The EU Emissions Trading System- the climate goals vs. competitiveness

Magda Dąbska

The Emissions Trading System (ETS) was a subject of a fierce discussion during the last plenary session of the European Parliament in Strasbourg. The European Parliament rejected so-called “backloading” with 334 votes against it, 315 votes in favour of Commission’s proposal and 63 abstentions. It means that the project is returned to the EP environmental committee before the possible second voting at the EP. However, due to such a big opposition to the amendment of Directive 2003/87/EC, it is likely that the Commission will withdraw its proposal. Anyway, what is the ETS and why has it attracted the attention of media recently?

ETS was introduced in 2005 as a first international scheme regulating emission CO2. It is governed by the rule “cape-and-trade” what means that each enterprise within the EU has to obtain a special allowance for emission CO2 and other greenhouse gases. In that way, the ETS aims at implementation of the Kyoto Protocol in terms of Clean Development Mechanism and reduction of emission CO2. ETS imposes a fixed price for each ton of carbon that is emitted, and as a consequence, it forces industry to invest in green energy. How does it work in practice?

The scheme is very simple. Enterprises that maintain the emission of CO2 below their admitted limits can re-sell own “surplus of allowances” for a certain price determined by supply and demand at the given point of time. Those enterprises that exceed the emission of CO2 beyond their limits have a following choice. Firstly, they can reduce the emission of CO2 by investing in a new technology. Secondly, they can buy more allowances or can combine these two previous options.

Nevertheless, economic crisis affects the ETS. Due to decrease in a total volume of production within the EU, the price of allowances have considerably dropped. Therefore, the Commission tried to withdraw 900 million of such allowances (so- called “backloading”) to increase their price and submitted an amendment to Directive 2003/87/EC. However, the European Parliament refused to accept this manipulation of market. What means this rejection exactly? In simple terms, the EU is torn between its climate goals and building its own competitiveness. According to Matthias Groote – German Member of S&D, who was responsible for the proposal through the Parliament, the rejection of backloading is  “the beginning of the repatriation of climate policy”. Yet his opponents claim that the competitiveness of European industry could be at stake after adoption of Commission’s proposal. According to MEPs voting “against” ETS should be considered as a kind of fiscal tool in time of economic crisis and its implementation leads to uncertainty on the market. They firmly underline that increase of price allowances has resulted in a relocation of production from European countries to regions where the price of special emission allowances are lesser or they do not exist at all.

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