On Wednesday, the full plenary of the European Parliament voted on post-2020 reforms to the European Emissions Trading System (ETS), Europe’s carbon market. There is widespread acknowledgement that the ETS is failing, mainly because the carbon price (at €5) is too low to incentivise low-carbon investment. So the aim of the reforms is to find ways to bump the price up. The consensus among even moderately green-minded reformers is that the legislative proposals passed by the EP will not do this. As such, they are a failure.
This is probably not the place for a detailed discussion on why the policy reforms are likely to fail. But the main takeaway should be that current EU emissions are around 10 per cent below the ETS emissions cap (in sectors covered by the ETS). And so the cap either has to fall incredibly quickly each year between 2020 and 2030 or the base year needs to be reset to bring the starting point in line with where emissions actually are in 2020. Neither of these things is included in the package passed by the parliament. There are simply too many allowances on the system and this is depressing the price. The glut is likely to continue.
But the politics are fascinating too (and I write as someone who is very disappointed at the outcome). ETS votes have always been subject to heavy lobbying, mainly from sectors who stand to or are being obliged to give up their free allocation of emissions allowances and start buying allowances to cover their emissions. But the added complication here is that the “grand coalition” in the European Parliament between the centre right European People’s Party (EPP) and the Socialists and Democrats (S&D) has broken down. This means that agreements reached in the committees of the EP (in this case the Environment Committee) are being voted down in plenary as discipline breaks down. Even within the major groups, discipline is breaking down as national delegations of MEPs are voting against their own groups’ own positions, painstakingly negotiated in committee. Even the rapporteur for the file Ian Duncan, voted against some of his own amendments in plenary, which is highly unusual.
Taken in the round, these developments could threaten to destabilise the standard modus operandi that the Parliament strengthens a Commission proposal before the Council waters it down again. In the case of the ETS, the parliament’s position going into negotiations with the Council will be barely stronger than the Commission’s – and I would expect this will have come as a surprise to many officials in DG CLIMA.
Finally, the ETS vote showed the degree to which lobbying coalitions that look very solid can fray at the last minute. There was – for example – a debate among “high emitting industry” as to whether or not to club together to stop the cement sector from having its free allowances removed. The collective line against the proposal to institute a border adjustment tariff for imports (to cover their emissions) seemed to be challenged at the last minute with a major intervention from Lakshmi Mittal in the FT, seemingly in support of the proposals.