Commission review must address ETS credibility issues

ETS review is of great importance.

The European Commission has brought forward an urgent review of the EU’s emissions trading scheme (ETS) and will report its recommendations in July (“Commission prepares to intervene in carbon market”, 16-22 May). Good news indeed, since the current situation is so far removed from the original expectation that there is a clear case for action. The key question, however, is this: what action will it take?

To answer this, the Commission’s review must clarify once and for all the objectives of the ETS and use this opportunity to ensure the long-term confidence (and revenues) of investors. Is it intended purely as a mechanism to deliver emissions-reduction targets efficiently or should it also support low-carbon investment and strategy?

The EU economy needs investment. In particular, the energy sector requires hundreds of billions of euros of private capital channelled into long-lived assets, which must meet Europe’s strategic needs for long-term energy and climate security. High-carbon investment carries inescapable, science-driven risks, but industry, having witnessed successive collapses of the carbon price, also lacks confidence in low-carbon investment. This is combined with (and reinforced by) the deeply uncertain economic outlook.

The Commission review must address the scheme’s credibility issues with potential investors. This will not be resolved, and could arguably be made worse, by intervention purely to ‘set aside’ allowances, without also increasing the ETS’s robustness to future shocks. Reform would need to introduce a mechanism that gives confidence that carbon prices will rise, and preclude the need for any further ad-hoc interventions. This could also restore and stabilise the revenues of €150 billion-€200bn originally expected over the rest of the decade.

The main options are well known. The question is whether the recommendations emerging out of the current debate will result in a piecemeal fix or a more systematic reform to ensure the ETS’s robustness and relevance to investment in an uncertain world. If the EU’s decision-makers are serious about getting the European economy back on track by focusing on growth and investment, while also reducing greenhouse-gas emissions, the answer is clear. The EU ETS review gives them an historic opportunity to boost investor confidence and attract badly needed capital into the European energy sector.

Michael Grubb

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Chairman of energy and climate policy, Cambridge University Centre for Mitigation Research

Michel Colombier

Scientific director, Institut du developpement durable et des relation

By Tncse