June 30, 2014 / 8:32 PM / 5 years ago

'Back door' climate fix to supplant EU emission goals

LONDON (Reuters) - As European leaders wrangle over energy and climate goals for 2030, Brussels officials are already pushing through a bill that effectively locks in deeper greenhouse gas cuts while potentially pushing up power bills for households and heavy industries.

European Union leaders are in talks over whether to set a 40 percent cut in carbon emissions compared with 1990 levels, extending a 2020 goal to cut emissions by 20 percent under 1990 levels.

They are wary about costs and some favor a weaker 35 percent goal unless an ambitious global agreement to tackle climate change is struck in late 2015.

The European Commission, the EU executive, suggested the 40 percent level in January but published no formal proposal other than a bill to launch a so-called market stability reserve, designed to hold and release permits to balance supply in the bloc’s Emissions Trading System (ETS), which regulates around half of the bloc’s greenhouse gas emissions.

The ETS forces over 12,000 power plants, factories and airlines to surrender a carbon permit for every tonne of carbon dioxide they emit.

But it is failing to drive investment in cleaner technologies amid the build-up of a 2.2 billion permit surplus - more than a year’s worth - pushing permit prices to around 5.50 euros ($7.50) per tonne from above 30 euros six years ago.

Billed as a technical fix for Europe’s ailing ETS, analysts say the reserve will have far-reaching implications that far outweigh any tweaks to the overall 2030 target level, which leaders have pledged to agree on by October but made little headway on during discussions last week. [ID:nL6N0P75TI]

“It’s climate ambition through the back door. It seems to be an easier thing for people to swallow than upping the emission target,” said Trevor Sikorski, a London-based analyst at Energy Aspects. He said installing the reserve rather than adjusting the overall emission target was “simply undemocratic.”

The Commission’s top climate policy official defended the approach as the most pragmatic option to fix the ETS. Last year the executive assessed six options including cancelling the surplus outright and increasing the overall emission reduction target.

“That is the political reality we are in. If we were making a proposal on cancelling we would not get there,” Jos Delbeke said at a Brussels meeting with industry experts on technical details of the reserve on June 25.

SURPLUS TREATMENT

The reserve proposal has yet to be debated by the EU Parliament and at an early stage of talks between national governments. To pass, a majority of both must agree.

Some member states only want it discussed as part of the 2030 framework, according to two diplomats working on the issue who asked not to be named.

Such a move could delay the bill’s passage into law as the wide-ranging 2030 proposal is only expected to be published towards the end of the year at the earliest.

“The 2030 target has relatively less importance (for the ETS) than the market stability reserve, which is a robust proposal in its own right,” said Stig Schjolset, an analyst at Thomson Reuters Point Carbon.

A Point Carbon scenario model shows that without the reserve in place, carbon prices would average 18 euros over the next decade under a 40 percent emission target, dropping to 15 euros on average if the EU set a 35 percent target.

Yet with the reserve, carbon prices would catapult to an average of 28 euros under a 40 percent target but would still be as high as 25 euros under a 35 percent goal.

For Schjolset, the reserve effectively changes the cap by withholding permits from use. Despite rules to gradually release permits when the market gets tighter he expects around 1 billion units to still be held in the reserve by 2030.

“That is a billion or so additional reductions by 2030 ... so if it works as expected, you are actively determining the cap, and policymakers are doing it with open eyes,” he said.

Environmental campaigners Sandbag are concerned that, unless the surplus permits are permanently canceled, it will undermine the incentive for big emitting companies to cut pollution because they will judge that the units will eventually be allocated.

Despite its limitations, Sandbag’s Damien Morris welcomed the reserve proposal as a means to more quickly drive carbon prices higher.

He said this would ensure companies don’t spend billions of euros now on carbon-intensive upgrades only to be taken out of service decades early when the bloc will be forced to set tougher targets to tackle climate change.

“The whole idea is that it will be cheaper to do this in the longer term ... this is a cost-saving proposal,” he said.

($1 = 0.7331 euros)

Editing by William Hardy

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