EU Carbon Market Slumps
Air Date: Week of July 1, 2011
The European Union checks their greenhouse gas emissions through a cap and trade scheme where carbon credits are traded. But recently this market has weakened and the value of the credits has plunged. Host Bruce Gellerman talks with Stig Schjolset, head of EU Carbon Analysis for Point Carbon, about why this is happening and if a carbon market can really work.
GELLERMAN: California has announced it’s delaying implementing the state’s carbon cap and trade program. Officials cite a slew of lawsuits for stalling the market-based approach to cutting climate change gas emissions. Meanwhile, China, the world’s biggest polluter of greenhouse gases, is speeding up adoption of cap and trade to expand it nationwide by 2015. European Union nations were the first to enact a carbon market, but for the past few weeks the price for emission credits has been in a free-fall, making it a lot cheaper for companies there to emit climate-warming gases than convert to clean, renewable energy sources.
Blame, in part, the millions of free emission credits companies got when the market was first established and plans to provide them with even more in the near future. Also driving the price for polluting down are worries over the global financial mess and Greece’s economic woes. Stig Schjolset, head of EU Carbon Analysis for Point Carbon has been watching the market nosedive. Hi Stig - welcome to Living on Earth!
SCHJOLSET: Yeah, thanks!
GELLERMAN: Boy, there’ve been some breathtaking losses in the last few weeks. What, the market lost, what, a third in just four weeks?
SCHJOLSET: That is true. The market lost about four euros last week. So it came down from around 16.50 to 12 and a half euros in just about a week.
GELLERMAN: That’s in the price per ton of carbon.
GELLERMAN: Well what’s going on?
SCHJOLSET: Well the EU, as such, has a reduction target of 20% by 2020 compared to 1990 levels. But what we have seen lately is that the European Commission, as well as the member states, have started to implement - or at least think about implementing - a number of additional policy measures. The European Commission published a draft energy efficiency directive last week. So what the market has been anticipating is that the energy efficiency directive will bring down emissions in Europe. And when emissions are going down, the price of carbon will also go down.
GELLERMAN: So the irony is as you improve your efficiencies, you lower the price for these carbon allowances - and that really drops the incentive to cut back efficiencies.
SCHJOLSET: Exactly, exactly. So what you can say - perhaps, slightly simplified way - is that European governments will be more willing to spend public money on things like improved energy efficiency and deployment of renewable energy. But of course once you spend the public money on reducing those emissions, you sort of lose the efficiency in the carbon market because the incentive to reduce emissions through the high carbon price will be reduced.
GELLERMAN: What’s the effect of Germany announcing that it’s going to get rid of its fleet of nuclear power plants by, what, 2022?
SCHJOLSET: Well short-term - German nuclear power production will mainly have to be replaced by fossil fuel production. So short-term will definitely increase emissions in Europe. And we have seen this spring that these nuclear phase-out decisions actually have supported carbon prices.
GELLERMAN: So because Germany announced that it’s going to phase out nuclear power plants, the price of carbon hasn’t sunk lower than it might have.
SCHJOLSET: (Laughs.) True.
GELLERMAN: There was a discussion that airlines that fly into Europe would have to abide by a cap and trade system. What’s happened with those conversations?
SCHJOLSET: All airlines landing or taking off from an EU airport will be covered by this scheme from first of January 2012. That is already written into the EU legislation. And the only thing that can change is - is if U.S. and Chinese airlines are able to be opted out through some of the court cases. They are now launched in the European Court of Justice.
GELLERMAN: Which airlines are those?
SCHJOLSET: It is three airlines in the U.S. and also three Chinese airlines. They have launched court cases to be exempted from their obligation to be included in the European carbon market.
GELLERMAN: Why should U.S. and China airlines be exempted from this?
SCHJOLSET: That is the question the European Commission is asking as well. U.S. and Chinese airlines are now disputing Europe’s right to put the mandatory cap on their emissions.
GELLERMAN: So if U.S. and China airlines win their court case, it would put them at a competitive advantage compared to other airlines.
SCHJOLSET: Yeah. They would be able to fly, for example, from New York to London without paying for the carbon they pollute on that route, while a European airline flying the same distance would then have to pay to cover its carbon emissions.
GELLERMAN: If EU was to win its lawsuit against the United States and China airlines, what would those airlines do - would they just stop flying into Europe?
SCHJOLSET: No, they wouldn’t stop flying into Europe. I think they would comply with the scheme and they would buy carbon permits to cover their emissions and add some costs to ticket prices, as European airlines will do.
GELLERMAN: You know, Stig, the EU carbon-trading scheme is the grandfather of trading schemes. Are other carbon markets around the world looking at what’s happening to the EU in terms of what they should do?
SCHJOLSET: Yes, European officials are of course working very closely with China. We also know that EU officials are discussing with New Zealand, Australia, Japan, and South Korea. You know, I think, long-term - many regions would like to see compatible trading schemes and perhaps a movement towards a global price of carbon. But that is, I think, decades down the road because Europe is still far ahead of other regions when it comes to implementing a carbon-trading scheme and accepting relatively high carbon prices.
GELLERMAN: Well Stig Schjolset, thank you so very much, I really appreciate it.
SCHJOLSET: Yeah, thanks a lot.
GELLERMAN: Stig Schjolset is head of EU Carbon Analysis with Point Carbon.
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