energy efficiency and allowances on the carbon market. If, for example, one thousand companies improve their energy efficiency; the carbon price will drop. This also implies, however, that companies that do not invest in energy efficiency will get allowances cheaper. It is important that the correlation between energy efficiency and the carbon market is now recognised.

Ultimately, this requires a corresponding political decision, and this is obviously controversial. But I would like to stress that a set-aside could help protect our ability to realise our climate and energy targets, both current and future ones – also if we were to step up pace or ambitions. In any case, if and when a decision is taken, the Commission would be careful to ensure that it would not be introduced overnight but in a gradual and predictable manner.

Regulatory stability

Ever since we introduced the EU ETS, there has been an almost permanent push for reforms. However, as a politician, I must also ensure a sufficient degree of regulatory stability of the ETS.

For instance, my feeling is the ongoing cancellation mechanism recommended by Sandbag would go a step too far. Unless extremely mechanical, it would make the system less of a market driven by the fundamentals..

In developing the EU ETS must strike a careful balance between on the one hand giving the power, heavy industry and aviation sectors the predictability needed for long-term investments; and on the other hand setting the targets and other framework conditions so as to achieve continuous emission reductions in the most cost-efficient way. To work well, the market framework should not be changed often. But likewise, the system is not there for it's own sake, and changes in the legal framework now and then may be necessary to ensure it actually delivers emission cuts. So balance is the key word: a balance between predictability and the need for adjustments.

We can today confidently say that the EU ETS has started doing just that - delivering real abatement; we must keep up the speed to reach our long-term destination in time, which is an 80% cut in domestic emission by the middle of this century. And there is no better way of doing this than by the EU ETS. The system is working and delivering.

1 :

"Carbon 2011" report for Point Carbon's annual conference in Amsterdam, 1-3 March 2011. "[…] a record 59% of respondents in EU power and heavy industry sectors say that EU ETS has already caused them to reduce their own emissions. This is up from 54% last year. Add to this the 9% saying that the EU ETS has prompted reductions to be planned, and we see that more than two thirds report an effect of the EU ETS on current or future emissions."


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