Does emissions trading work in a mix of environmental policy instruments?
Supporters of emissions trading defend it by pointing out that it should have a place in a balanced mix of environmental policy instruments. However, experience with the EU emissions trading system over the past decade shows that emissions trading does not work well in such a mix. In fact, as the experience in the European Union shows, in a mix, emissions trading tends to marginalise conventional regulatory instruments.
Emissions trading conflicts with regulatory instruments promoting sector-specific transformation pathways
Regulatory instruments such as binding national targets for renewable energy and market-based instruments such as emissions trading have until now stood alongside each other in the EU's climate and energy policy, and have been of equal importance. From 2021, however, this will change radically. For the 2021-2030 period, the European Commission and governments have decided to make nationally binding targets for renewable energy and the achievement of energy efficiency targets subordinate to emissions trading. This is not because emissions trading has proven to be particularly effective. The opposite is the case. It is because petroleum giants like BP, Shell, Statoil and Total and trade associations in the petroleum, coal and gas industries successfully lobbied for the abolition of binding national targets for the expansion of renewable energy and energy efficiency.
What arguments enabled emissions trading to prevail over the regulatory targets for renewables and efficiency?
In 2007, the British government argued that: "One of the main objections of government to meeting the renewables target . . . is that it will undermine the role of the European emission trading scheme. [Meeting the 20% renewables target] crucially undermines the scheme's credibility ... and reduces the incentives to invest in other carbon technologies like nuclear power." The British government was thus resisting binding national targets for renewable energy generation mainly because it wanted instead to expand nuclear energy. This line of argument sought to justify the expansion of nuclear energy on the grounds of the high cost of carbon permits. This shows that the reliance of the emissions trading system on price as a signal makes it possible to slow renewable energy expansion and pursue high-risk technologies.
Delaying the decarbonisation with CSS
In recent years, the oil industry has used a similar argument: in 2013, Shell deplored the price collapse in the EU emissions trading system and the planned reform of the emissions trade. A company representative lamented that there were too many instruments and targets that led to "other policies doing the heavy lifting". He explained that "a carbon market with a single target is needed. Get rid of all the other targets and policies and let the carbon market do the technology dispersion."
While the main aim of the British government was to justify the expansion of nuclear energy on the grounds of the high cost of carbon permits, the fossil fuel industry is interested in high-risk carbon capture and storage (CCS) technology. It sees CCS as an opportunity to delay the phasing out of fossil fuel use. The emissions trading system provides the logical framework for this with an argument that, within the rationale of the system, seems superficially plausible but does not stand on closer inspection: CCS facilitates the 'decarbonised' use of coal and oil but for that to happen, the price of carbon needs to rise, and binding renewable energy targets prevent the carbon price from rising.
From 2021 on no binding targets for the expansion of renewable energies in the EU
A couple years later, the European Commission argued in the same way as the fossil fuel industry. In its proposal for the EU's climate and energy policy for the period to 2030, it explains that there should in future be only one binding target at national level: "a greenhouse gas reduction target at EU level which is shared equitably among the Member States in the form of binding national targets." From 2021, there are no longer to be binding national targets for the expansion of renewable energy of the sort that had previously been enshrined in the EU’s climate and energy policy.
The EU emissions trading system is thus becoming an instrument for promoting high-risk technologies such as CCS and helping to prolong the extraction and use of fossil fuels. It is also unclear what consequences the dropping of nationally binding renewable energy targets will have for the programmes promoting renewable energy generation in member states.
All this shows that emission trading is not an instrument that, in combination with other regulatory tools, can drive the energy transition away from fossil carbon burning. Quite the opposite. The examples show how it can be misused to advance high-risk technologies such as CCS. It is often claimed that the emissions trading system ‘could be the most important collective climate policy instrument, if only it worked’. The reality, however, is that emission trading has not worked for over a decade now. The consequence of retaining an emissions trading system that isn't working (but which has worked very well as a cash cow for the largest emitters of greenhouse gases in the EU) is the weakening of other instruments such as energy feed-in laws and binding national targets for the expansion of renewable energy generation.
This article is part of our dossier "New Economy of Nature".