The EU’s emissions trading system (ETS) covers almost half of the EU’s greenhouse gas emissions and has been hailed as the cornerstone and flagship of EU climate policy. Being able to agree internally on the development of its flagship climate policy tool is thus a key prerequisite for achieving the Union’s decarbonization ambitions. While the EU28 are responsible for ‘only’ some 10% of global greenhouse gas (GHG) emissions, this group is still the world’s third-largest emitter. The EU is also an international frontrunner in the use of carbon trading. However, from 2012 onwards, the ETS found itself in severe crisis. Even a formally simple measure to change the timing of auctioning of emission allowances and bolster a sagging carbon price was rejected by the European Parliament in spring 2013 (the ‘backloading’ proposal). But then, only two years later, a far more complex and important measure was adopted—the Market Stability Reserve—and proposals for a complete ETS overhaul were launched. How was it possible to turn the flagship around so quickly? This book tells the fascinating story.
The history of emissions trading in the EU goes back to the 1990s. Under the 1997 Kyoto Protocol the EU had agreed to reduce its GHG emissions by 8% by 2008–12 (from a 1990 baseline). But that would require common policies that could ensure the achievement of such a target—and here the EU was struggling, as shown by the failure of a proposed carbon tax (Boasson and Wettestad 2013, chapter 3). In this situation, a key initiative involved a U-turn on an instrument that strong forces within the EU had earlier seen as a dubious American invention: emissions trading (Christiansen and Wettestad 2003; Skjærseth and Wettestad 2008).
From 1998 onwards, an EU emissions trading system (ETS) was developed as a new central measure within climate policy. The ETS was adopted in 2003, when the main rules for the pilot phase (2005–07) and Kyoto Protocol commitment phase (2008–12) were decided in Directive 2003/87. The ETS was adopted as a cap and trade system, albeit with a significant degree of decentralization. Initially, there was no common central cap, and specific decisions about allowance allocations were in the hands of the individual member-states—and allowances were handed out for free. The power sector was a central target group and implementer, together with several energy-intensive industries such as steel and cement. Chapter 3 provides more on the initial design and early years of the ETS.
As something new for the EU and for the international community, the ETS was seen as the ‘new grand experiment’ (Kruger and Pizer 2004). From the start, it was evident that the EU was entering new regulatory territory and that it would be necessary to adapt, alter, and reform the system as practical experience accumulated. From its earliest days, the ETS was also set up to function as the key measure for implementing the Kyoto Protocol and subsequent international commitments, covering around 45% of EU CO2 emissions. Hence, it was hailed as a climate policy cornerstone and a flagship, set up to underpin and interact synergistically with other climate and energy policies.
The system was successfully launched in 2005. But—not so surprising for a grand experiment—the first years proved problematic, with member-states implementing the system differently and with a volatile carbon price that plummeted to near zero in 2007. The first major reform significantly changed the rules for the third phase (2013–20), and was adopted in 2008, as part of the EU’s overall climate and energy package. Specifically, the ETS reform introduced a single EU-wide cap with a common linear reduction factor. This reform made the ETS a much more harmonized and auction-based system. Moreover, it was agreed that if the Copenhagen climate summit in 2009 was successful, the EU would move from its adopted 20% reduction target to a 30% target, and a related tightening process of the ETS would be set in motion (Boasson and Wettestad 2013).
However, the years leading up to implementation of this reform proved increasingly problematic. The financial crisis hit Europe in late 2008, lowering economic growth and reducing production. This reduced demand for ETS allowances. No new global climate accord was adopted at the Copenhagen summit in 2009, and then the idea for a US nationwide ETS was scrapped. This global fiasco took away the rationale for the EU moving to a 30% reduction target and a related tightening of the ETS.
From 2012 onwards, the EU ETS entered into a major crisis. The price level sank so low as to put the necessary long-term decarbonization investments at risk. By autumn 2012, the growing surplus of allowances and a carbon price falling well below 10 euros led the European Commission to propose further reform of the ETS: both a temporary withdrawal of allowances (‘backloading’) and a menu of more structural reform possibilities. However, that process soon became bogged down in controversy between supporters of the ETS and those wanting a more ambitious climate policy, and opponents rejecting any intervention in the ETS. A nadir was reached in April 2013 when the European Parliament rejected even temporary backloading, which may be seen as a rather simple measure. To industry CEOs, policymakers, and analysts, the ETS was on its deathbed. Overall, the situation in the spring of 2013 seemed gridlocked.
Jumping two years forward in time, in May 2015, EU policy-makers managed to agree on a far more complex and structural reform measure, with a Market Stability Reserve (MSR) as its core. This was quickly followed by proposals from the Commission for a total ETS overhaul, put on the table in July 2015. This speedy progress certainly appears puzzling, given the heavy resistance to even light-touch regulatory change only a few years earlier. Moreover, there had been only moderate change in important contextual factors like the competitiveness of the EU economy, or the international climate negotiations.
Examining this puzzle and explaining how reform and possible ‘rescuing’ of the EU’s climate policy flagship was achieved is the main objective of this book. We ask: how and why did the capacity of the EU to reform its climate policy flagship improve so markedly in the years between 2012 and 2015? We take a close, systematic look at how key EU internal and external factors developed between 2012 and 2015. This process and these changes have been little researched so far. The topic is analytically important, with implications for ongoing policy processes like the completion of ETS reform and longer-term prospects with regard to the carbon price and interaction between the ETS and other policies.
The next chapter presents the analytical framework, where we draw upon a wide range of theories and perspectives, highlighting the member-states, EU institutions, non-governmental actors, and the EU-external environment. Chapter 3 provides a brief overview of the initiation of the ETS, the first years of functioning, and the ‘revolutionary’ changes for the 2013–20 phase adopted in 2008. Chapter 4 provides a chronological overview of central ETS developments post-2008, with particular attention to the years 2012–15. The analytical discussion is presented in Chap. 5, structured by six main propositions on why the EU’s capacity to adopt ETS reform has changed. The main conclusions are outlined in Chap. 6, with reflections on the prospects ahead and analytical implications. As to the former, we take up three sub-issues: implications for the completion of ETS reform, carbon price prospects, and implications for the interaction between the ETS, and other central climate and energy policies.
References
Boasson, E.L., and J. Wettestad. 2013. EU climate policy: Industry, policy interaction and external environment. Surrey: Ashgate.
Christiansen, A., and J. Wettestad. 2003. The EU as a frontrunner on greenhouse gas emissions trading: How did it happen and will the EU succeed? Climate Policy 3(1): 3–18.CrossRef
Kruger, J., and W.A. Pizer. 2004. The EU emissions trading directive: Opportunities and potential pitfalls, Discussion Paper 04–24. Washington, DC: Resources for the Future.
Skjærseth, J.B., and J. Wettestad. 2008. EU emissions trading: Initiation, decision-making and implementation. Aldershot: Ashgate.