Greenhouse gas emissions trading
14 Aug, 2009 05:13 pm
A recent survey found that there was a significant interest in reducing greenhouse gas emissions, but that investment decisions were made without close attention in the emissions trading scheme market. Rather, investment decisions were guided by expectations about the long term development of overall energy costs.
For major emitters, such as heavy industries and power plants, the European Union already has a greenhouse gas emissions trading scheme (ETS) in place. In December 2008 the European Union accepted a ‘climate package’ to achieve a 20% greenhouse gas emission reduction by 2020 and the ETS was hailed as the main instrument for achieving this goal. But will it do so? It would seem that the answer is no.
The first reason for this negative answer is that much of the work expected of ETS, probably over 60%, will in fact be done by the subsidies needed to realize the 20% target for renewable energy. Secondly, under the present European ETS it is allowed that 50% of the emission reduction can be achieved by ‘Cleaner Development Mechanism (CDM)’projects in developing countries. The current price associated with such projects is about 12 euro per ton CO2. This price is heavily inflated as CDM projects in China show. To realize CDM projects in the Chinese chlorofluorocarbon industry, about 4.9 billion euro has been paid for emission reductions which were achieved at a cost of roughly 100 million euro. As a consequence thereof there has probably been a heavy rain in China of Mercedes and BMW-cars. In view of the low costs of CDM projects, it is highly unlikely that emission rights under the European ETS, as currently designed, will cost more than 20 euro per ton CO2.
What this may mean has been looked into by Anders Sandoff and Gabriela Schaad in a paper that is in press in Energy Policy (1). This paper surveyed the investment decisions in Sweden that were actually made under the ETS. The market price at the time of the survey was 20 euro per ton CO2.
The survey found that there was a significant interest in reducing greenhouse gas emissions, but that investment decisions were made without close attention in the ETS market. Rather, investment decisions were guided by expectations about the long term development of overall energy costs.
It would seem that at a price of 20 euro per ton CO2 the European ETS can not be expected to make a major contribution to emission reduction. For a significant impact, the price should probably be substantially over 60 euro per ton CO2 for a sustained period.
Another problem that besets the current European ETS is the emission reduction supposed to come from biomass use by major emitters of greenhouse gases. For instance municipal waste incinerators generating electricity from burning potato peel and other organic kitchen and garden wastes are thought to burn organic material without the emission of CO2. This however is nonsense, as may easily be understood by everyone who has tried to burn potato peel. In practice, usually natural gas has to be used as a fuel to burn the organic waste and the energy efficiency of the incinerator is reduced. Burning organic kitchen and garden waste does not lead to added electricity production by municipal waste incinerators, whereas under the present European ETS it is supposed to generate a considerable amount of electricity. This is not the only example of creative accounting in the European ETS. Burning of palm oil and sewage sludge tends to be ineffective or even counterproductive in mitigating climate change, whereas in the European ETS such burning is supposed to be highly beneficial.
The flaws in the current European ETS are a major problem for the proper mitigation of climate change. It is important to eliminate such flaws if a system for greenhouse gas emissions trading is to be included in the upcoming climate treaty.
(1) A. Sandoff, G. Schaad. Does EU ETS lead to emission reductions through trade? The case of the Swedish emissions trading sector participants. Energy Policy in press