Do You Hear the People Sing? EU ETS Backers have Become Les Miserables

When cap-and-trade was introduced as the primary policy tool to drive emission reductions in Europe in 2005, it marked something of a policy revolution.revolution_with_fist

From the ancien regime of command-and-control regulation here was something that represented a brave new world of efficient and flexible controls on pollution.  Old rules which had been watered-down, manipulated and evaded by vested interests would be guillotined by the unwavering blade of the EU Commission’s cap.

The invisible hand of the market would guide polluters, like Marianne, to the just and true levels of pollution.  Liberte, Egalite, EUA!

Eight years on and it feels like the EU ETS revolution is lurching towards a familiar outcome.

The EU ETS is still the world’s biggest and most important carbon market.  However, just as the monarchy retook the throne in France, voices calling for an end to the EU ETS and the adoption of national regulatory policy measures are in the ascendency.

Should have called in the experts

Economic contraction and credit surpluses have created a low carbon price that make the ETS a virtual irrelevance in terms of emission reductions.  Hostility to the EU and high energy prices are not helping the cause.

With the revolution stalling, we have seen its political leader, EU Climate Commissioner Connie Hedegaard,  pleading with European states and the European Parliament to join the barricade once more.

Now that's how you storm a barricade

Now that’s how you storm a barricade

A violent attack on the surplus, to raise prices and silence doubters has been proposed (the back-loading of 900m EUAs) followed up a more decisive strike to secure the revolution through structural reforms to the ETS later in the year .

This will be a new stage, a renewal of the revolution.

The EU ETS pulled us irreversibly away from direct regulation of pollution in 2005, but this essential, decisive market intervention will fix it once and for all.  The invisible hand of the market is still sovereign, one more blast of the regulators’ cannon will prove that.  One more day, one day more!

But,  there is a problem.  Do you hear the people sing?

As the European parliament prepares to vote on the first stage of Hedegaard’s market reforms on Tuesday, there is a definite sense that the people are not stirring.

Industry is generally content with the status quo.  Consumers have neither understood nor benefited from cap-and-trade, and a recent study showed that cap-and-trade could render certain consumer action ineffective, further undermining the policy.  National governments are having to implement additional policy measures to stimulate green investment and reduce national emissions while carbon prices remain ineffective.

It almost looks a bit like a barricade, though a very tidy one.

It almost looks a bit like a barricade, though a very tidy one.

It is little wonder that politicians are finding the policy increasingly difficult to support.  German politicians hold the key to the result of Tuesday’s vote, as the economic and environment ministries engage in a debate that could decide the future of the European carbon market.

All indications are that we have reached the denouement of the EU ETS revolution.

Hedegaard may be able to persuade the European Parliament to join the barricade for this battle next week.  But the revolution is in serious danger.

We should remember that, in the end, the revolution in France succeeded, and the Enlightenment continued to make its way across Europe and America, despite the failure of the 1832 barricades.

Vive la Revolution!

Vive la Revolution!

Cap-and-trade, with tight caps, flexible to economic change, and on a manageable scale (eg. city or state) may eventually prevail as the global policy tool of choice to combat climate change.

However for the EU ETS the risks of failure of the current reform proposals should not be underestimated.   If it does fail, Hedegaard may bring down the curtain on her five year term in 2015 with the mournful refrain   ‘I dreamed a dream in times gone by…….’.

Without reform, the EU ETS is becoming a issue of faith and principle rather than an instrument of logical policy.  My faith is being sorely tested. But I still hope reform, in the form of the cancellation of a big number (try 1.2bn) of EUAs, prevails.

Fantine reads of the scale of industry carbon surpluses

Fantine reads of the scale of industry carbon surpluses

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